-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MM5hgLWj5jmEZ1htraKd7AxswQC7UNVNCUM2s4CsMAfFTPBkRGQyX4uWLFmD8lEm e7sUKjzRfgQcDU60oV1AQg== 0000932440-00-000142.txt : 20000505 0000932440-00-000142.hdr.sgml : 20000505 ACCESSION NUMBER: 0000932440-00-000142 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 DATE AS OF CHANGE: 20000504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KMC TELECOM HOLDINGS INC CENTRAL INDEX KEY: 0001059851 STANDARD INDUSTRIAL CLASSIFICATION: 4899 IRS NUMBER: 223545925 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-50475 FILM NUMBER: 590131 BUSINESS ADDRESS: STREET 1: 1545 ROUTE 206 STREET 2: SUITE 300 CITY: BEDMINSTER STATE: NJ ZIP: 07921 BUSINESS PHONE: 9084702100 MAIL ADDRESS: STREET 1: 1545 ROUTE 206 STREET 2: SUITE 300 CITY: BEDMINSTER STATE: NJ ZIP: 07921 10-K 1 FOR 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 333-50475 KMC TELECOM HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-3545325 (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 1545 ROUTE 206, SUITE 300 BEDMINSTER, NEW JERSEY 07921 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) Registrant's telephone number, including area code: (908) 470-2100 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. The aggregate market value of the voting common stock held by non-affiliates of the registrant as of March 29, 2000 was approximately $69,982,563, based upon an estimate of the fair value thereof by management of the registrant. There is no established trading market for the voting common stock of the registrant and no sales have occurred within the past sixty days. As of March 29, 2000, 853,765 shares of the registrant's Common Stock, $0.01 par value, were outstanding. There is no established trading market for the Common Stock. DOCUMENTS INCORPORATED BY REFERENCE. None. CAUTIONARY STATEMENT REGARDING FORWARD - LOOKING STATEMENTS STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS INCLUDE: STATEMENTS REGARDING THE ANTICIPATED DEVELOPMENT AND EXPANSION OF OUR BUSINESS, THE MARKETS IN WHICH OUR SERVICES ARE CURRENTLY OFFERED, OR WILL BE OFFERED IN THE FUTURE, ANTICIPATED CAPITAL EXPENDITURES AND REGULATORY REFORM, THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY, OUR DIRECTORS OR OFFICERS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE AND OTHER MATTERS, AND OTHER STATEMENTS REGARDING MATTERS THAT ARE NOT HISTORICAL FACTS. ALL FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS SET FORTH IN "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS." PART I ITEM 1. BUSINESS. BACKGROUND The initial predecessors of KMC Telecom Holdings, Inc. were founded in 1994 and 1995, respectively, by Harold N. Kamine, the Company's Chairman of the Board. These predecessors were merged in 1996 and renamed KMC Telecom Inc. KMC Telecom Holdings, Inc. was formed during 1997 primarily to own, directly or indirectly, all of the shares of its operating subsidiaries, KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., and KMC Telecom of Virginia, Inc. The principal equity investors in the Company currently include Mr. Kamine, Nassau Capital Partners, L.P., Newcourt Capital, Inc., First Union Corp., General Electric Capital Corporation and Lucent Technologies, Inc. COMPANY OVERVIEW We are a facilities-based competitive local exchange carrier providing telecommunications and data services in Tier III markets (markets with a population from 100,000 to 750,000). A facilities-based competitive local exchange carrier is one which operates its own network, including switching equipment and transmission lines, rather than one which intends to primarily resell the services of other carriers. The markets in which we operate are predominantly located in the Southeastern and Midwestern United States. We target as customers business, government and institutional end-users, as well as Internet service providers, long distance carriers and wireless service providers. Our objective is to provide our customers with a complete solution for their communications needs. We currently provide on-net local dial tone, Internet access infrastructure, ISDN (or integrated services digital network), long distance, special access, private line and a variety of other advanced services and features. We currently operate in 34 Tier III markets and have systems under construction in 3 additional Tier III markets. We expect these new systems to be commercially operational by the end of the first half of 2000. During 2000 we will continue to investigate new Tier III markets. We construct robust fiber optic networks in each of our markets, which we believe allows us to ensure high quality of service, facilitate the delivery of value-added and data services, and effectively control our costs. We currently have Lucent Technologies Series 5ESS(R)-type switches in commercial operation in all of our operational markets and intend to install Lucent switches in any future networks which we may build. BUSINESS STRATEGY We intend to become the dominant competitive provider of telephony and data services in the markets that we serve. To accomplish this objective we intend to: 2 Focus on Tier III markets. We intend to operate in Tier III markets with attractive demographic, economic, competitive and demand characteristics. We believe that incumbent local exchange carriers tend to focus their efforts on larger markets and generally underserve and underinvest in Tier III markets. We also believe that there is generally significantly less competition from other facilities-based competitive local exchange carriers in Tier III markets, which allows us to gain market share more rapidly than we could expect in Tier I and Tier II markets. In addition, network construction, labor and rights-of-way costs are generally lower in Tier III markets than in Tier I and Tier II markets. For example, many Tier III markets permit significant aerial deployment of fiber optic cable which is less expensive than the buried deployment required in many Tier I and Tier II markets. We estimate that approximately 70% of our fiber is deployed aerially. We select target markets from among the approximately 250 Tier III markets in the United States by first identifying those markets that do not yet have significant, established competitors to the existing incumbent local exchange carrier, and by then reviewing the specific demographic, economic, competitive and telecommunications demand characteristics of such markets to determine their suitability for the types of services which we offer. We estimate market demand on the basis of the concentration of potential business, government and institutional end-user customers in the market and the general economic prospects for the area. Deploy comprehensive fiber networks. We build geographically extensive, full service, facilities-based networks. We believe such networks provide significant operating leverage, facilitate the capture of market share, and are likely to deter other competitive local exchange carriers from attempting to penetrate our markets due to the cost of constructing a competing network of equal capability. Prior to both the initial construction of our network backbone and any subsequent network expansion, we perform detailed rate of return analyses to justify the capital expenditures involved. In all of our operational markets, we have completed our backbone construction connecting the market's central business district with outlying office parks, large institutions, the locations of long distance carriers' transmission equipment and major incumbent local exchange carrier central offices. We intend to continue to expand our existing networks in response to anticipated customer demand. Provide enabling infrastructure for data services growth. We intend to serve as a gateway for the provision of sophisticated value-added data services and high speed connectivity to customers in Tier III markets. We believe it is strategically important for us to offer these services because: o data and internet access is required for businesses to succeed and grow, o e-commerce is mission critical for many businesses, and o national service carriers and internet service providers, such as Qwest and UUNet feel it is necessary for them to expand into Tier III markets. We will provide data services directly to our own customers and will also provide access to Tier III markets for long distance carriers, national service carriers, Internet service providers and other businesses which require broadband access to those markets but which have not constructed their own networks and connections in those markets to enable them to provide it to their own customers. Establish local presence with personalized customer service. We seek to capture and retain our retail customers through local, personalized sales, marketing and customer service programs. To this end, we: o establish sales offices in each market in which we operate a network, o strive to recruit our city directors and sales staff from the local market, o rely principally on a face-to-face selling approach, and o support our sales staff with locally based customer service and technical support personnel. Most of our existing sales personnel are local residents who have previously worked for the incumbent local exchange carrier or other telecommunications companies. We believe that our "Creative Solutions with a 3 Hometown Touch"(R) sales approach is very important to customers in Tier III markets, who do not typically receive focused local sales contact or customer support from the incumbent local exchange carrier. We seek to build long-term relationships with our customers by responding rapidly and creatively to their telecommunications needs. Employ a national approach to larger accounts. While establishing a local presence to market to retail customers in our markets, we will employ a national approach to large wholesale customers, such as long distance carriers and Internet service providers, through our carrier group and to the headquarters of large corporations with branch offices in our markets through our national accounts sales organization. Deploy networks rapidly. It is our practice to use innovative "switch-in-a-box" construction and deployment techniques for most of our networks. Using these techniques, transmission, switching and power equipment are pre-installed by Lucent under controlled factory conditions in portable, weatherproof, storm-proof concrete buildings delivered to the Lucent facility by our contractor. The completed buildings are then shipped to the appropriate city for final installation, reducing costs, installation risks and time to market. Implement a high-quality operations support system. We are developing a high-quality operations support system to provide us with comprehensive billing, order processing and customer care software for all of our existing and contemplated services. This system is designed to provide us with a single "flow-through" order form that will entail several components, allowing each order to be tracked from service provisioning through to complete installation. We believe that this system will allow us to quickly address customer concerns and provide us with a competitive advantage in customer service and operations efficiency. Initial installation of the new operational support systems commenced during the third quarter of 1999, with development and expansion to continue over the next 12 months. Leverage our experienced management team. Our experienced management team is led by Harold N. Kamine, Chairman of the Board of Directors. Other members of the team include Roscoe C. Young II, President and Chief Operating Officer, William H. Stewart, Executive Vice President and Chief Financial Officer, Tricia Breckenridge, Executive Vice President--Business Development and James L. Barwick, Senior Vice President and Chief Technology Officer. SERVICES General. We have historically provided dedicated access service and have also resold switched services which we purchased from incumbent local exchange carriers. In December 1997, we began providing our own on-net switched services to our customers via direct connections to our networks or unbundled network elements leased from incumbent local exchange carriers. On-net switched services and resale services have accounted for the following percentages of our revenues in 1997, 1998 and 1999: 1997 1998 1999 ---- ---- ---- On-net switched services....... 32% 37% 69% Resale services................. 68% 63% 31% Private Line and Special Access Services. We currently provide various types of on-net dedicated services which permit the transmission of voice and data between two points over circuits dedicated to a particular customer. Private line service involves the provision of a private, dedicated telecommunications connection of a customer's different locations. For these services we offer several types of dedicated circuits that have different capacities. DS-1 and DS-3 circuits are dedicated lines that can carry up to 24 and 672 DS-0 circuits, respectively. Special access service involves leasing private, dedicated telecommunications lines running over our networks to long distance carriers. The long distance carriers use these lines to connect different locations where they have installed transmission equipment within the market, to connect locations where they have installed transmission equipment to the transmission equipment locations of other long distance carriers within the market, or to connect large customers directly to the locations of their transmission equipment. In addition to DS-0, DS-1 and DS-3 dedicated circuits, we also offer OC3, OC12 and OC48 circuits for these services. These OC circuits provide the fastest transmission available for carriers and large business users. 4 Switch-Based Services. We have added and continue to add capability to provide local dial tone and switched access origination and termination services to our networks. Switches are currently in commercial operation in all of our 34 existing markets and we expect switches to be in commercial operation in the 3 additional Tier III markets in which we currently have networks under construction by the end of the first half of 2000. Long Distance. We offer a full range of long distance products including inter-LATA, intra-LATA, interstate, international, calling card and 800-number services. During the first quarter of 1999, we introduced KMC-branded operator services, directory services, prepaid phone cards and audio-conference services. We offer these services both on-net and off-net. We offer long distance services on a resale basis by entering into wholesale agreements with various long distance carriers to deliver these services. We believe that many of our customers will prefer the option of purchasing long distance services from us as part of a one-stop telecommunications solution. Centrex-type Services. We provide Centrex-type services. By using Centrex-type services instead of purchasing and installing a switching system on its own premises, a customer can substantially reduce its capital expenditures and the fixed costs associated with maintaining telecommunications equipment. We introduced our ClearStarsm Advantage service in all of our operational markets during the first quarter of 1999. It has been designed to support multiple applications, ranging from basic access services to services focused on desktop applications. The basic access service connects to a customer's internal system and is equipped with up to 14 features including call forwarding, speed dialing and call transfer capabilities. More sophisticated levels of service are designed to replace portions of a customer's existing telecommunications system. At the high end of service offerings is ClearStarsm Advantage Plus, a packaged, end-to-end offering which combines all of the basic features with Basic Rate ISDN network access, advanced feature functionality, voice messaging and Lucent ISDN multi-featured telephone sets. New Data Services Offerings. Data services represented approximately 9% of our revenue for 1999. We currently plan to expand our capabilities by introducing additional data services in 2000. We believe that these services will enhance our ability to provide an integrated turnkey solution to our customers' voice, data and video transmission requirements. These data services will include: o Basic Rate ISDN. Basic Rate ISDN, or BRI, provides customers the potential of 144 kilobits per second of digital communications via a single network facility interface. We believe it will be attractive to small and medium size customers, since it provides dial-up access to the Internet, and other dial-up data applications, while simultaneously providing the ability to integrate voice traffic on a single network facility. o Primary Rate ISDN. Primary Rate ISDN provides customers the equivalent of 1.544 megabits per second of digital communications via a T-1 type facility, with 23 channels for voice and data communications and a 24th channel providing network signaling and control for the services. We focus our Primary Rate ISDN sales efforts on (i) Internet service providers who use Primary Rate ISDN as a means of supporting customer access to their operations, and (ii) end-user customers who use Primary Rate ISDN as a network access facility for their internal telecommunications systems. o Port wholesale. Port wholesaling is a technology that provides large bandwidth users with data switching capability at the network level, allowing them to acquire capacity as required without investing in data switching equipment. Port wholesaling gives us the ability to provide data switching to Internet service providers by allowing data calls to be terminated through the port wholesale equipment rather than the switch. This enables the Internet service provider to more cost effectively manage its data requirements while, at the same time, increasing the efficiency and capacity of our Lucent Technologies Series 5ESS(R)-type switch. o DSL. DSL is a method of using unconditioned, copper wire pairs for high bit-rate data transport for use in the "last mile" connecting our network backbone ring to the customer's premises. We plan to utilize DSL to provide high bandwidth data and video service to small and medium size customers. o Frame Relay/ATM. Frame relay and ATM, or asynchronous transfer mode, are used by some of our data customers as a fast data transport service for Wide Area Networks. Today we resell these services. In the future we intend to provide these services over our own network and utilize a third party provider for transport outside our network. 5 We plan to remain flexible in responding to evolving customer demands for data services. LOCAL NETWORKS As part of determining the economic viability of a network in a particular market, we review the demographic, economic, competitive and telecommunications demand characteristics of the market. We estimate market demand using data gathered from long distance carriers, the Federal Communications Commission, local sources, site visits and specific market studies commissioned by us, the concentration of potential business, government and institutional end-user customers and the general economic prospects for the area. Once we target a market for development, we design a network to provide access to approximately 70% of the business customers in that market either through direct connections to our network or through unbundled network elements leased from the incumbent local exchange carrier. Typically, we construct a "self-healing" synchronous optical network ("SONET") architecture backbone ring to provide coverage of the major business districts, government offices, hospitals, office parks and universities, the principal locations of the transmission equipment of long distance carriers offering services in the area, and the incumbent local exchange carrier's central office(s). Following construction of our backbone network, we expect to build additional loops to increase the size of our addressable market, as required. During Phase I of our network construction program we completed networks in 8 Tier III markets. We established networks in 15 Tier III markets during Phase II of the program and will add networks in 14 additional Tier III markets during Phase III. Eleven of the 14 networks to be added during Phase III have been completed and the remaining 3 networks will be completed during the first half of 2000. The markets in which we established or plan to establish markets during each of these phases of the program are as follows:
PHASE I PHASE II PHASE III - - ----------------------- ---------------------------- --------------------------- Huntsville, Alabama Greensboro, North Carolina Charleston, South Carolina Baton Rouge, Louisiana Winston-Salem, North Carolina Lansing, Michigan Shreveport, Louisiana Tallahassee, Florida Akron, Ohio Corpus Christi, Texas Roanoke, Virginia Spartanburg, South Carolina Savannah, Georgia Ann Arbor, Michigan Toledo, Ohio Madison, Wisconsin Topeka, Kansas Columbia, South Carolina Augusta, Georgia Fort Wayne, Indiana Monroe, Louisiana Melbourne, Florida Eden Prairie, Minnesota Montgomery,Alabama Daytona Beach, Florida Clearwater/St.Petersburg, Florida Fort Myers, Florida Dayton, Ohio Longview, Texas Biloxi/Gulf Port, Mississippi Sarasota, Florida Johnson City/Kingsport, Tennessee Pensacola, Florida Chattanooga, Tennessee Fayetteville, North Carolina Rockville/Bethesda/Frederick, Maryland Norfolk, Virginia
6 The following table presents aggregate data as of February 29, 2000, for the networks placed in operation during Phase I and Phase II, respectively, of our network construction program:
SWITCHED DEDICATED DS-0 ACCESS EQUIVALENT ADDRESSABLE CENTRAL LINES IN CIRCUITS IN ROUTE COMMERCIAL OFFICE SERVICE(1) SERVICE(2) MILES BUILDINGS(3) COLLOCATIONS ---------- ------------- ----- ------------ ------------ Phase I markets (8 markets) 65,396 136,572 662 14,800 33 Phase II markets (15 markets) 65,342 130,626 757 25,947 52 ---------- ------------- ----- ------------ ------------ Total 130,738 267,198 1,419 40,747 85
- - ----------------------------------------------- (1) Represents all active switched channels we provide to customers either by resale via the incumbent local exchange carrier's network, by unbundled network elements leased from the incumbent local exchange carrier, or by direct connection to our own network. (2) Represents all active dedicated DS-0, DS-1 and DS-3 circuits we provide to customers expressed on a DS-0 basis. (3) Addressable by either unbundled network elements leased from the incumbent local exchange carrier or by a direct connection to our own network. We define a commercial building as one with greater than ten employees. We are continuing to investigate expanding into additional Tier III markets during 2000. Further expansion of our networks, however, will be dependent upon our ability to obtain additional financing. The construction of a network requires us to obtain municipal franchises and other permits. These rights are typically the subject of non-exclusive agreements of finite duration providing for the payment of fees by us or the provision of services by us to the municipality without compensation. In addition, we must secure rights-of-way and other access rights which are typically provided under non-exclusive multi-year agreements, which generally contain renewal options. Generally, these rights are obtained from utilities, incumbent local exchange carriers, other competitive local exchange carriers, railroads and long distance carriers. The Telecommunications Act of 1996 requires most utilities to afford access to rights-of-way to competitive local exchange carriers on non-discriminatory terms and conditions and at reasonable rates. However, there can be no assurance that delays or disputes will not occur. Our agreements for rights-of-way and similar matters generally require us to indemnify the party providing such rights. Such indemnities could make us liable for actions (including negligence) of the other party. Our requirements for a planned network are communicated to our engineering group which finalizes the route and completes the network's design. Independent construction and installation contractors are selected through a competitive bidding process. Our own personnel negotiate required contracts and rights-of-way and supervise the construction, installation and testing of network components prior to commencing commercial service. Cable, equipment and supplies required for the networks are available from a variety of sources at competitive rates. The construction period for a new network varies depending upon such factors as the number of backbone route miles to be installed, the relative use of aerial as opposed to buried cable deployment, the initial number of buildings targeted for connection to the network backbone and other factors. Based upon our experience, we believe that a new fiber optic network can be made commercially operational within approximately 6 months after construction commences. In a typical Tier III market, selected office buildings are connected to our network by network backbone extensions or unbundled network elements leased from the incumbent local exchange carrier. Within each building, customer equipment is connected to Company-provided electronic equipment where customer transmissions are digitized, combined and converted to an optical signal. The traffic is then transmitted through the network backbone to our local central office where it can be routed to its ultimate destination. We are able to expand our reach in a market by collocating equipment in an incumbent local exchange carrier's central office and leasing unbundled network elements from that incumbent local exchange carrier in order to reach customers located in buildings which are not directly connected to our own backbone ring. We attempt to place collocation equipment in a sufficient number of incumbent local exchange carrier central offices to allow us to reach approximately 70% of the business customers in a given market, either by means of such unbundled network elements or direct connections to our own network. The decision as to 7 whether to collocate in a specific central office is based upon the number of business lines, number and type of businesses, number of households and the location of the central office within the market. Our networks consist of our fiber optic backbones, fiber laterals and unbundled network elements. Our networks allow for high speed, high quality transmission of voice, data and video communications. We typically install backbone fiber optic cables containing 48 to 144 fiber strands which have significantly greater bandwidth carrying capacity than other media. Our OC-48 SONET networks support up to 32,256 simultaneous voice conversations over a single pair of fiber optic fibers. We expect that continuing developments in compression technology and multiplexing equipment will increase the capacity of each fiber, thereby providing more bandwidth carrying capacity at relatively low incremental costs. We currently offer end-to-end fully protected fiber services utilizing SONET ring architecture which routes customer traffic simultaneously in both directions around the ring to provide protection against fiber cuts. If a line is cut, traffic can simply be reversed and sent to its destination around the other side of the ring. Back-up electronics become operational in the event of failure of the primary components. We monitor our fiber optic networks and electronics seven days per week, 24 hours per day, using a combination of local and national network control centers. Local network monitoring is accomplished by means of an automatic notification system that monitors for any system anomaly. This system provides instantaneous alarms to an on-call network technician whenever an anomaly is detected. The local market technician is trained in network problem resolution and provides on-site corrective procedures when appropriate. A national Network Reliability Center, located in Denver, Colorado, acts as the focal point for all of our operating networks, providing integrated and centralized network monitoring, and correlation and problem management. The Network Reliability Center has access to all operating networks and can work independently of the local systems to effect repair or restoration activities. The Network Reliability Center is currently provided by Lucent on a contractual basis. In the future, we may develop our own national center. We manage our network systems both locally and centrally. Customer service calls and maintenance are primarily handled through the local offices. In addition, as described above, we contract to provide integrated monitoring of our networks via Lucent's Network Reliability Center. This is accomplished by the use of a sophisticated integrated management system that is connected to all of our locations, including our Duluth, Georgia, operations center. With this system the Network Reliability Center is capable of accessing all available information regarding the configuration and operating condition of any network components in use. This proactive monitoring capability is further augmented by a 24 hour a day, seven day a week call center, also provided by Lucent at the Network Reliability Center, that receives, tracks and manages all customer calls and issues to satisfactory conclusion. The call center works with the Company's own customer care representatives and engineers in the Duluth facility to ensure that timely and consistent service is provided. SALES AND MARKETING We target our sales and marketing activities at three separate customer groups: retail, national accounts and wholesale. Retail customers are composed of business, government and institutional telecommunications and data services end-users and local Internet service providers. National accounts are usually large corporations which have branches or local offices within our markets, but which make their buying decisions centrally from their corporate headquarters. Wholesale customers typically consist of long distance carriers, wireless service providers and national Internet service providers. As of February 29, 2000, we had approximately 290 employees engaged in sales and marketing activities. Retail Customers. We target retail customer segments such as business, government, healthcare and educational institutions. We target all business customers in our markets as well as local Internet service providers. Each city's local sales staff is responsible for calling on the retail customers in its market. National Accounts. While there are few Fortune 500 companies with headquarters located in our operating cities, there are branches and local offices of large corporations within our market areas. Often these large corporations make their buying decisions centrally, either through their telecommunications or MIS functions, which are normally located at corporate headquarters. Our national accounts sales organization is structured to assist them in determining requirements for their various locations within our markets. 8 We believe that this focus on national accounts will further increase our market penetration with large companies in our cities. Wholesale Customers. We currently target the major long distance carriers such as AT&T, MCI WorldCom and Sprint, Internet service providers, wireless service providers and other competitive local exchange carriers, through our carrier group. We believe that we can effectively compete to provide access to these customers based on price, reliability, technology, route diversity, ease-of-ordering and customer service. We provide competitive pricing for the transport and termination of communications for high volume users of long-distance services, which has historically been provided by the incumbent local exchange carrier. To the extent that incumbent local exchange carriers begin to compete with long distance carriers in providing long distance services, the long distance carriers have a competitive incentive to move traffic away from incumbent local exchange carriers to competitive local exchange carriers like us. Wireless service providers, who need network backbone to transport calls, are an active customer base, as are other competitive local exchange carriers as wholesale users. Revenues from access services may decline in future years due to a change in pricing proposed by the Federal Communications Commission. Sales Personnel. We establish local sales offices in each market that we serve. Initially, each local sales office is staffed by a City Director and 2 or 3 salespersons, which increases to between 4 and 6 as our operations in the market expand. We seek to hire our sales personnel locally, since we believe that knowledge of, and contacts in, a local market are key factors for competitive differentiation and commercial success in a Tier III market. We believe that this local focus will help to set us apart from the incumbent local exchange carriers, our principal competitors. City Directors. We seek to hire local, seasoned telecommunications managers, with sales experience, as City Directors. City Directors assist with the initial network buildout and oversee the daily operations of their network, in addition to managing sales staff and market development. Daily operations responsibilities include monitoring provisioning, customer service, pricing decisions and the billing process. A City Director works with senior management in the strategic planning process, including capital expenditures and budget planning. They perform cash flow analysis for fiber connections of new buildings to the network, and participate in planning fiber network extensions in their markets. SUPPLIERS Lucent. We have contracted with Lucent, as our primary supplier, to purchase switching, transport and digital cross connect products. Lucent has also agreed to implement and test our switches and related equipment. In addition, Lucent and the Company have entered into an agreement pursuant to which Lucent has agreed to monitor our switches on an on-going basis. Lucent is an investor in our preferred stock and a lender under our Amended Senior Secured Credit Facility. Billing Support Systems Implementation. In the second quarter of 1999, we installed software developed by Billing Concepts Systems, Inc. to provide us with comprehensive billing functionality, including the ability to collect call detail records, message rating, bill calculation, invoice generation, commission tracking, customer care and inquiry, collections management, and quality assurance. The Billing Concepts software enables us to produce a single bill covering all of the products and services that we provide to a customer. Additional development of the new billing systems will take place over the next 9 months. Operational Support Systems Implementation. We entered into an agreement with Eftia OSS Solutions Inc. to develop operational support systems. These systems manage service order processing, circuit and asset inventory, telephone number inventory and trouble administration. The operational support system's responsibilities will be expanded during the later phases of the project to include workforce management, local number portability management, network management, service bureau interfaces, and Internet-based service inquiry. The system will automate operational support activities and provide a means of managing operational performance of our business. Initial installation of the new operational support systems commenced during the third quarter of 1999, with development and expansion to continue over the next 12 months. 9 COMPETITION Overview. The telecommunications industry is highly competitive. Our principal competitors in Tier III markets will be the incumbent local exchange carriers. In most instances the incumbent local exchange carrier is one of the Regional Bell Operating Companies (such as Ameritech, Bell Atlantic, BellSouth or SBC), one of GTE Corporation's subsidiaries or one of Sprint Corporation's subsidiaries. Incumbent local exchange carriers presently have almost 100% of the market share in those areas we consider our market areas. Because of their relatively small size, we do not believe that Tier III markets can profitably support more than two competitors to the incumbent local exchange carrier. Other competitors may include other competitive local exchange carriers, microwave and satellite carriers, wireless telecommunications providers and private networks built by large end-users. Potential competitors (using similar or different technologies) include cable television companies, utilities and Regional Bell Operating Companies seeking to operate outside their current local service areas. In addition, there may be future competition from large long distance carriers, such as AT&T and MCI WorldCom, which have begun to offer integrated local and long distance telecommunications services. AT&T also has announced its intention to offer local services using a new wireless technology. Consolidation of telecommunications companies and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to significant new competitors to the Company. Both the long distance business and the data transmission business are extremely competitive. Prices in both businesses have declined significantly in recent years and are expected to continue to decline. In the long distance business, we will face competition from large carriers such as AT&T, MCI WorldCom and Sprint. We will rely on other carriers to provide transmission and termination for our long distance traffic and therefore will be dependent on such carriers. Incumbent Local Exchange Carriers. Our principal competitors for local exchange services are the Regional Bell Operating Companies, GTE Corporation's subsidiaries and Sprint Corporation's subsidiaries. As a recent entrant in the integrated telecommunications services industry, we have not yet achieved a significant market share for any of our services. In particular, the incumbent local exchange carriers: have long-standing relationships with their customers, o have financial, technical and marketing resources substantially greater than ours, o have the potential to fund competitive services with revenues from a variety of businesses, and o currently benefit from certain existing regulations that favor the incumbent local exchange carriers over us in certain respects. Recent regulatory initiatives allow us, as a competitive local exchange carrier, to interconnect with incumbent local exchange carrier facilities. This provides increased business opportunities for us. However, these regulatory initiatives have been accompanied by increased pricing flexibility for, and relaxation of regulatory oversight of, the incumbent local exchange carriers. If the incumbent local exchange carriers engage in increased volume and discount pricing practices or charge us increased fees for interconnection to their networks, or if the incumbent local exchange carriers seek to delay implementation of our interconnection to their networks, our business, financial condition and results of operations could be adversely affected. To the extent that we interconnect with and use incumbent local exchange carrier networks to serve our customers, we are dependent upon their technology and capabilities. We will become increasingly dependent on interconnection with incumbent local exchange carriers as switched services become a greater percentage of our business. The Telecommunications Act of 1996 imposes interconnection obligations on incumbent local exchange carriers, but we cannot assure you that we will be able to obtain the interconnection we require at rates, and on terms and conditions, that will permit us to offer switched services at desirable rates, terms and conditions. In the event that we experience difficulties in obtaining appropriate and reasonably priced service from the incumbent local exchange carriers, our ability to serve our customers would be impaired. 10 Competitive Local Exchange Carriers and Other Competitors. We will compete from time to time with other competitive local exchange carriers. It is likely that in several of our markets we will face competition from two or more facilities-based competitive local exchange carriers. After the investment and expense of establishing a network and support services in a given market, the marginal cost of carrying an additional call is negligible. Accordingly, in Tier III markets where there are 3 or more facilities-based competitive local exchange carriers, we expect substantial price competition. We believe that operations in such markets are likely to be unprofitable for one or more operators. We expect to face competition in each of our markets. However, we believe that our commitment to build a significant network, deploy switches and establish local sales and support facilities at the outset in each of the Tier III markets which we target should reduce the number of facilities-based competitors and drive other entrants to focus on the resale of incumbent local exchange carrier service or our services or to invest in other markets. We believe that each market will also see more agent and distributor resale initiatives. We expect to experience declining prices and increasing price competition. We cannot assure you that we will be able to achieve or maintain adequate market share or revenue, or compete effectively, in any of our markets. REGULATION Our services are subject to varying degrees of federal, state and local regulation. The Federal Communications Commission exercises jurisdiction over facilities of, and interstate and international services offered by, telecommunications common carriers. The state regulatory commissions retain jurisdiction over the same facilities and services to the extent they are used to originate or terminate intrastate communications. Local governments sometimes impose franchise or licensing requirements on competitive local exchange carriers. Federal Regulation We are regulated at the federal level as a nondominant common carrier subject to minimal regulation under Title II of the Communications Act of 1934. The Communications Act of 1934 was substantially amended by the Telecommunications Act of 1996. This legislation is designed to enhance competition in the local telecommunications marketplace by: o removing state and local entry barriers, o requiring incumbent local exchange carriers to provide interconnection to their facilities, o facilitating the end-users' choice to switch service providers from incumbent local exchange carriers to competitive local exchange carriers such as the Company, and o requiring access to rights-of-way. The legislation also is designed to enhance the competitive position of the competitive local exchange carriers and increase local competition by newer competitors such as long distance carriers, cable television companies and public utility companies. Under the Telecommunications Act of 1996, Regional Bell Operating Companies have the opportunity to provide in-region long distance services if certain conditions are met and are no longer prohibited from providing certain cable television services. In addition, the Telecommunications Act of 1996 eliminates certain restrictions on utility holding companies, thus clearing the way for them to diversify into telecommunications services. The Telecommunications Act of 1996 specifically requires all telecommunications carriers (including incumbent local exchange carriers and competitive local exchange carriers (like us)): o not to prohibit or unduly restrict resale of their services, o to provide dialing parity and nondiscriminatory access to telephone numbers, operator services, directory assistance and directory listings, 11 o to afford access to poles, ducts, conduits and rights-of-way, and o to establish reciprocal compensation arrangements for the transport and termination of telecommunications. It also requires competitive local exchange carriers and incumbent local exchange carriers to provide interconnection for the transmission and routing of telephone exchange service and exchange access. It requires incumbent local exchange carriers to provide such interconnection: o at any technically feasible point within the incumbent local exchange carrier's network, o that is at least equal in quality to that provided by the incumbent local exchange carrier to itself, its affiliates or any other party to which the incumbent local exchange carrier provides interconnection, and o at rates, terms and conditions that are just, reasonable and nondiscriminatory. Incumbent local exchange carriers also are required under the new law to provide nondiscriminatory access to network elements on an unbundled basis at any technically feasible point, to offer their local telephone services for resale at wholesale rates, and to facilitate collocation of equipment necessary for competitors to interconnect with or access the unbundled network elements. The Telecommunications Act of 1996 provided for the removal of most restrictions from AT&T and the Regional Bell Operating Companies resulting from the consent decree entered in 1982 providing for divestiture of the Regional Bell Operating Companies from AT&T in 1984. The Telecommunications Act establishes procedures under which a Regional Bell Operating Company can enter the market for long distance service between specified areas within its local service area. The Telecommunications Act of 1996 permitted the Regional Bell Operating Companies to enter the out-of-region long distance market immediately upon enactment, and Regional Bell Operating Companies can provide intra-LATA long distance services. Before the Regional Bell Operating Company can provide in-region inter-LATA services, it must obtain Federal Communications Commission approval upon a showing that facilities-based competition is present in its market, that the Regional Bell Operating Company has entered into interconnection agreements in the states where it seeks authority, that the Regional Bell Operating Company has satisfied a 14-point "checklist" of competitive requirements, and that such entry is in the public interest. To date, the Federal Communications Commission has granted such authority only to Bell Atlantic in New York State. The provision of inter-LATA services by Regional Bell Operating Companies is expected to reduce the market share of major long distance carriers, and consequently, may have an adverse effect on the ability of competitive local exchange carriers to generate access revenues from the long distance carriers. Federal Communications Commission Rules Implementing the Local Competition Provisions of the Telecommunications Act of 1996. The Federal Communications Commission in 1996 established a framework of national rules enabling state public service commissions and the Federal Communications Commission to begin implementing many of the local competition provisions of the Telecommunications Act of 1996. The Federal Communications Commission prescribed certain minimum points of interconnection necessary to permit competing carriers to choose the most efficient points at which to interconnect with the incumbent local exchange carriers' networks. The Federal Communications Commission also adopted a minimum list of unbundled network elements that incumbent local exchange carriers must make available to competitors upon request and a methodology for states to use in establishing rates for interconnection and the purchase of unbundled network elements. The Federal Communications Commission also adopted a methodology for states to use when applying the Telecommunications Act's "avoided cost standard" for incumbent local exchange carriers to set the prices to be charged to resellers of their services. The Federal Communications Commission has authority to establish national pricing rules for interconnection, unbundled elements and resale services. The Supreme Court also upheld the Federal Communications Commission's interpretation of the "pick and choose" provisions, which permit carriers to obtain favorable provisions in interconnection agreements. However, the Supreme Court overturned the Federal Communications Commission's rules regarding what network elements must be unbundled by the Regional Bell Operating Companies, and remanded to the 12 Federal Communications Commission the question of what network elements are "necessary" to competing carriers such as the Company. On November 5, 1999, the Federal Communications Commission issued an order and proposed rulemaking establishing the network elements that must be offered by incumbent local exchange carriers as unbundled network elements. In addition, the Supreme Court's decision creates some uncertainty regarding the legal status of complaints filed at the Federal Communications Commission to enforce interconnection agreements. We cannot assure you that we will be able to maintain interconnection agreements on terms acceptable to us. On December 9, 1999, the Federal Communications Commission released an order requiring incumbent local exchange carriers to offer "line sharing" arrangements that will permit competitors like us to offer DSL service over the same copper wires used by the incumbent local exchange carriers to provide voice service. The specific prices and terms of these arrangements will be determined by future decisions of state utility commissions, and cannot be predicted at this time. The Federal Communications Commission's ruling may also be challenged in court. We expect, however, that this order, if implemented, will allow us to offer DSL services at a significantly lower cost than is now possible. On March 17, 2000, the U.S. Court of Appeals for the District of Columbia Circuit vacated certain Federal Communications Commission rules relating to collocation of competitors' equipment in incumbent local exchange carriers' central offices. This decision requires the Federal Communications Commission to limit collocation to equipment that is "necessary" for interconnection with the incumbent local exchange carrier or access to the incumbent local exchange carrier's unbundled network elements. We believe that all of the equipment we currently place in collocation arrangements is necessary for these purposes, and therefore our collocation arrangements should not be adversely affected by the court decision. However, any disputes over the "necessary" status of particular items of equipment may have to be resolved by the Federal Communications Commission or by state commissions, and such disputes could result in delays or changes to our collocation plans. Other Regulation. In general, the Federal Communications Commission's policies encourage the entry of new competitors in the telecommunications industry and are designed to prevent anti-competitive practices. Currently, large incumbent local exchange carriers such as GTE and the Regional Bell Operating Companies are regulated as "dominant" carriers, while competitive local exchange carriers such as the Company are considered "nondominant" carriers. Dominant carriers face more detailed regulatory scrutiny. As a nondominant carrier, we are subject to relatively minimal Federal Communications Commission regulation. o Tariff. We may install and operate facilities for the transmission of domestic interstate communications without prior Federal Communications Commission authorization. The Federal Communications Commission requires us to file tariffs and periodic reports concerning our interstate circuits and deployment of network facilities, and offer interstate services on a nondiscriminatory basis, at just and reasonable rates. We also remain subject to Federal Communications Commission complaint procedures. The Federal Communications Commission adopted an order in 1996 (the "Detariffing Order") which eliminated the requirement that nondominant interstate carriers maintain tariffs on file with the Federal Communications Commission for domestic interstate services. The order provided that, after a nine-month transition period, relationships between interstate carriers and their customers would be set by contract. Several parties requested reconsideration and/or filed appeals of the Detariffing Order. On February 13, 1997, the United States Court of Appeals for the District of Columbia Circuit stayed implementation of the Detariffing Order. If the Detariffing Order becomes effective, nondominant interstate services providers will no longer be able to rely on the filing of tariffs with the Federal Communications Commission as a means of providing notice to customers of prices, terms and conditions under which they offer their interstate services. If we cancel our Federal Communications Commission tariffs as a result of the Detariffing Order, we will need to individually negotiate contract terms with certain of our customers, which could result in substantial legal and administrative expense. o Access Charges. The Federal Communications Commission has granted incumbent local exchange carriers significant flexibility in pricing their interstate special and switched access services on 13 a specific central office by central office basis. Under this pricing scheme, incumbent local exchange carriers may establish pricing zones based on access traffic density and charge different prices for each zone. We anticipate that this pricing flexibility will result in incumbent local exchange carriers lowering their prices in high traffic density areas, which is where our customers are concentrated. The Federal Communications Commission adopted an order on August 5, 1999 granting incumbent local exchange carriers subject to price cap regulation additional pricing flexibility. These changes will reduce access charges and will shift charges currently based on minutes to flat-rate, monthly per line charges. As a result, the aggregate amount of access charges paid by long distance carriers to access providers in the United States may decrease. The order provides certain immediate regulatory relief to incumbent local exchange carriers subject to price cap regulation and sets a framework of "triggers" to provide those companies with greater pricing flexibility to set interstate access rates as competition increases. The order also initiated a rulemaking to determine whether the Federal Communications Commission should regulate the access charges of competitive local exchange carriers. If this increased pricing flexibility is not effectively monitored by federal regulators, it could have a material adverse effect on our ability to price our interstate access services competitively. A May 16, 1999 order, which was upheld on appeal by the United States Court of Appeals for the Eighth Circuit, substantially increased the amounts that incumbent local exchange carriers subject to the Federal Communications Commission's price cap rules ("price cap local exchange carriers") recover through monthly flat-rate charges and substantially decreased the amounts that these local exchange carriers recover through traffic sensitive (per-minute) access charges. Several parties appealed the May 16th order. These decisions are likely to have a significant impact on our operations, expenses, pricing and revenue. Universal Service Reform. The Federal Communications Commission implemented the provisions of the Telecommunications Act of 1996 relating to the preservation and advancement of universal telephone service in 1997. The Federal Communications Commission's universal service principles provide that universal service support mechanisms and rules should not unfairly advantage or disadvantage one provider or technology over another. All telecommunications carriers providing interstate telecommunications services, including us, must contribute to the universal service support fund. On October 8, 1999, the Federal Communications Commission released an order implementing changes to its universal service rules to comply with a recent decision of the Fifth Circuit Court of Appeals. Among other changes, the Federal Communications Commission revised its rules concerning assessment of carriers' intrastate and international revenues for universal service contribution. The Federal Communications Commission narrowed the scope of the contribution base, removing intrastate end-user telecommunications revenues from the assessment, consistent with the opinion of the Fifth Circuit Court of Appeals. The contribution factor for the first quarter of 2000 is 5.877% of interstate and international end-user telecommunications revenues. State Regulation We believe that most, if not all, states in which we operate or propose to operate require a certification or other authorization to offer intrastate and local services. Many of the states in which we operate or intend to operate are in the process of addressing issues relating to the regulation of competitive local exchange carriers. We are subject to state tariff filing requirements. These certifications generally require a showing that the carrier has adequate financial, managerial and technical resources to offer the proposed services in a manner consistent with the public interest. We have obtained state authority for the provision of our dedicated services and a full range of local switched services and long distance services. In most states, we are required to file tariffs setting forth the terms, conditions and prices for services that are classified as intrastate. We plan to obtain additional state authorities to accommodate our business and network expansion. Some states also impose reporting, customer service, and quality requirements, as well as unbundling and universal service requirements. In addition, we are subject to the outcome of proceedings held by state utility commissions to determine state regulatory policies with respect to incumbent local exchange carrier and competitive local exchange carrier competition, geographic build-out, mandatory detariffing and other issues relevant to competitive local exchange carrier operations. Certain states have adopted state-specific universal service funding obligations. 14 In addition to obtaining state certifications, we must negotiate terms of interconnection with the incumbent local exchange carrier before we can begin providing switched services. Our executed agreements are subject to the approval of the state commissions. State commissions have approved our existing agreements. We anticipate state commission approval of our future interconnection agreements. We believe that, as the degree of local competition increases, the states will offer the incumbent local exchange carriers increasing pricing flexibility. This flexibility may present the incumbent local exchange carriers with an opportunity to subsidize services that compete with our services with revenues generated from noncompetitive services, thereby allowing incumbent local exchange carriers to offer competitive services at prices below the cost of providing the service. We cannot predict the extent to which this may occur, but it could have a material adverse effect on our business. We actively participate in various regulatory proceedings before the states, the outcome of which may establish policies that affect our competitive and/or economic position in the local and other telecommunications services markets. We also may be subject to requirements in certain states to obtain prior approval for, or notify the state commission of, any transfers of control, sales of assets, corporate reorganizations, issuances of stock or debt instruments and related transactions. Local Government Authorizations. We are required to obtain street use and construction permits and licenses and/or franchises to install and expand our fiber optic networks using municipal rights of way. In some municipalities where we have installed or anticipate constructing networks, we will be required to pay license or franchise fees based on a percentage of gross revenues or on a per foot basis, as well as post performance bonds or letters of credit. We are actively pursuing permits, franchises and other relevant authorities for use of rights-of-way and utility facilities in a number of cities. FRANCHISES AND PERMITS The construction of a network requires us to obtain municipal franchises and other permits. These rights are typically the subject of non-exclusive agreements of finite duration providing for the payment of fees or the provision of services by us to the municipality without compensation. In addition, we must secure rights-of-way and other access rights which are typically provided under non-exclusive multi-year agreements, which generally contain renewal options. Generally, these rights are obtained from utilities, incumbent local exchange carriers, other competitive local exchange carriers, railroads and long distance carriers. The Telecommunications Act of 1996 requires most utilities to afford access to rights-of-way to competitive local exchange carriers on non-discriminatory terms and conditions and at reasonable rates. However, there can be no assurance that delays and disputes will not occur. Our agreements for rights-of-way and similar matters generally require us to indemnify the party providing such rights. Such indemnities could make us liable for actions (including negligence) of the other party. CUSTOMERS No single customer accounted for more than 10% of our consolidated revenues in 1998 or 1999. Our five largest customers accounted for 11% of our consolidated revenues in 1998 and 8% of our consolidated revenues in 1999. We expect customer concentration to continue to decrease as we expand into additional markets and increase full scale marketing of an integrated service package. In the near term, however, the loss of, or decrease of business from, one or more of our principal customers could have a material adverse effect on our business, financial condition and results of operations. Although they are not our customers, we did recognize revenue of approximately $9.7 million, or 15.1% of our 1999 revenue, from incumbent local exchange carriers primarily related to reciprocal compensation for terminating local calls from customers of the incumbent local exchange carriers to Internet service providers which are our customers. Of this amount approximately 64% is attributable to reciprocal compensation due to us from BellSouth. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Revenue" for a discussion of a dispute which has arisen between incumbent local exchange carriers, such as BellSouth, and competitive 15 local exchange carriers, like us, with respect to the obligation of incumbent local exchange carriers to make reciprocal compensation payments to competitive local exchange carriers with respect to the termination of local calls to Internet service providers. EMPLOYEES As of February 29, 2000, we had approximately 1,100 full time employees. None of our employees are represented by a labor union or subject to a collective bargaining agreement, nor have we experienced any work stoppage due to labor disputes. We believe that our relations with our employees are good. GEOGRAPHIC AREAS We have no foreign operations. All of our networks are located in, and all of our revenues are attributable to, the United States. ITEM 2. PROPERTIES. We are headquartered in Bedminster, New Jersey in approximately 14,000 square feet of office space, approximately 7,200 of which we lease from Kamine Development Corp. (an entity controlled by Mr. Kamine, the Company's Chairman of the Board). The lease with Kamine Development Corp., which expires in January 2007, provides for a base annual rental of approximately $217,000 (adjusted periodically for changes in the consumer price index), plus operating expenses. We also maintain an operations center in an aggregate of approximately 104,000 square feet of leased space in Duluth, Georgia under leases which expire at various dates from July 2000 through February 2003. We also own or lease facilities in each of our existing markets for central offices, sales offices and the location of our switches and related equipment. We believe that our facilities are in good condition, are suitable for our operations and that, if needed, suitable alternative space would be readily available. ITEM 3. LEGAL PROCEEDINGS. We are from time to time involved in litigation incidental to the conduct of our business. There is no pending legal proceeding to which we are a party, however, which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. There is currently no established trading market for our Common Stock, $0.01 par value per share. As of March 29, 2000 there were nine holders of record of our Common Stock. We have never declared nor paid cash dividends on our Common Stock and do not presently anticipate paying any cash dividends on our Common Stock in the foreseeable future. We currently expect that earnings, if any, will be retained for growth and development of our business. As a holding company, we depend upon the receipt of dividends and other cash payments from our operating subsidiaries in order to meet our cash requirements. Pursuant to the terms of our Amended and Restated Loan and Security Agreement, dated as of February 15, 2000, among our principal operating subsidiaries and a group of lenders led by First Union National Bank, Newcourt Commercial Finance Corporation and Lucent (the "Amended Senior Secured Credit Facility"), those subsidiaries are restricted in their ability to pay dividends on their capital stock. The indentures applicable to our 13 1/2% Senior Notes due 2009 and our 12 1/2% Senior Discount Notes due 2008, respectively, impose certain restrictions upon our ability to pay dividends on our capital stock. 16 Subject to the foregoing and to any restrictions which may be contained in any future indebtedness which we may incur, the payment of cash dividends on our Common Stock will be within the sole discretion of our Board of Directors, and will depend upon the earnings, capital requirements and financial position of the Company, applicable requirements of law, general economic conditions and other factors considered relevant by our Board of Directors. On May 24, 1999, we sold $275.0 million aggregate principal amount of 13 1/2% Senior Notes due 2009 to Morgan Stanley & Co. Incorporated, as representative of certain initial purchasers. The sale of the Senior Notes to the initial purchasers was made in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2) of that Act, on the basis that the transaction did not involve a public offering. The initial purchasers agreed that any resales which they made would be made only (i) to qualified institutional buyers as defined in Rule 144A under the Securities Act, (ii) to institutional accredited investors as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act, or (iii) outside the United States to persons other than U.S. persons in reliance upon Regulation S under the Securities Act. On December 16, 1999, one institutional investor exercised 50 warrants to purchase an aggregate of 10 shares of our Common Stock for aggregate gross proceeds of $0.10. The issuance of the shares upon exercise of the warrants was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, on the basis that the transaction did not involve a public offering. The Warrant Agreement applicable to the warrants contains representations as to such investor's investment intent and imposes substantial restrictions upon transfer of the securities. On January 1, 1999, July 1, 1999 and October 1, 1999, the Company granted options to purchase an aggregate of 82,342 shares of its Common Stock to employees of the Company and employees of certain affiliates of the Company under the 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates. No consideration was received by us for the issuance of the options. The options have various exercise prices with 67,509 exercisable at an exercise price of $125 per share, 2,933 exercisable at an exercise price of $225 per share, and 11,900 exercisable at an exercise price of $250 per share. The issuance of the options was made in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 4(2) of that Act, on the basis that the transaction did not involve a public offering. 17 ITEM 6. SELECTED FINANCIAL DATA. The selected financial data set forth below for the years ended December 31, 1995, 1996, 1997, 1998 and 1999 were derived from our audited financial statements and those of our predecessors. The data presented below should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included in "Item 8. Financial Statements and Supplementary Data."
YEAR ENDING DECEMBER 31 ---------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Revenue...................................... $ - $ 205 $ 3,417 $ 22,425 $64,313 Operating expenses: Network operating costs................... - 1,361 7,735 37,336 110,309 Selling, general and administrative....... 1,591 2,216 9,923 24,534 55,803 Stock option compensation expense......... - 240 13,870 7,080 29,833 Depreciation and amortization............. 6 287 2,506 9,257 29,077 --------- ------------ ---------- ---------- --------- Total operating expenses............... 1,597 4,104 34,034 78,207 225,022 --------- ------------ ---------- ---------- -------- Loss from operations......................... (1,597) (3,899) (30,617) (55,782) (160,709) Other expense (a)............................ - - - - (4,297) Interest income.............................. - - 513 8,818 8,701 Interest expense (b)......................... (23) (596) (2,582) (29,789) (69,411) --------- ------------ ----------- ---------- --------- Net loss..................................... (1,620) (4,495) (32,686) (76,753) (225,716) Dividends and accretion on redeemable preferred stock .................................... - - (8,904) (18,285) (81,633) -------- ----------- ----------- ---------- --------- Net loss applicable to common shareholders... $(1,620) $ (4,495) $ (41,590) $ (95,038) $(307,349) ======== ============ =========== ========== ========== Net loss per common share.................... $ (2.70) $ (7.49) $ (64.93) $ (114.42) $ (360.88) ======== ============ ============ =========== ========== Weighted average number of common shares outstanding............................... 600 600 641 831 852 ========= ======== ========== ========== ======== OTHER DATA: Capital expenditures (including acquisitions) $ 3,498 $ 9,111 $ 61,146 $ 161,803 $ 440,733 Adjusted EBITDA(c)........................... (1,591) (3,373) (14,241) (39,445) (101,799) EBITDA(c).................................... (1,591) (3,613) (28,111) (46,525) (135,929) Cash used in operating activities............ (779) (2,687) (8,676) (33,573) (98,293) Cash used in investing activities............ (1,920) (10,174) (62,992) (180,198) (277,078) Cash provided in financing activities........ 2,728 14,314 85,734 219,399 440,156
AS OF DECEMBER 31, ---------------------------------------------------------------- 1995 1996 1997 1998 1999 ---------------------------------------------------------------- BALANCE SHEET DATA: Cash and cash equivalents.................... $ 34 $ 1,487 $ 15,553 $ 21,181 $85,966 Investments held for future capital expenditures............................... - - - 27,920 - Restricted investments(d).................... - - - - 88,571 Networks and equipment, net.................. 3,496 12,347 71,371 224,890 639,324 Total assets................................. 3,704 16,715 95,943 311,310 886,040 Long-term debt............................... 2,727 12,330 61,277 309,225 811,137 Redeemable preferred stock................... - - 35,925 52,033 203,790 Redeemable common stock and warrants......... - - 11,726 22,979 46,680 Total nonredeemable equity (deficiency)...... (1,623) 389 (26,673) (104,353) (384,4130)
- - ----------------------------------------------- (a) During the second quarter of 1999, the Company recorded a $4.3 million charge to other expense in connection with an unfavorable arbitration award. The net amount due under the terms of the award was paid in full in June 1999. (b) Excludes capitalized interest of (i) $37,000 for 1995, (ii) $103,000 for 1996, (iii) $854,000 for 1997, (iv) $5.1 million for 1998 and (v) $6.6 million for 1999. During the construction of the Company's networks, the interest costs related to construction expenditures are capitalized. 18 (c) Adjusted EBITDA consists of earnings (loss) before net interest, income taxes, depreciation and amortization charges, stock option compensation expense (a non-cash charge) and other expense. EBITDA consists of earnings (loss) before all of the foregoing items except stock option compensation expense and other expense. These items are provided because they are measures commonly used in the telecommunications industry. They are presented to enhance an understanding of the Company's operating results and they are not intended to represent cash flow or results of operations in accordance with generally accepted accounting principles. Adjusted EBITDA and EBITDA are not calculated under generally accepted accounting principles and are not necessarily comparable to similarly titled measures of other companies. For a presentation of cash flows calculated under generally accepted accounting principles, see the Company's historical financial statements contained in Item 8 of this Report. (d) Represents amounts pledged to secure the next five payments of interest on the 13 1/2% Senior Notes. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion and analysis together with the Company's financial statements, including the notes and the other financial information appearing elsewhere in this Report. Due to our limited operating history, startup nature and rapid growth, period-to-period comparisons of financial data are not necessarily indicative, and you should not rely upon them as an indicator of our future performance. The following discussion includes forward-looking statements. OVERVIEW General. We are a facilities-based competitive local exchange carrier providing telecommunications and data services in Tier III markets. The markets in which we operate are predominantly located in the Southeastern and Midwestern United States. We target as customers business, government and institutional end-users, as well as Internet service providers, long distance carriers and wireless service providers. Our objective is to provide our customers with a complete solution for their communications needs. We currently provide on-net local dial tone, Internet access infrastructure, ISDN, long distance, special access, private line and a variety of other advanced services and features. We have invested significant capital and effort in developing our telecommunications business. This capital has been invested in the development of our networks, the development and installation of operating systems, the introduction of services, marketing and sales efforts, and an acquisition. We expect to make significant additional capital expenditures to build additional networks, to expand current networks to additional customer buildings, long distance carrier points of presence and incumbent local exchange carrier central offices, and to broaden our service offerings, and we may consummate acquisitions. Proper management of our growth will require us to maintain cost controls, continue to assess market potential, ensure quality control in implementing our services, as well as to expand our internal management, customer care and billing and information systems, all of which will require substantial investment. The development, construction and expansion of our networks requires significant capital, a large portion of which is invested before any revenue is generated. We have incurred, and expect to continue to incur, significant and increasing operating losses, negative adjusted EBITDA and net cash outflows for operating and investing activities while we expand our network operations and build our customer base. Based on our experience to date and that of our competitors, we estimate that a new network will begin to generate positive EBITDA within 24 to 36 months after commencement of commercial operations. Construction periods and operating results will vary from network to network. There can be no assurance that we will be able to establish a sufficient revenue-generating customer base or gross margins in any particular market or on a consolidated basis. The facilities-based competitive local exchange carrier business is capital intensive. We estimate that the total initial costs associated with the purchase and installation of fiber optic cable and transmission and switching equipment, including capitalized engineering costs, will average approximately $10.0 million to $12.0 million for the fiber optic backbone and switch in each standard Tier III network, depending upon the size of the market served, the scope and complexity of the network, and the proportion of aerial to underground fiber deployment. Our actual costs could vary significantly from this range. The amounts and timing of these expenditures are subject to a variety of factors that may vary significantly with the geographic and demographic characteristics of each market. In addition to equipment and construction expenditure requirements, upon commencement of the construction phase of a network we begin to incur direct operating costs for such items as salaries and rent. As network construction progresses, we incur costs associated with construction, including 19 preparation of rights-of-way, and increased sales, marketing, operating and administrative expenses. We capitalize certain direct costs related to network planning and construction costs for new networks. The initial construction of a network consists of deploying the fiber optic backbone, installing the switch and related electronics and testing the system. This takes approximately 6 months, depending upon the size and complexity of the network. The time required during the construction phase is also significantly influenced by the number of route miles involved, the mix of aerial versus underground fiber deployment, possible delays in preparing rights-of-way, provisioning fiber optic cable and electronic equipment, and required construction permits and other factors, including weather. Local Services. To facilitate our entry into local services, we plan to install switching equipment in all of our markets. Switches are in commercial operation in all of our 34 operating markets and we expect to be in commercial operation in 3 additional Tier III markets by the end of the first half of 2000. We also intend to install Lucent switches in any future networks which we may build. Once a switch is commercially operational, we offer local dial tone and switched data services such as ISDN, Internet access infrastructure, Local Area Network-to-Local Area Network interconnect and Wide Area Network services, as well as voice mail and other custom calling features. We expect operating margins to improve as switching becomes operational and switched services are provided on-net, the network is expanded (primarily by adding buildings to the network), and larger volumes of traffic are carried on our network. Although under the Telecommunications Act of 1996, incumbent local exchange carriers are required to unbundle local network elements, thereby decreasing operating expenses by permitting us to purchase only the origination and termination services we need, we cannot assure you that such unbundling will be effected in a timely manner and result in prices favorable to us. Revenue. Historically, we have derived our revenue primarily from resale of switched services, along with special access, private line and Internet access infrastructure services provided on our facilities. Future revenues will include increasing amounts of on-net services, long distance services and value-added data services, such as ISDN, DSL, Local Area Network-to-Local Area Network interconnect, Wide Area Network services, BRI (or Basic Rate ISDN), PRI (or Primary Rate ISDN) and port wholesale as well as other value-added services such as Centrex-type services, voice mail and other custom calling features. We maintain interconnection agreements with the major incumbent local exchange carriers in each state in which we operate. Among other things, these contracts govern the reciprocal amounts to be billed by us for terminating local traffic of Internet service providers in each state. Incumbent local exchange carriers around the country have been contesting whether the obligation to pay reciprocal compensation to competitive local exchange carriers should apply to local telephone calls from an incumbent local exchange carrier's customers to Internet service providers served by competitive local exchange carriers. The incumbent local exchange carriers claim that this traffic is interstate in nature and therefore should be exempt from compensation arrangements applicable to local intrastate calls. Competitive local exchange carriers have contended that the interconnection agreements provide no exception for local calls to Internet service providers and reciprocal compensation is therefore applicable. Incumbent local exchange carriers have threatened to withhold, and in many cases have withheld, reciprocal compensation to competitive local exchange carriers for the transport and termination of these calls. During 1999, we recognized revenue from incumbent local exchange carriers of approximately $9.7 million, or 15.1% of our 1999 revenue, for such services. Payments of approximately $1.6 were received from the incumbent local exchange carriers during 1999. We determined to recognize this revenue because we concluded, based upon all of the facts and circumstances available to us at the time, including numerous state public service commission and state and federal court decisions upholding competitive local exchange carriers' entitlement to reciprocal compensation for such calls, that realization of those amounts was reasonably assured. On October 13, 1999, however, the Louisiana Public Service Commission ruled that local traffic to Internet service providers in Louisiana is not eligible for reciprocal compensation. As a result of that ruling, we determined that we could no longer conclude that realization of amounts attributable to reciprocal compensation for termination of local calls to Internet service providers in Louisiana was reasonably assured. Accordingly, we recorded an adjustment to reduce revenue in the quarter ended September 30, 1999, which reversed all reciprocal compensation revenue previously recognized related to Internet service provider traffic in Louisiana for the entire year of 1998 and for the first nine months of 1999. The adjustment amounted to $4.4 million, of which $1.1 million relates to the year ended December 31, 1998 and $3.3 million relates to the nine months ended September 30, 1999. 20 Although incumbent local exchange carriers have disputed the entitlement of competitive local exchange carriers to reciprocal compensation for termination of local calls to Internet service providers in jurisdictions other than Louisiana as well, we have determined to continue to recognize amounts due to us for reciprocal compensation for calls in jurisdictions other than Louisiana in which we currently operate systems because we have concluded, based upon all of the facts and circumstances, including numerous state public service commission and state and federal court decisions upholding competitive local exchange carriers entitlement to reciprocal compensation for such calls, that realization of such amounts is reasonably assured. South Carolina has also ruled that incumbent local exchange carriers are not obligated to pay reciprocal compensation for termination of local calls to Internet service providers. As a result, unless that decision is reversed, we will not recognize revenue for such calls in South Carolina for our systems in Spartanburg, Columbia and Charleston. In jurisdictions other than Louisiana and South Carolina we will continue to account for reciprocal compensation with the incumbent local exchange carriers, including the activity associated with the disputed Internet service provider traffic, as local traffic pursuant to the terms of our interconnection agreements. Accordingly, in these jurisdictions, we will continue to recognize revenue in the period that the traffic is terminated. Currently, over 30 state commissions and several federal and state courts have ruled that reciprocal compensation arrangements do apply to calls to Internet service providers, while four jurisdictions have ruled to the contrary. A number of these rulings are subject to appeal. Additional disputes over the appropriate treatment of Internet service provider traffic are pending in other states. On February 26, 1999, the Federal Communications Commission issued a declaratory ruling determining that Internet service provider traffic is interstate for jurisdictional purposes, but that its current rules neither require nor prohibit the payment of reciprocal compensation for such calls. In the absence of a federal rule, the Federal Communications Commission determined that state commissions have authority to interpret and enforce the reciprocal compensation provisions of existing interconnection agreements, and to determine the appropriate treatment of Internet service provider traffic in arbitrating new agreements. The Federal Communications Commission also requested comment on alternative federal rules to govern compensation for such calls in the future. In response to the Federal Communications Commission ruling some Regional Bell Operating Companies have asked state commissions to reopen previous decisions requiring the payment of reciprocal compensation on Internet service provider calls. Some Regional Bell Operating Companies and some competitive local exchange carriers appealed the Federal Communications Commission's declaratory ruling to the United States Court of Appeals for the District of Columbia Circuit, which issued a decision on March 24, 2000, vacating the declaratory ruling. The court stated that the Federal Communications Commission had not adequately explained its conclusion that calls to Internet service providers should not be treated as local traffic for reciprocal compensation purposes. We view this decision as favorable, but the court's direction to the Federal Communications Commission to re-examine the issue will likely result in further delay in the resolution of pending compensation disputes, and there can be no assurance as to the ultimate outcome of these proceedings. Operating Expenses. Our principal operating expenses consist of network operating costs, selling, general and administrative expenses, stock option compensation expense and depreciation and amortization. Network operating costs include charges from incumbent local exchange carriers for resale services, termination and unbundled network element charges; charges from long distance carriers for resale of long distance services; salaries and benefits associated with network operations, billing and information services and customer care personnel; franchise fees and other costs, including direct city administration costs. Network operating costs also include a percentage of both our intrastate and interstate revenues which we pay as universal service fund charges. Selling, general and administrative expenses consist of sales personnel and support costs, corporate and finance personnel and support costs and legal and accounting expenses. Depreciation and amortization includes charges related to plant, property and equipment and amortization of intangible assets, including franchise acquisition costs. Depreciation and amortization expense will increase as we place additional networks into service and continue to expand our existing networks. Interest Expense. Interest expense includes interest charges on our 13 1/2% Senior Notes, 12 1/2% Senior Discount Notes and our Amended Senior Secured Credit Facility. Interest expense also includes amortization of deferred financing costs. Interest expense will increase substantially in future periods as a result of the issuance of the 13 1/2% Senior Notes and increased borrowings under the Amended Senior Secured Credit Facility, discussed below. 21 1999 COMPARED TO 1998 Revenue. Revenue increased from $22.4 million for 1998 to $64.3 million for 1999. This increase is primarily attributable to the fact that for 1999 we derived revenues from 23 markets during the entire period, as compared to 1998 when we derived revenues from only 8 markets during the entire period, and began to derive revenues from 14 additional markets during the fourth quarter of 1998. In addition, each of our markets from which we derived revenues during 1998 generated increased revenues during 1999. During 1998 and 1999, we recognized revenue which we believed was due to us from incumbent local exchange carriers for terminating local traffic of Internet service providers. We determined to recognize this revenue because we concluded, based upon all of the facts and circumstances known to us at the time, including numerous state public service commission and state and federal court decisions upholding competitive local exchange carriers' entitlement to reciprocal compensation for such calls, that realization of those amounts was reasonably assured. On October 13, 1999, however, the Louisiana Public Service Commission ruled that local traffic to Internet service providers in Louisiana is not eligible for reciprocal compensation. As a result of that ruling, we determined that we could no longer conclude that realization of amounts attributable to termination of local calls to Internet service providers in Louisiana was reasonably assured. Accordingly, we recorded an adjustment to reduce revenue in the third quarter of 1999, which reversed all reciprocal revenue recognized related to Internet service provider traffic in Louisiana for the entire year of 1998 and the first nine months of 1999. The adjustment amounted to $4.4 million, of which $1.1 million relates to the year ended December 31, 1998 and $3.3 million relates to the nine months ended September 30, 1999. Although incumbent local exchange carriers, such as BellSouth, have generally withheld payments of amounts due for reciprocal compensation to competitive local exchange carriers such as the Company for calls to Internet service providers and disputed the entitlement of competitive local exchange carriers to reciprocal compensation for such calls in jurisdictions other than Louisiana as well, we have determined to continue to recognize amounts due to us for reciprocal compensation for such calls in jurisdictions other than Louisiana and South Carolina (which is the only other jurisdiction in which we currently operate that has adopted a similar position) because we have concluded, based upon all of the facts and circumstances, including numerous state public service commission and state and federal court decisions upholding competitive local exchange carriers' entitlement to reciprocal compensation for such calls, that realization of such amounts is reasonably assured. Revenue for 1998 and 1999 included $14.2 million and $19.7 million, respectively, of revenue derived from resale of switched services and an aggregate of $8.2 million and $44.6 million (including, after giving effect to the third quarter 1999 $4.4 million adjustment for Louisiana, $9.7 million of revenue related to reciprocal compensation during 1999), respectively, of revenue derived from on-net special access, private line and switched services. Resale of switched services represented 63.2% of revenue in 1998 and 30.6% of revenue in 1999. Network Operating Costs. Network operating costs increased from $37.3 million in 1998 to $110.3 million in 1999. This increase of approximately $73.0 million was due primarily to the increase in the number of markets in which we operated in 1999 and the related increases of $27.7 million in direct costs associated with providing on-net services, resale services and leasing unbundled network element services, $19.2 million in personnel costs, $6.5 million in network support services, $6.3 million in consulting and professional services costs, $2.2 million in telecommunications costs, $2.2 million in facility costs, $1.4 million in travel costs and $7.5 million in other direct operating costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $24.5 million in 1998 to $55.8 million in 1999. This increase of approximately $31.3 million resulted primarily from increases of $20.5 million in personnel costs, $3.9 million in professional costs, $2.9 million in travel related costs, as well as increases in other marketing and general and administrative costs aggregating approximately $4.0 million. These increases were due primarily to the greater number of networks in commercial operation during 1999. Stock Option Compensation Expense. Stock option compensation expense, a non-cash charge, increased from $7.1 million for 1998 to $29.8 million for 1999. This increase primarily resulted from an increase in the estimated fair value of the Company's Common Stock, as well as the grant of additional option awards during 1999. 22 Depreciation and Amortization. Depreciation and amortization expense increased from $9.3 million for 1998 to $29.1 million for 1999, primarily as a result of depreciation expense associated with the greater number of networks in commercial operation during 1999. Other Expense. During the second quarter of 1999, the Company recorded a $4.3 million charge to other expense in connection with an unfavorable arbitration award. The net amount due under the terms of the award was paid in full in June 1999. Interest Income. Interest income remained consistent from $8.8 million in 1998 to $8.7 million in 1999. Interest Expense. Interest expense increased from $29.8 million in 1998 to $69.4 million in 1999. The increase resulted primarily from the issuance of the Senior Notes in May 1999, additional accretion on the Senior Discount Notes and increased interest charges related to higher borrowings under the Senior Secured Credit Facility. The Company capitalized interest related to network construction projects of $5.1 million during 1998 and $6.6 million during 1999. Net Loss. For the reasons stated above, net loss increased from $76.8 million for 1998 to $225.7 million for 1999. 1998 COMPARED TO 1997 Revenue. Revenue increased from $3.4 million for 1997 to $22.4 million for 1998. This increase is primarily attributable to the fact that for 1998 we derived revenues from 8 markets during the entire period, as well as 14 additional markets from which we began to derive revenues at various points during the period, as compared to 1997 when we derived revenues from only 1 market during the entire period, and began to derive revenues from 7 additional markets at various points during the year. In addition, each of our markets from which we derived revenues during 1997 generated increased revenues during 1998. Revenue for 1997 and 1998 included $2.3 million and $14.2 million, respectively, of revenue derived from resale of switched services and an aggregate of $1.1 million and $8.2 million (including $2.9 million of revenue from reciprocal compensation in 1998), respectively, of revenue derived from on-net special access, private line and switched services. Resale of switched services represented 67.6% of revenue in 1997 and 63.2% of revenue in 1998. Network Operating Costs. Network operating costs increased from $7.7 million in 1997 to $37.3 million in 1998. This increase of approximately $29.6 million was due primarily to the increase in the number of markets in which we operated in 1998 and the related increases of $14.5 million in costs associated with providing resale services and leasing unbundled network element services, $5.3 million in personnel costs, $1.6 million in consulting and professional services costs, $3.4 million in contracted network support costs, and $1.1 million in facilities related costs, $1.0 million in travel related costs and $2.7 million in other direct operating costs. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased from $9.9 million in 1997 to $24.5 million in 1998. This increase of approximately $14.6 million resulted primarily from increases of $8.5 million in personnel costs, $900,000 in professional costs (consisting primarily of legal costs relating to regulatory matters) and $1.2 million in travel related costs, as well as increases in other marketing and general and administrative costs aggregating approximately $4.0 million. Stock Option Compensation Expense. Stock option compensation expense, a non-cash charge, decreased from $13.9 million in 1997 to $7.1 million in 1998. These charges are directly impacted by changes in the estimated fair value of the Company's common stock. The increase in the estimated fair value of such stock in 1998 was less than the increase in 1997. The expense charge for 1998 includes the net effect of a credit resulting from the termination of the KMC Telecom Inc. stock option plan, which was substantially offset by a charge related to the adoption of the KMC Telecom Holdings, Inc., stock option plan, in September 1998. Depreciation and Amortization. Depreciation and amortization expense increased from $2.5 million for 1997 to $9.3 million for 1998, primarily as a result of depreciation expense associated with the greater number of networks in commercial operation during 1998, as well as higher amortization of intangible assets. 23 Interest Expense. Interest expense increased from $2.6 million in 1997 to $29.8 million in 1998. This increase resulted primarily from the issuance of the Senior Discount Notes during the first quarter of 1998, which generated interest expense of $29.6 million in 1998, as well as the increased expense attributable to the higher level of borrowings under a credit facility in 1998. The Company capitalized interest of $5.1 million related to network construction projects during 1998 and $854,000 during 1997. Net Loss. For the reasons stated above, net loss increased from $32.7 million for 1997 to $76.8 million for 1998. STOCK COMPENSATION PLAN During 1996 and 1997 one of our principal operating subsidiaries granted options to purchase shares of its common stock pursuant to its 1996 Stock Plan. On June 26, 1998, the Board of Directors of the Company adopted the 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates which authorizes the grant of options to purchase common stock of the Company. During the third quarter of 1998, the Company replaced the options to purchase shares of common stock of the subsidiary previously granted under its 1996 Stock Plan, with options to purchase common stock of the Company granted under the 1998 Stock Plan and granted options to certain additional employees of the Company. Upon cancellation of the outstanding options under the 1996 Stock Plan, the Company reversed all compensation expense previously recorded with respect to such options. Additionally, to the extent the fair value of the common stock of the Company exceeded the exercise price of the options granted under the 1998 Stock Plan, the Company recognized compensation expense related to such options to the extent vested. The net effect of the cancellation of the options outstanding under the 1996 Stock Plan and the grant of options under the 1998 Stock Plan resulted in a credit to compensation expense of approximately $600,000 in 1998. Certain provisions in the stock option awards granted under the 1998 Stock Plan will necessitate that such awards be treated as variable stock compensation awards pursuant to Accounting Principles Board Opinion No. 25. Accordingly, compensation expense will be charged or credited periodically through the date of exercise or cancellation of such stock options, based on changes in the value of the Company's stock as well as the vesting schedule of such options. These compensation charges or credits are non-cash in nature, but could have a material effect on the Company's future reported net income (loss). LIQUIDITY AND CAPITAL RESOURCES We have incurred significant operating and net losses as a result of the development and operation of our networks. We expect that such losses will continue as we emphasize the development, construction and expansion of our networks and build our customer base. As a result, there will not be any cash provided by operations in the near future and we will need to fund the expansion of our networks. We have financed our operating losses and capital expenditures with equity invested by our founders, preferred stock placements, credit facility borrowings and the 12 1/2% Senior Discount Notes and the 13 1/2% Senior Notes. In February 1999, we issued PIK Preferred Stock and warrants to purchase common stock for aggregate gross proceeds of $65.0 million to two purchasers. In April 1999, we issued additional shares of PIK Preferred Stock and warrants to purchase common stock to one additional purchaser for aggregate gross proceeds of $35.0 million. On May 24, 1999, we issued $275.0 million aggregate principal amount of 13 1/2% Senior Notes due 2009 in a private offering. On December 30, 1999, we exchanged those notes for $275.0 million aggregate principal amount of notes that had been registered under the Securities Act of 1933. Approximately $104.1 million of the proceeds of the offering were used to purchase a portfolio of U.S. treasury securities that were pledged to secure the payment of the first six interest payments on the 13 1/2% Senior Notes. During the first quarter of 2000, we amended and expanded our $250.0 million senior secured credit facility to a new $700.0 million facility. In connection with the amendment, the $41.0 million borrowed under our prior credit facility with Lucent Technologies, Inc. was repaid and that facility was combined into the amended facility. Under the Amended Senior Secured Credit Facility, our subsidiaries which own our 34 existing networks and the 3 networks which are to be completed by the end of the first half of 2000 are permitted to borrow up to an aggregate of $700.0 million, subject to certain conditions, for the purchase of fiber optic cable, switches and other telecommunications equipment and, once certain financial conditions are met, for working capital 24 and other general corporate purposes. At March 29, 2000 we had $441.8 million of indebtedness outstanding under the Amended Senior Secured Credit Facility and had an additional $258.2 million in borrowing capacity available thereunder subject to certain conditions. The Amended Senior Secured Credit Facility contains a number of affirmative and negative covenants, one of which requires us to make cash capital contributions to our subsidiaries which are the borrowers thereunder of at least $185 million prior to April 1, 2001. In March 2000, we received a commitment from Lucent Technologies, Inc. to purchase an additional $100 million of our PIK Preferred Stock which we will apply towards the $185 million requirement referred to above. We currently contemplate raising the $85 million balance through private or public sales of securities in the capital markets. Net cash provided by financing activities from borrowings and equity issuances was $440.2 million for 1999. Our net cash used in operating and investing activities was $375.4 million for 1999. We made capital expenditures of $61.1 million in 1997 (including the acquisition of the Melbourne, Florida network for a purchase price of $2.0 million), $161.8 million in 1998 and $440.7 million in 1999. Continued significant capital expenditures are expected to be made in 2000 and thereafter. The majority of these expenditures is expected to be made for network construction and the purchase of switches and related equipment to facilitate the offering of our services. In addition, we expect to continue to incur operating losses while we expand our business and build our customer base. Actual capital expenditures and operating losses will depend on numerous factors, including the nature of future expansion and acquisition opportunities and factors beyond our control, including economic conditions, competition, regulatory developments and the availability of capital. At December 31, 1999, we had outstanding commitments aggregating approximately $96.5 million related to the purchase of fiber optic cable and telecommunications equipment under our agreements with certain suppliers and service providers. We believe that our cash, the expected proceeds from our proposed sale of PIK Preferred Stock to Lucent and borrowings available under the Amended Senior Secured Credit Facility will be sufficient to meet our liquidity needs through the completion of our remaining 3 networks currently planned for completion by the end of the first half of 2000, as well as operating losses and capital expenditure requirements for all of our 37 markets for the next 12 months. However, in the event that our plans change, the assumptions upon which our plans are based prove inaccurate, we expand or accelerate our business plan or we determine to consummate acquisitions, the foregoing sources of funds may prove insufficient to complete all such networks, and we may be required to seek additional financing sooner than we currently expect. Additional sources of financing may include public or private equity or debt financings by the Company, capitalized leases and other financing arrangements. We will require additional financing before we can begin to implement our plans to expand into any additional Tier III markets. We are exploring a number of alternatives but we cannot assure you that we will be successful in this regard. We can give no assurance that additional financing will be available to us or, if available, that it can be obtained on a timely basis and on acceptable terms. Failure to obtain such financing could result in the delay or abandonment of some or all of our development and expansion plans and expenditures, which would have a material adverse effect on our business, financial condition and results of operations. Such a failure could also limit our ability to make principal and interest payments on our indebtedness, and meet our dividend and redemption obligations with respect to our preferred stock. YEAR 2000 COMPLIANCE We did not experience any material business interruption as a result of the Year 2000 issue. Our own software applications functioned well and we did not experience any problems with the software applications of the local exchange carriers, long distance carriers or others on whose operations we depend or with 25 which our systems interact. We spent approximately $150,000 in connection with our Year 2000 compliance efforts, which we expensed as incurred. This amount did not include the cost of the new billing software, operational software and financial and personnel software systems which we implemented as a result of the expansion of our business. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the Year 2000 to ensure that any Year 2000 matters that may arise are addressed promptly. CERTAIN FACTORS WHICH MAY AFFECT OUR FUTURE RESULTS We Have Had a Limited Operating History and Have Incurred Negative Gross Profits, Operating Losses, Negative Cash Flow and Negative Adjusted EBITDA We were formed in September 1997 as a holding company. Our subsidiaries commenced material operations in 1996 and, as a result, we have had only a limited operating history and limited revenues. We have only recently completed the process of building many of our networks. Our prospects must be considered in the light of the risks, expenses and difficulties frequently encountered by companies in the early stage of development. In connection with the construction of our networks we have incurred and expect to continue to incur significant and increasing negative gross profits, operating losses and negative adjusted EBITDA while we expand our business and build our customer base. We can give no assurance that an adequate customer base with respect to any or all of our services will be obtained or sustained. Our negative gross profits, operating losses, negative adjusted EBITDA, cash used by operations and capital expenditures will increase as a result of the continuation of our expansion strategy. We cannot assure you that we will achieve or sustain profitability or generate positive EBITDA or at any time have sufficient resources to meet our capital expenditure and working capital requirements or make payments on our indebtedness. We must significantly increase our revenues and cash flows to meet our debt service and preferred stock dividend obligations. Substantial Indebtedness At February 29, 2000, we had outstanding approximately $938.2 million of indebtedness outstanding. Our indebtedness could have important consequences. For example, it could: o limit our ability to obtain any necessary financing in the future, o require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the funds available to us for other purposes, including working capital and capital expenditures, o limit our flexibility in planning for, or reacting to changes in, our business or the industry in which we operate, o make us more highly leveraged than many, if not all, of our competitors, which could place us at a competitive disadvantage compared to those of our competitors that are less leveraged, and o increase our vulnerability in the event of a downturn in our business. If we fail to meet our obligations there could be a default on our indebtedness which would permit the holders of substantially all of our indebtedness to accelerate the maturity thereof. In connection with the build-out of our networks and expansion of our services, we have been experiencing increasing negative adjusted EBITDA and our earnings were insufficient to cover fixed charges for 1997, 1998 and 1999. We might not be able to improve our earnings before fixed charges or adjusted EBITDA expense. If we do not, we might not be able to meet our debt service obligations. We cannot assure you that our cash flow from operations and capital resources will be sufficient to repay our 13 1/2% Senior Notes, 12 1/2% Senior Discount Notes, and the Amended Senior Secured Credit Facility in full or that a substantial portion of our indebtedness will not need to be refinanced. We can give no assurance that we will be able to effect such refinancings. 26 You should be aware that our ability to repay or refinance our current debt depends on our successful financial and operating performance and our ability to successfully implement our business strategy. Unfortunately, we cannot assure you that we will be successful in implementing our strategy or in realizing our anticipated financial results. You should also be aware that our financial and operational performance depends upon a number of factors, many of which are beyond our control. These factors include: o the economic and competitive conditions in the telecommunications network industry, o any operating difficulties, increased operating costs or pricing pressure we may experience, o the passage of legislation or other regulatory developments that may adversely affect us, o any delays in implementing any strategic projects, and o our ability to complete our networks on time and in a cost-effective manner. The Amended Senior Secured Credit Facility and the indentures applicable to our 13 1/2% Senior Notes and 12 1/2% Senior Discount Notes contain a number of significant covenants. These covenants limit our ability to, among other things: o borrow additional money, o make capital expenditures and other investments, o pay dividends, o merge, consolidate, or dispose of our assets, and o enter into transactions with our affiliates. Under the Amended Senior Secured Credit Facility, our subsidiaries are required to meet certain financial tests at the end of each quarter. Failure to comply with these covenants could limit our ability to make further borrowings, or could result in a default under the Amended Senior Secured Credit Facility, allowing the lenders to accelerate the maturity of the loans made thereunder. There can be no assurance that we will be able to comply with such covenants in the future. Our Future Growth Will Require Substantial Additional Capital Our current plans for expansion will require substantial additional cash from outside sources. We currently anticipate that our capital expenditures for 2000 will be approximately $285.0 million. We also will have substantial net losses to fund. Our substantial cash requirements will continue into the foreseeable future. We believe that our cash, the expected proceeds from our proposed sale of PIK Preferred Stock to Lucent and borrowings available under our Amended Senior Secured Credit Facility, will provide sufficient funds for us to complete the initial fiber optic backbone and installation of a switch in the remaining 3 networks currently planned for completion by the end of the first half of 2000, as well as operating losses and capital expenditure requirements for all of our 37 markets for the next 12 months. Thereafter, we will require additional financing. However, in the event that: o our plans change, o the assumptions upon which our plans are based prove inaccurate, o we expand or accelerate our business plan, or o we determine to consummate acquisitions, 27 the foregoing sources of funds may prove to be insufficient to complete all such networks, and we may require additional financing sooner than we currently expect. We will require additional financing, however, before we can begin to implement our plans to expand into any additional Tier III markets. We are exploring a number of alternatives, but we cannot assure you that we will be successful in this regard. Additional sources of financing may include: o public or private equity or debt financings, o capitalized leases, and o other financing arrangements. Pursuant to certain provisions of our Series A and Series C Cumulative Convertible Preferred Stock, and our Series E and Series F Senior Redeemable, Exchangeable, PIK Preferred Stock, we may not increase the authorized number of shares of our preferred stock or common stock without the consent of the holders of two-thirds of the shares of those series. We currently have only three million shares of common stock authorized. Additional financing might not be available to us on acceptable terms, within the limitations contained in our indebtedness, or at all. Failure to obtain such additional financing could result in the delay or abandonment of some or all of our development and expansion plans and expenditures, which would have a material adverse effect on our business prospects. Because We Are a Holding Company, We Will Be Reliant on Funds from Our Subsidiaries to Repay Our Indebtedness and Our Subsidiaries' Creditors May Have Priority on those Funds We are a holding company whose sole material asset is the common stock of our subsidiaries. In connection with the Amended Senior Secured Credit Facility, we have reaffirmed the pledge of all of the common stock of our operating subsidiaries that own our 34 existing networks (and the 3 networks planned for completion by the end of the first half of 2000) to the lenders under the Amended Senior Secured Credit Facility. Our operating subsidiaries, which currently own substantially all of our operating assets, are directly liable to the lenders under the Amended Senior Secured Credit Facility. We must rely upon dividends and other payments from our operating subsidiaries to generate the funds necessary to meet our obligations, including the payment of principal and interest on the notes. These subsidiaries are legally distinct from us and have no obligation to pay amounts due by us. The ability of our operating subsidiaries to make such payments to us will be subject to, among other things, the availability of funds, the terms of each operating subsidiary's indebtedness and applicable state laws. In particular, the terms of the operating subsidiaries' credit facilities prohibit them from paying dividends and principal and interest on intercompany borrowings unless, among other things, they are in compliance with certain financial covenants. Accordingly, we cannot assure you that we will be able to obtain any funds from our operating subsidiaries. Claims of creditors of our subsidiaries, including trade creditors, will generally have priority as to the assets of such subsidiaries over the claims of the Company and the holders of our indebtedness and capital stock. We have unconditionally guaranteed the repayment of the Amended Senior Secured Credit Facility. Our Industry is Extremely Competitive and Many of Our Competitors Have Greater Resources Than We Do The telecommunications industry is extremely competitive, particularly with respect to price and service. We face competition in all of our markets. Generally, the incumbent local exchange carrier competitor is one of the Regional Bell Operating Companies, one of GTE Corporation's subsidiaries or one of Sprint Corporation's subsidiaries. The incumbent local exchange carriers: o have long-standing relationships with their customers, 28 o have financial, technical and marketing resources substantially greater than ours, o have the potential to fund competitive services with revenues from a variety of businesses, and o currently benefit from certain existing regulations that favor the incumbent local exchange carriers over us in certain respects. We do not believe that Tier III markets can profitably support more than two competitors to the incumbent local exchange carrier. Accordingly, we believe that once we have completed the construction of our network backbone and the installation of our switch in a given market, potential new entrants in that market are likely to seek to deploy their capital elsewhere. We will generally continue to build in our markets after initial backbone construction and switch installation. We expect that this demonstration of our commitment to our markets will further deter new entrants. However, it is likely that in one or more of our markets we will face competition from two or more facilities-based competitive local exchange carriers. After the investment and expense of establishing a network and support services in a given market, the marginal cost of carrying an additional call is negligible. Accordingly, in Tier III markets where there are three or more facilities-based competitive local exchange carriers, we expect substantial price competition. We believe that operations in such markets are likely to be unprofitable for one or more operators. Potential competitors in our markets include: o microwave and satellite carriers, o wireless telecommunications providers, o cable television companies, utilities, Regional Bell Operating Companies seeking to operate outside their current local service areas, and o large long distance carriers, such as AT&T and MCI WorldCom, which have begun to offer integrated local and long distance telecommunications services. Consolidation of telecommunications companies and the formation of strategic alliances within the telecommunications industry, as well as the development of new technologies, could give rise to significant new competitors for us. One of the primary purposes of the Telecommunications Act of 1996 is to promote competition, particularly in local markets. We believe that Tier III markets will also see more agent and distributor resale initiatives. Recent regulatory initiatives allow competitive local exchange carriers like us to interconnect with incumbent local exchange carrier facilities. This provides increased business opportunities for us. However, these regulatory initiatives have been accompanied by increased pricing flexibility for, and relaxation of regulatory oversight of, the incumbent local exchange carriers. If the incumbent local exchange carriers engage in increased volume and discount pricing practices or charge competitive local exchange carriers increased fees for interconnection to their networks, or if the incumbent local exchange carriers delay implementation of interconnection to their networks, our business, financial condition and results of operations could be adversely affected. To the extent we interconnect with and use incumbent local exchange carrier networks to service our customers, we are dependent upon the technology and capabilities of the incumbent local exchange carriers to provide services and to maintain our service standards. We will become increasingly dependent on interconnection with incumbent local exchange carriers as switched services become a greater percentage of our business. The Telecommunications Act imposes interconnection obligations on incumbent local exchange carriers, but we cannot assure you that we will be able to obtain the interconnections we require at desirable rates, terms and conditions. In the event that we experience difficulties in obtaining appropriate and reasonably priced service from the incumbent local exchange carriers, our ability to serve our customers would be impaired. 29 Both the long distance business and data transmission business are extremely competitive. Prices in both businesses have declined significantly in recent years and are expected to continue to decline. In the long distance business we will face competition from large carriers such as AT&T, MCI Worldcom and Sprint. We will rely on other carriers to provide transmission and termination for our long distance traffic and therefore will be dependent on such carriers. We expect to experience declining prices and increasing price competition. We might not be able to achieve or maintain adequate market share or revenue, or compete effectively, in any of our markets. Any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations. The Regional Bell Operating Companies and GTE Companies Have Disputed the Entitlement of Competitive Local Exchange Carriers to Reciprocal Compensation for Certain Calls to Internet Service Providers Every time a customer of a Regional Bell Operating Company calls an Internet service provider that is one of our customers, we are entitled to receive payment from the Regional Bell Operating Company or a GTE Company. This payment is called "reciprocal compensation." The Regional Bell Operating Companies and GTE Companies object to making reciprocal compensation payments and are seeking to have this changed by legislation, regulation and litigation. The Regional Bell Operating Companies and GTE Companies have threatened to withhold, and in many cases have withheld, reciprocal compensation for the transport and termination of such calls. We recognized revenue of approximately $2.9 million, or 12.9% of our 1998 revenue, from incumbent local exchange carriers related to reciprocal compensation. We recognized revenue of approximately $9.7 million, or 15.1% of our revenue, related to these calls for 1999. Payments of approximately $135,000 and $1.6 million were received from the incumbent local exchange carriers during 1998 and 1999, respectively. We determined to recognize this revenue because we concluded, based upon all of the facts and circumstances available to us at the time, including numerous state public service commission and state and federal court decisions upholding competitive local exchange carriers' entitlement to reciprocal compensation for such calls, that realization of those amounts was reasonably assured. On October 13, 1999, however, the Louisiana Public Service Commission ruled that local traffic to Internet service providers in Louisiana is not eligible for reciprocal compensation. As a result of that ruling, we determined that we could no longer conclude that realization of amounts attributable to reciprocal compensation for termination of local calls to Internet service providers in Louisiana was reasonably assured. Accordingly, we recorded an adjustment to reduce revenue in the quarter ended September 30, 1999, which reversed all reciprocal compensation revenue previously recognized related to Internet service provider traffic in Louisiana for the entire year of 1998 and for the first nine months of 1999. The adjustment amounted to $4.4 million, of which $1.1 million relates to the year ended December 31, 1998 and $3.3 million relates to the nine months ended September 30, 1999. Although incumbent local exchange carriers have disputed the entitlement of competitive local exchange carriers to reciprocal compensation for termination of local calls to Internet service providers in jurisdictions other than Louisiana as well, we have determined to continue to recognize amounts due to us for reciprocal compensation for calls in jurisdictions other than Louisiana in which we operate systems because we have concluded, based upon all of the facts and circumstances, including numerous state public service commissions and state and federal court decisions upholding competitive local exchange carriers entitlement to reciprocal compensation for such calls, that realization of such amounts is reasonably assured. South Carolina has also ruled that incumbent local exchange carriers are not obligated to pay reciprocal compensation for termination of local calls to Internet service providers. As a result, unless that decision is reversed, we will not recognize revenue for such calls in South Carolina for our systems in Spartanburg, Columbia and Charleston. Currently, over 30 state commissions and several federal and state courts have ruled that reciprocal compensation arrangements do apply to calls to Internet service providers, while four jurisdictions have ruled to the contrary. A number of these rulings are subject to appeal. Additional disputes over the appropriate treatment of Internet service provider traffic are pending in other states. On February 26, 1999 the Federal Communications Commission issued a declaratory ruling determining that Internet service provider traffic is interstate for jurisdictional purposes, but that its current rules neither require nor prohibit the payment of reciprocal compensation for such calls. In 30 the absence of a federal rule, the Federal Communications Commission determined that state commissions have authority to interpret and enforce the reciprocal compensation provisions of existing interconnection agreements, and to determine the appropriate treatment of Internet service provider traffic in arbitrating new agreements. The Federal Communications Commission also requested comment on alternative federal rules to govern compensation for such calls in the future. In response to the Federal Communications Commission ruling some Regional Bell Operating Companies have asked state commissions to reopen previous decisions requiring the payment of reciprocal compensation on Internet service provider calls. Some Regional Bell Operating Companies and some competitive local exchange carriers appealed the Federal Communications Commission's declaratory ruling to the United States Court of Appeals for the District of Columbia Circuit, which issued a decision on March 24, 2000, vacating the declaratory ruling. The court stated that the Federal Communications Commission had not adequately explained its conclusion that calls to Internet service providers should not be treated as local traffic for reciprocal compensation purposes. We view this decision as favorable, but the court's direction to the Federal Communications Commission to re-examine the issue will likely result in further delay in the resolution of pending compensation disputes, and there can be no assurance as to the ultimate outcome of these proceedings. Our management will continue to consider the circumstances surrounding this dispute periodically in determining whether reserves against unpaid balances are warranted. As of December 31, 1999, no reserves are considered necessary by management. Our interconnection agreements provide for reciprocal compensation. As these expire, the incumbent local exchange carriers are expected to refuse to execute new agreements that provide for reciprocal compensation for such traffic. This is the case for our interconnection agreement with BellSouth, which expired in February, 1999. Upon termination of our interconnection agreements, if we cannot agree on reciprocal compensation with the incumbent local exchange carrier, the matter will be referred for arbitration to the state public utility commissions. If new interconnection agreements do not provide for reciprocal compensation, this could have a material adverse effect on our business, financial condition and results of operations. There Are Significant Risks in Our Expansion Strategy and a Failure to Manage Our Growth Effectively Could Adversely Affect Our Operations We must achieve substantial growth in order to meet our payment obligations under our indebtedness. Our networks have only recently become commercially operational and we have only recently deployed switches in our networks. Our success will depend, among other things, upon our ability to: o assess potential markets, o design and build fiber optic backbone routes that provide ready access to a substantial customer base, o achieve a sufficient customer base, o install facilities, o obtain required rights-of-way, building access and governmental permits, o implement interconnection and collocation with the incumbent local exchange carriers, o obtain unbundled network elements from incumbent local exchange carriers, and o secure financing. In addition, we may make additional acquisitions of existing businesses. Acquisitions could divert our resources and management time and would require integration with our management information, payroll and other systems, and with our existing networks and service offerings. We cannot assure you that any expansions of our networks will be completed on schedule, at a reasonable cost or within our specifications. Our growth may place a significant strain on our financial, management and operational resources. Our future performance will depend, in part, upon our ability to: 31 o manage our growth effectively, o monitor operations, o control costs, and o maintain effective quality control. This will require us to continue to implement and improve our operating, financial and accounting systems, to expand, train and manage our employee base and to effectively manage the integration of acquired businesses. If we fail to expand in accordance with our plans or to manage our growth, there would be a material adverse effect on our business, financial condition and results of operations. In addition, the establishment of new operations or acquisitions will involve significant expenses in advance of anticipated revenues and may cause fluctuations in our operating results. There Are Significant Risks Involved in Implementation of Our Business Plan We are a recent entrant into the competitive local telecommunications services industry. The local telecommunications services market was virtually closed to competition until the Telecommunications Act of 1996 and related regulatory rulings eliminated many barriers to entry. There are numerous operating complexities associated with providing these services. We will be required to develop new products, services and systems and will need to develop new marketing initiatives to sell these services. We have limited experience providing switched access and local dial tone services and we cannot assure you that we will be able to successfully implement our switched and data services strategy. We are deploying high capacity digital switches in our markets. This will enable us to offer local dial tone and a variety of switched access services and data services. We expect to incur negative gross profits and negative adjusted EBITDA from our switched services in any given market during the 24 to 36 month period after the switch is deployed. We expect operating margins to improve as each network is expanded and larger volumes of traffic are carried on our network. Implementation of our switched and data services is also subject to the ability of our equipment manufacturers to meet our switch deployment schedule. We cannot assure you that all of our switches will be deployed on the schedule that we presently contemplate or that, if deployed, our switches will be utilized to the degree that we presently expect. Our services may not be profitable due to, among other factors: o lack of customer demand, o inability to secure access to incumbent local exchange carrier facilities at acceptable rates, o competition and pricing pressure from other competitive local exchange carriers and the incumbent local exchange carriers, and o cost overruns in connection with network build-outs. The franchises that we obtain may require us to complete the build-out of our network within a period specified in the franchise grant. If we are unable to complete the build-out of a network within the specified period, and unable to obtain an extension of time in which to complete the build-out, our franchise agreement may be terminable by the local authority. We Must Improve Our Customer Service Systems Sophisticated information and processing systems are vital to our growth and our ability to monitor costs, bill customers, provision customer orders and 32 achieve operating efficiencies. Until recently our billing and information systems were produced largely in-house with partial reliance on third-party vendors and these systems have generally met our needs due in part to our low volume of bills and orders. As we expand our services and our customer base, the need for sophisticated billing and information systems has increased significantly. We have recently embarked upon a program to implement a full suite of order management, customer service, billing and financial applications. These applications include electronic order tracking software developed by Eftia OSS Solutions Inc., software providing comprehensive billing functions developed by Billing Concepts Systems, Inc., and financial software developed by People Soft, Inc. Initial installation of the new operational support systems commenced during the third quarter of 1999, with development and expansion to continue over the next 12 months. The initial installation of the new billing and financial systems was completed during the second quarter of 1999. Additional development of the billing and financial systems will take place over the next 9 months. Our failure to: o implement the new operational support systems on a timely basis, o adequately identify all of our information and processing needs, or o upgrade our systems as necessary, could have a material adverse effect on our business, financial condition and results of operations. We Will Be Reliant on Incumbent Local Exchange Carriers for Interconnection and Provisioning In each of our markets, we rely on incumbent local exchange carriers to originate and terminate all of our switched services traffic until our own switch becomes operational. Although the incumbent local exchange carriers are legally required to "unbundle" their services and permit us to purchase only the origination and termination services we need, thereby decreasing operating expenses, we cannot assure you that such unbundling will be timely or result in favorable prices. The Supreme Court overturned the Federal Communications Commission's rules regarding what network elements must be unbundled by the incumbent local exchange carriers, and remanded to the Federal Communications Commission the question of which network elements are "necessary" to competing carriers such as the Company. On November 5, 1999, the Federal Communications Commission issued an order and proposed rulemaking establishing the network elements that must be offered by incumbent local exchange carriers as unbundled network elements. The Supreme Court's decision also creates some uncertainty regarding the legal status of complaints filed at the Federal Communications Commission to enforce interconnection agreements. Carrying customer traffic on our own network generates substantially higher margins than reselling (i.e. paying an incumbent local exchange carrier to carry the traffic over its network). We are in the process of bringing our customers on-net, so that their traffic will generate better margins. During 1999 we significantly expanded our internal department that deals with bringing customers on-net. During the next 12 months we expect to begin transmitting our orders to the incumbent local exchange carriers electronically. However, we are dependent on the incumbent local exchange carriers to carry out the conversion process. During 1998 and 1999, 63% and 31%, respectively, of our revenue was from reselling. We cannot bring a customer on-net unless the incumbent local exchange carrier sends a technician to physically alter its network. Historically, the incumbent local exchange carriers have not stationed a large number of technicians in Tier III markets. We believe that incumbent local exchange carriers are increasing their technical staffs in Tier III markets, but they are still not able to process our orders promptly. In addition, the incumbent local exchange carriers have a financial incentive to delay this process. Accordingly, we expect to face substantial delays in bringing our resale customers on-net, which will delay our ability to improve our financial results as much as we would like. The foregoing factors could result in a material adverse effect on our business, financial condition and results of operations. 33 There Are Significant Risks of Entry into the Long Distance Business In order to offer our end-user customers a complete package of telecommunications services, we recently began to offer long distance services. As a new entrant in the long distance business, we expect to generate low gross margins and substantial start-up expenses as we roll out our long distance service offerings. Long distance telecommunications services involve the origination of traffic from end-user customers to our telecommunications switches. From these, we will rely on other carriers to provide transmission and termination services for our long distance traffic and will therefore be dependent on such carriers. We enter into resale agreements with long distance carriers to provide us with long distance transmission services. These agreements typically provide for the resale of long distance services on a per minute basis (some with minimum volume commitments or volume discounts). The negotiation of these agreements involves estimates of future supply and demand for long distance telecommunications transmission capacity, as well as estimates of the calling pattern and traffic levels of our future long distance customers. Should we fail to meet our minimum volume commitments, if any, pursuant to these resale agreements, we may be obligated to pay underutilization charges or we may lose the benefit of all or a portion of the volume discounts we have negotiated. Likewise, we may underestimate our need for long distance facilities and therefore be required to obtain the necessary transmission capacity in "spot markets" which are often more expensive than longer term contracts. We cannot assure you that we will acquire long distance capacity on favorable terms or that we can accurately predict long distance prices and volumes so that we can generate favorable gross margins from our long distance business. Our success in entering into the long distance business will be dependent upon, among other things: o our ability to select new equipment and software and integrate these into our networks, o our ability to hire and train qualified personnel, o our ability to enhance our billing, back-office and information systems to accommodate long distance services, and o the acceptance by potential customers of our long distance service offerings. If our long distance transmission business fails to generate favorable gross margins, or if we fail in any of the foregoing respects, such failure may have a material adverse effect on our business, financial condition and results of operations. There Are Significant Risks of Entry into the Data Transmission Business To complement our telecommunications services offerings, we began offering data transmission services in certain of our markets in 1997. We now offer ISDN, Internet access infrastructure, Local Area Network-to-Local Area Network interconnect and Wide-Area Network services and we are developing product applications for DSL, port wholesale, frame relay and ATM services to complement our existing data services. These services are primarily targeted at large and medium sized businesses with substantial data communications requirements. In providing these services, we will be dependent upon vendors for equipment, as well as ongoing training and support and other matters. The success of our entry into the data transmission business will be dependent upon, among other things: o our ability to select new equipment and software and integrate these into our networks, o our ability to hire and train qualified personnel, o our ability to enhance our billing, back-office and information systems to accommodate data transmission services, and o the acceptance by potential customers of our service offerings. 34 We cannot assure you that we will be successful with respect to these matters. If we are not successful with respect to these matters, there may be a material adverse effect on our business, financial condition and results of operations. We Are Subject to Significant Government Regulation Which May Change in an Adverse Manner Our networks and the provision of switched and private line services are subject to significant regulation at the federal, state and local levels. The telecommunications industry in general, and the competitive local exchange carrier industry in particular, are undergoing substantial regulatory change and uncertainty. We cannot assure you that future regulatory, judicial or legislative changes, or other regulatory activities will not have a material adverse effect on our business, financial condition and results of operations. The Terms of Our Indebtedness May Restrict Our Corporate Activities The documents under which our long-term debt was issued contain a number of significant covenants. These covenants limit, among other things, our ability to: o borrow additional money, o create liens, o engage in sale-leaseback transactions, o pay dividends, o make investments, o sell assets, o issue capital stock, o redeem capital stock, o merge or consolidate, and o enter into transactions with our stockholders and affiliates. However, the limitations contained in the documents under which our long-term debt was issued are subject to a number of important qualifications and exceptions. In particular, while the indenture applicable to our 12 1/2% Senior Discount Notes and the indenture applicable to the 13 1/2% Senior Notes restrict our ability to incur additional indebtedness, they do permit us to incur an unlimited amount of purchase money indebtedness. If we incur new indebtedness, the related risks that we and our subsidiaries now face could intensify. Any of the foregoing factors could have a material adverse effect on our business, financial condition and results of operations. We Are Dependent on Third Parties for Our Rights-of-Way and Franchises We must obtain easements, rights-of-way, entry to premises, franchises and licenses from various private parties, actual and potential competitors and state and local governments in order to construct and operate our networks, some of which may be terminated upon 30 or 60 days' notice to us. We cannot assure you that we will obtain rights-of-way and franchise agreements on acceptable terms or that current or potential competitors will not obtain similar rights-of-way and franchise agreements that will allow them to compete against us. If any of our existing franchise or license agreements were terminated or not renewed and we were forced to remove our fiber optic cables or abandon our networks in place, such termination could have a material adverse effect on our business, financial condition and results of operations. 35 The Telecommunications Industry is Subject to Rapid Technological Change The telecommunications industry is subject to rapid and significant changes in technology, and we must rely on third parties for the development of and access to new technology. We cannot predict the effect of technological changes on our business. We believe our future success will depend, in part, on our ability to anticipate or adapt to such changes and to offer, on a timely basis, services that meet customer demands. We may not be able to anticipate or adapt to such changes and to offer, on a timely basis, services that meet customers' demands. A failure to do so would have a material adverse effect on our business, financial condition and results of operations. The Future Success of Our Business Depends Upon Certain Key Personnel We believe that the efforts of a small number of key management and operating personnel will largely determine our success and the loss of any such persons could adversely affect us. We do not maintain so-called "key man" insurance on any of our personnel. We have employment agreements with Mr. Kamine, the Chairman of our Board of Directors, and Mr. Young, our President and Chief Operating Officer, which currently run through December 31, 2002. Our success will also depend in part upon our ability to hire and retain highly skilled and qualified operating, marketing, financial and technical personnel. The competition for qualified personnel in the telecommunications industry is intense and, accordingly, we may not be able to hire or retain necessary personnel. Our failure to hire or retain necessary personnel could have a material adverse effect on our business, financial condition and results of operations. 36 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risks relating to our operations result primarily from changes in interest rates. The substantial majority of our long-term debt bears interest at a fixed rate. However, the fair market value of the fixed rate debt is sensitive to changes in interest rates. We are subject to the risk that market interest rates will decline and the interest expense due under the fixed rate debt will exceed the amounts due based on current market rates. We have entered into an interest rate swap agreement with a commercial bank to reduce the impact of changes in interest rates on a portion of our outstanding variable rate debt. The agreement effectively fixes the interest rate on $125.0 million of our outstanding variable rate borrowings under the Amended Senior Secured Credit Facility due 2007. The interest rate swap agreement terminates in April 2004. The following table provides information about our significant financial instruments that are sensitive to changes in interest rates (in millions):
Fair Value on Future Principal Payments December 31, 1999 2000 2001 2002 2003 2004 Thereafter Total --------------------------------------------------------------------- Long-Term Debt: Fixed Rate: Senior Discount Notes, Interest payable at 12 1/2%, Maturing 2008.................... $ 275.7 $ - $ - $ - $ - $ - $ 301.1 $ 301.1 Senior Notes, Interest payable at 13 1/2 %, Maturing 2009.................... 263.5 - - - - - 275.0 275.0 Variable rate: Amended Senior Secured Credit Facility, interest variable (10.26% at December 31, 1999)(a)............ 235.0 - - .5 22.5 35.6 176.4 235.0 --------------------------------------------------------------------- Interest rate swap: Variable rate for fixed rate........ (3.9) $ - - - - - - - --------------------------------------------------------------------- Total............................ $ 770.3 $ - $ - $ .5 $22.5 $35.6 $ 752.5 $ 811.1 =====================================================================
- - ----------------------------------------------- (a) Pay interest rate is based on a variable rate, which at our option, is determined by either a base rate or LIBOR, plus, in each case, a specified margin. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following statements are filed as part of this Annual Report on Form 10-K:
FORM 10-K PAGE NO. ------------ Report of Independent Auditors................................................. 39 Consolidated Balance Sheets as of December 31, 1998 and 1999................... 40 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999............................................................... 41 Consolidated Statements of Redeemable and Nonredeemable Equity for the years ended December 31, 1997, 1998 and 1999...................................... 42 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999......................................................... 44 Notes to Consolidated Financial Statements..................................... 45 Independent Auditors' Report on Schedules...................................... 72 Schedule I - Condensed Financial Information of Registrant..................... 73 Schedule II - Valuation and Qualifying Accounts................................ 82
38 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders KMC Telecom Holdings, Inc. We have audited the consolidated balance sheets of KMC Telecom Holdings, Inc. as of December 31, 1998 and 1999, and the related consolidated statements of operations, redeemable and nonredeemable equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of KMC Telecom Holdings, Inc. as of December 31, 1998 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP MetroPark, New Jersey January 31, 2000, except for Note 18 as to which the date is March 28, 2000 39
KMC TELECOM HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) DECEMBER 31 ------------------------------ 1998 1999 ------------- ------------- ASSETS Current assets: Cash and cash equivalents.............................................. $ 21,181 $ 85,966 Restricted investments................................................. -- 37,125 Accounts receivable, net of allowance for doubtful accounts of $350 and $5,551 in 1998 and 1999, respectively........................... 7,539 27,373 Prepaid expenses and other current assets.............................. 1,315 1,375 ------------- ------------- Total current assets...................................................... 30,035 151,839 Investments held for future capital expenditures.......................... 27,920 -- Long-term restricted investments.......................................... -- 51,446 Networks and equipment, net............................................... 224,890 639,324 Intangible assets, net.................................................... 2,829 3,602 Deferred financing costs, net............................................. 20,903 38,816 Other assets.............................................................. 4,733 1,013 ------------- ------------- $ 311,310 $ 886,040 ============= ============= LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY) Current liabilities: Accounts payable....................................................... $ 21,052 $ 167,490 Accrued expenses....................................................... 9,187 37,047 Deferred revenue....................................................... 1,187 4,309 ------------- ------------- Total current liabilities................................................. 31,426 208,846 Notes payable............................................................. 41,414 235,000 Senior notes payable...................................................... -- 275,000 Senior discount notes payable............................................. 267,811 301,137 ------------- ------------- Total liabilities......................................................... 340,651 1,019,983 Commitments and contingencies Redeemable equity: Senior redeemable, exchangeable, PIK preferred stock, par value $.01 per share; authorized: -0- shares in 1998 and 630 shares in 1999; shares issued and outstanding: Series E, -0- in 1998 and 65 shares in 1999 ($65,004 liquidation preference)..................................................... -- 50,770 Series F, -0- in 1998 and 44 shares in 1999 ($44,177 liquidation preference)..................................................... -- 41,370 Redeemable cumulative convertible preferred stock, par value $.01 per share; 499 shares authorized; shares issued and outstanding: Series A, 124 shares in 1998 and 1999 ($12,380 liquidation preference)..................................................... 30,390 71,349 Series C, 175 shares in 1998 and 1999 ($17,500 liquidation preference)..................................................... 21,643 40,301 Redeemable common stock, shares issued and outstanding, 224 in 1998 and 1999............................................................ 22,305 33,755 Redeemable common stock warrants....................................... 674 12,925 ------------- ------------- Total redeemable equity................................................... 75,012 250,470 Nonredeemable equity (deficiency) Common stock, par value $.01 per share; 3,000 shares authorized, issued and outstanding, 614 shares in 1998 and 629 shares in 1999.... 6 6 Additional paid-in capital.............................................. 13,750 -- Unearned compensation................................................... (5,824) (9,163) Accumulated deficit..................................................... (112,285) (375,256) ------------- ------------- Total nonredeemable equity (deficiency)................................... (104,353) (384,413) ------------- ------------- $ 311,310 $ 886,040 ============= ============= See accompanying notes.
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KMC TELECOM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31 ---------------------------------------------- 1997 1998 1999 ------------ ------------ ------------ Revenue....................................................... $ 3,417 $ 22,425 $ 64,313 Operating expenses: Network operating costs.................................... 7,735 37,336 110,309 Selling, general and administrative........................ 9,923 24,534 55,803 Stock option compensation expense.......................... 13,870 7,080 29,833 Depreciation and amortization.............................. 2,506 9,257 29,077 ------------ ------------ ------------ Total operating expenses...................................... 34,034 78,207 225,022 ------------ ------------ ------------ Loss from operations.......................................... (30,617) (55,782) (160,709) Other expense................................................. -- -- (4,297) Interest income............................................... 513 8,818 8,701 Interest expense.............................................. (2,582) (29,789) (69,411) ------------ ------------ ------------ Net loss...................................................... (32,686) (76,753) (225,716) ------------ ------------ ------------ Dividends and accretion on redeemable preferred stock......... (8,904) (18,285) (81,633) ------------ ------------ ------------ Net loss applicable to common shareholders.................... $ (41,590) $ (95,038) $ (307,349) ============ ============ ============ Net loss per common share..................................... $ (64.93) $ (114.42) $ (360.88) ============ ============ ============ Weighted average number of common shares outstanding.......... 641 831 852 ============ ============ ============ See accompanying notes.
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KMC TELECOM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE AND NONREDEEMABLE EQUITY YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (IN THOUSANDS) Redeemable Equity --------------------------------------------------------------------------------------- PREFERRED STOCK ---------------------------------------------------------------------------- SERIES A SERIES C SERIES D SERIES E SERIES F COM- --------------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES --------------------------------------------------------------------------------------- Balance, December 31, 1996 - $ - - $ - - $ - - $ - - $ - - Conversion of convertible notes payable of Series A Preferred Stock 124 11,519 Issuance of warrants Issuance of common stock and exercise of warrants 133 Issuance of Series C Preferred Stock 150 14,199 Issuance of Series D Preferred Stock 25 2,299 Accretion on redeemable equity 7,360 468 80 Issuance and adjustment to fair value of stock options to employees Amortization of unearned compensation Increase in fair value of stock options issued to non-employees Net loss ========================================================================================= Balance, December 31, 1997 124 18,879 150 14,667 25 2,379 - - - - - Conversion of Series D Preferred Stock 25 2,379 (25) (3,379) to Series C Preferred Stock Issuance of common stock 91 Accretion on redeemable equity 11,511 4,597 Payment of dividends on preferred stock of subsidiary Issuance of warrants Cancellation of KMC Telecom stock options Issuance and adjustment to fair value of stock options to employees Issuance and adustment to fair value of stock options to non-employees Amortization of unearned compensation Net loss ========================================================================================= Balance, December 31, 1998 124 30,390 175 21,643 - - - - - - 224
Redeemable Equity (cont'd) Nonredeemable Equity (Deficiency) ----------------------------- ------------------------------------------------------------ TOTAL TOTAL ADDITIONAL NONREDEEMABLE MON STOCK REDEEMABLE COMMON STOCK PAID-IN UNEARNED ACCUMULATED EQUITY ----------------- -------------- AMOUNT WARRANTS EQUITY SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIENCY) ------------------------------------------------------------------------------------------ Balance, December 31, 1996 $ - $ - $ - 600 $6 $ 4,468 $ (1,239) $ (2,846) $ 389 Conversion of convertible notes payable of Series A Preferred Stock 11,519 - Issuance of warrants 2,025 2,025 - Issuance of common stock and exercise of warrants 10,863 (1,500) 9,363 14 - Issuance of Series C Preferred Stock 14,199 - Issuance of Series D Preferred Stock 2,299 Accretion on redeemable equity 324 14 8,246 (8,246) 8,246 Issuance and adjustment to fair value of stock options to employees 14,296 (14,296) - Amortization of unearned compensation 9,014 9,014 Increase in fair value of stock options issued to non-employees 4,856 4,856 Net loss (32,686) (32,686) ========================================================================================= Balance, December 31, 1997 11,187 539 47,651 614 6 15,374 (6,521) (35,532) (26,673) Conversion of Series D Preferred Stock to Series C Preferred Stock - - Issuance of common stock 9,500 9,500 - Accretion on redeemable equity 1,618 135 17,861 (17,861) (17,861) Payment of dividends on preferred stock of subsidiary (592) (592) Issuance of warrants 10,446 10,446 Cancellation of KMC Telecom stock options (26,191) 4,845 (21,346) Issuance and adjustment to fair value of stock options to employees 27,906 27,906 - Issuance and adustment to fair value of stock options to non-employees 4,668 4,668 Amortization of unearned compensation 23,758 23,758 Net loss (76,753) (76,753) =========================================================================================== Balance, December 31, 1998 22,305 674 75,012 614 6 13,750 (5,824) (112,285) (104,353) See accompanying notes.
42
KMC TELECOM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF REDEEMABLE AND NONREDEEMABLE EQUITY YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 (IN THOUSANDS) Redeemable Equity --------------------------------------------------------------------------------------- PREFERRED STOCK ---------------------------------------------------------------------------- SERIES A SERIES C SERIES D SERIES E SERIES F COM- --------------------------------------------------------------------------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES --------------------------------------------------------------------------------------- Balance, December 31, 1998 (carried forward) 124 $30,390 175 $21,643 - $ - - $ - - $ 224 Issuance of Series E Preferred Stock 60 44,829 Issuance of Series F Preferred Stock 40 34,817 Stock dividend of Series E Preferred Stock 5 5,004 Stock dividend of Series F Preferred Stock 4 4,177 Issuance of warrants Reclassification of warrants related to "put rights" Exercise of warrants Accretion on redeemable equity 40,959 18,658 937 2,376 Issuance and adjustment to fair value of stock option to employees Adjustment to fair value of stock options to non-employees Amortization of unearned compensation Exercise of stock options Reclassification of additional paid-in capital deficiency Net loss ========================================================================================= Balance, December 31, 1999 124 $71,349 175 $40,301 - $ - 65 $50,770 44 $41,370 224 =========================================================================================
Redeemable Equity (cont'd) Nonredeemable Equity (Deficiency) ---------------------------- ------------------------------------------------------------ TOTAL TOTAL ADDITIONAL NONREDEEMABLE MON STOCK REDEEMABLE COMMON STOCK PAID-IN UNEARNED ACCUMULATED EQUITY ----------------- -------------- AMOUNT WARRANTS EQUITY SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIENCY) ------------------------------------------------------------------------------------------ Balance, December 31, 1998 (carried forward) $22,305 $ 674 $75,012 614 $6 $13,750 $(5,824) $(112,285) $(104,353) Issuance of Series E Preferred Stock 44,829 - Issuance of Series F Preferred Stock 34,817 - Stock dividend of Series E Preferred Stock 5,004 (5,004) (5,004) Stock dividend of Series F Preferred Stock 4,177 (4,177) (4,177) Issuance of warrants 10,606 10,606 749 749 Reclassification of warrants related to "put rights" (249) (249) 249 249 Exercise of warrants 1 1 Accretion on redeemable equity 11,450 1,894 76,274 (76,274) (76,274) Issuance and adjustment to fair value of stock option to employees 27,286 (27,286) - Adjustment to fair value of stock options to non-employees 5,832 5,832 Amortization of unearned compensation 23,947 23,947 Exercise of stock options 15 333 333 Reclassification of additional paid-in capital deficiency 37,255 (37,255) - Net loss (225,716) (225,716) ================================================================================================= Balance, December 31, 1999 $33,755 $12,925 $250,470 629 $6 $ - $(9,163) $(375,256) $(384,413) ================================================================================================= See accompanying notes.
43 KMC TELECOM HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31 1997 1998 1999 ------- -------- ------ OPERATING ACTIVITIES Net loss...................................................... $ (32,686) $ (76,753) $(225,716) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............................. 2,506 9,257 29,077 Provision for doubtful accounts............................ 34 370 5,263 Non-cash interest expense.................................. 610 25,356 31,141 Non-cash stock option compensation expense................. 13,870 7,080 29,833 Changes in assets and liabilities: Accounts receivable...................................... (1,330) (6,591) (25,097) Prepaid expenses and other current assets................ (346) (826) (60) Accounts payable......................................... 2,934 7,449 29,319 Accrued expenses......................................... 6,062 2,953 24,227 Due to affiliates........................................ (35) (47) - Other assets............................................. (295) (1,821) 3,720 ------- -------- -------- Net cash used in operating activities......................... (8,676) (33,573) (98,293) ------- -------- -------- INVESTING ACTIVITIES Construction of networks and purchases of equipment........... (59,146) (148,580) (318,536) Acquisitions of franchises, authorizations and related assets. (1,846) (1,147) (1,992) Cash paid for acquisition of Melbourne Network................ (2,000) - - Deposit on purchase of equipment.............................. - (2,551) - Purchase of investments, net.................................. - (27,920) - Redemption of investments..................................... - - 43,450 -------- --------- --------- Net cash used in investing activities......................... (62,992) (180,198) (277,078) -------- --------- --------- FINANCING ACTIVITIES Proceeds from notes payable, net of issuance costs............ 59,873 938 - Proceeds from issuance of common stock and warrants, net of issuance costs....................................... 9,363 20,446 - Proceeds from issuance of preferred stock and related warrants, net of issuance costs............................. 16,498 - 91,001 Issuance costs of credit facilities........................... - (6,515) (2,300) Proceeds from exercise of stock options....................... - - 333 Proceeds from issuance of senior notes, net of issuance costs and purchase of portfolio of restricted investments........ - - 158,286 Proceeds from senior secured credit facility, net of issuance costs...................................................... - - 192,836 Repayment of notes payable.................................... - (20,801) - Proceeds from issuance of senior discount notes, net of issuance costs............................................. - 225,923 - Dividends on preferred stock of subsidiary.................... - (592) - -------- --------- --------- Net cash provided by financing activities..................... 85,734 219,399 440,156 -------- --------- --------- Net increase in cash and cash equivalents..................... 14,066 5,628 64,785 Cash and cash equivalents, beginning of year.................. 1,487 15,553 21,181 ----------- ----------- ----------- Cash and cash equivalents, end of year........................ $ 15,553 $ 21,181 $ 85,966 =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for interest, net of amounts capitalized................................................... $ 766 $ 4,438 $ 29,182 =========== =========== ===========
See accompanying notes. 44 KMC TELECOM HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 1. ORGANIZATION KMC Telecom Holdings, Inc. ("KMC Holdings") is a holding company formed during 1997 primarily to own all of the shares of its operating subsidiaries, KMC Telecom Inc. ("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), KMC Telecom III, Inc. ("KMC Telecom III") and KMC Telecom of Virginia, Inc. On September 22, 1997, the stockholders of KMC Telecom exchanged all of their KMC Telecom common and preferred stock for equal numbers of shares of common and preferred stock of KMC Holdings. The merger was accounted for as an exchange of shares between entities under common control, and no changes were made to the historical cost basis of KMC Telecom's net assets. KMC Telecom Holdings, Inc. and its subsidiaries, KMC Telecom, Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Financial Services LLC, KMC Telecom.com, and KMC Telecom Financing, Inc. are collectively referred to herein as the Company. The Company is a facilities-based competitive local exchange carrier ("CLEC") providing telecommunications and data services to its customers; principally business, government and institutional end users, as well as Internet service providers, long distance companies and wireless service providers, primarily in the Southeastern and Midwestern United States. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation As noted above, effective September 22, 1997, KMC Telecom became a wholly-owned subsidiary of KMC Holdings. The accompanying financial statements include the consolidated financial position and results of operations of KMC Holdings and its subsidiaries subsequent to September 22, 1997. All significant intercompany transactions and balances have been eliminated. On July 1, 1999, the Company acquired all of the membership interests of KMC Services LLC from Harold N. Kamine, the Chairman of the Board of Directors, for nominal consideration. KMC Services LLC was formed to provide services to the Company and its customers, initially offering a leasing program for equipment physically installed at the customer's premises. The acquisition was accounted for as a combination of entities under common control, and no changes were made to the historical cost basis of KMC Services LLC's assets. During the second quarter of 1999, the Company had reduced the carrying value of its $709,000 loan receivable from KMC Services LLC to an amount equal to the value of KMC Services LLC's net assets at the acquisition date. KMC Services LLC has been consolidated with the Company since July 1, 1999. Cash and Cash Equivalents The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Investments Held for Future Capital Expenditures In 1998, the Company has designated certain amounts as investments held for future capital expenditures. As of December 31, 1998, the Company's investments held for future capital expenditures consisted of cash equivalents (bank term deposits and commercial paper with maturities of less than 90 days) of $11.2 million and debt securities (U.S. government obligations and commercial bonds due within 1 year) of $16.7 million. All debt securities have been designated by the Company as held-to-maturity. Accordingly, such securities are recorded in the accompanying December 31, 1998 financial statements at amortized cost. 45 Networks and Equipment Networks and equipment are stated at cost, net of accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets using the straight-line method for financial statement reporting purposes. The estimated useful lives of the Company's principal classes of assets are as follows: Networks: Fiber optic systems...............................................20 years Telecommunications equipment......................................10 years Furniture and other................................................5 years Leasehold improvements.......................................Life of lease Intangible Assets Costs incurred in developing new networks or expanding existing networks, including negotiation of rights-of-way and obtaining regulatory authorizations are capitalized and amortized over the initial term of the agreements, which generally range from 2 to 7 years. Costs incurred to obtain city franchises are capitalized by the Company and amortized over the initial term of the franchises, which generally range from 2 to 7 years. Deferred Financing Costs The Company capitalizes issuance costs related to its debt. Such costs are amortized utilizing the interest method over the lives of the related debt. The related amortization is included as a component of interest expense, and amounted to $561,000, $2,279,000 and $3,814,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Other Assets Other assets are comprised principally of employee loans, security deposits and other deposits and, at December 31, 1998, non-refundable deposits for the purchase of switching equipment. Revenue Recognition Revenue is recognized in the period the service is provided. The Company generally invoices customers one month in advance for recurring services resulting in deferred revenue. Unbilled revenue included in accounts receivable represents revenue earned for services which will be billed in the succeeding month and totaled $1,272,000 and $5,305,000 at December 31, 1998 and 1999, respectively. Net Loss Per Common Share Earnings per share are calculated in accordance with FASB Statement No. 128, Earnings per Share ("Statement 128"). All earnings per share amounts for all periods have been presented in accordance with the provisions of Statement 128. Diluted earnings per share have not been presented for any period, as the impact of including outstanding options and warrants would be anti-dilutive. Income Taxes The Company uses the liability method to account for income taxes. Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities. Advertising Costs Advertising costs are included in selling, general and administrative expenses and charged to expense as incurred. For the years ended December 31, 1997, 1998 and 1999, such costs were $66,000, $2,769,000 and $4,080,000, respectively. 46 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Impairment of Long-Lived Assets The Company records impairment losses on long-lived assets used in operations or expected to be disposed of when impairment indicators are present and the cash flows expected to be derived from those assets are less than the carrying amounts of those assets. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. No such events and circumstances have occurred. Stock-Based Compensation As permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation ("Statement 123"), the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee stock-based compensation. Under APB 25, no compensation expense is recognized at the time of option grant if the exercise price of the employee stock option is fixed and equals or exceeds the fair market value of the underlying common stock on the date of grant, and the number of shares to be issued pursuant to the exercise of such option are known and fixed at the grant date. As more fully described in Note 8, the Company's outstanding stock options are not considered fixed options under APB 25. The Company accounts for non-employee stock-based compensation in accordance with Statement 123. Segment Reporting In 1998, the Company adopted FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information ("Statement 131"). Statement 131 uses a management approach to report financial and descriptive information about an entity's operating segments. Operating segments are revenue-producing components of an enterprise for which separate financial information is produced internally for the entity's chief operating decision maker. Under this definition, the Company operated within a single segment for all periods presented. Start-up Activities In 1999, the Company adopted Statement of Position 98-5, Reporting on the Costs of Start-Up Activities, which requires costs of start-up activities to be expensed as incurred. This statement had no effect on the Company's results of operations or financial position, because the Company expensed such costs in prior years. Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133 ("Statement 133"), Accounting for Derivative Instruments and Hedging Activities, which will require the Company to recognize all derivatives on the balance sheet at fair value. The Company will be required to adopt Statement 133, as amended by Statement No. 137 which defers the effective date, as of January 1, 2001. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has not yet determined what the effect of Statement 133 will be on the earnings and financial position of the Company. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides additional guidance in applying generally accepted accounting 47 principles to revenue recognition in financial statements. In 1999 and previous years, the Company recognized installation revenue upon completion of the installation. Effective January 1, 2000, in accordance with the provisions of SAB 101, the Company will begin deferring installation revenue over the life of the contract. The Company estimates the effect of this change will be a reduction of revenue of approximately $2.2 million and will be reported as a cumulative effect of a change in accounting principle in the Company's interim unaudited consolidated financial statements for the period ended March 31, 2000. Reclassifications Certain reclassifications have been made to the 1997 and 1998 consolidated financial statements to conform with the 1999 presentation. 3. NETWORKS AND EQUIPMENT Networks and equipment are comprised of the following:
DECEMBER 31 1998 1999 -------------------------------- (in thousands) Fiber optic systems........................................... $ 99,502 $ 164,985 Telecommunications equipment.................................. 115,769 421,718 Furniture and fixtures........................................ 7,340 21,397 Leasehold improvements........................................ 1,177 1,811 Construction-in-progress...................................... 11,770 66,380 -------------------------------- 235,558 676,291 Less accumulated depreciation................................. (10,668) (36,967) ================================ $ 224,890 $ 639,324 ================================
Costs capitalized during the development of the Company's networks include amounts incurred related to network engineering, design and construction and capitalized interest. Capitalized interest related to the construction of the networks during the years ended December 31, 1997, 1998 and 1999 amounted to, $854,000, $5,133,000 and $6,635,000, respectively. For the years ended December 31, 1997, 1998 and 1999, depreciation expense was $2,122,000, $8,284,000 and $27,723,000, respectively. 4. INTANGIBLE ASSETS Intangible assets are comprised of the following:
DECEMBER 31 1998 1999 ------------------------------ (in thousands) Franchise costs................................ $ 1,690 $ 2,015 Authorizations and rights-of-ways.............. 1,455 2,052 Building access agreements and other........... 480 637 Other.......................................... 582 401 ------------------------------ 4,207 5,105 Less accumulated amortization.................. (1,378) (1,503) ------------------------------ $ 2,829 $ 3,602 ==============================
48 5. ACCRUED EXPENSES Accrued expenses are comprised of the following: DECEMBER 31 1998 1999 ------------------------------- (in thousands) Accrued compensation............................ $4,436 $11,423 Accrued costs related to financing activities... 380 7,316 Accrued interest payable........................ 162 8,544 Accrued telecommunications costs................ 565 3,794 Other accrued expenses.......................... 3,644 5,970 =============================== $9,187 $37,047 =============================== 6. LONG-TERM DEBT Senior Secured Credit Facility On December 22, 1998, KMC Telecom, KMC Telecom II and KMC Telecom of Virginia (the "Subsidiary Borrowers"), refinanced and expanded the Amended and Restated Loan and Security Agreement (the "AT&T Facility") by entering into a Loan and Security Agreement (the "Senior Secured Credit Facility") with Newcourt Commercial Finance Corp. ("Newcourt"), First Union National Bank, General Electric Capital Corporation ("GECC") and Canadian Imperial Bank of Commerce (the "Creditors"). Under the Senior Secured Credit Facility, the Creditors agreed to lend the Subsidiary Borrowers up to an aggregate of $250 million initially to be used for the construction and expansion of fiber optic telecommunications networks in certain markets and for payment of transaction fees and expenses and, subject to the attainment of certain financial conditions, for working capital and general corporate purposes. The Senior Secured Credit Facility includes a $175 million eight year revolving loan and a $75 million eight and one half year term loan. At December 31, 1998 and 1999, an aggregate of $41.4 and $235.0 million, respectively, was outstanding under this facility. As discussed further in Note 18, the Subsidiary Borrowers and KMC Telecom III amended, restated and combined the Senior Secured Credit Facility and the Lucent Loan and Security Agreement during the first quarter of 2000. Borrowings under the Senior Secured Credit Facility bear interest payable at the Subsidiary Borrowers' option, at (a) the "Applicable Base Rate Margin" (which generally ranges from 1.75% to 3.25%) plus the greater of (i) the administrative agent's prime rate or (ii) the overnight federal funds rate plus .5% or (b) the "Applicable LIBOR Margin" (which generally ranges from 2.75% to 4.25%) plus LIBOR, as defined. Interest on borrowings outstanding at December 31, 1999 was based on both the base rate and LIBOR. The Subsidiary Borrowers were being charged a weighted-average interest rate of 9.38% and 10.26% at December 31, 1998 and 1999, respectively. The Subsidiary Borrowers must pay an annual commitment fee on the unused portion of the Senior Secured Credit Facility ranging from .75% to 1.25%. The Senior Secured Credit Facility contains a number of affirmative and negative covenants including, among others, covenants restricting the ability of the Subsidiary Borrowers to consolidate or merge with any person, sell or lease assets not in the ordinary course of business, sell or enter into long term leases of dark fiber, redeem stock, pay dividends or make any other payments (including payments of principal or interest on loans) to KMC Holdings, create subsidiaries, transfer any permits or licenses, or incur additional indebtedness or act as guarantor for the debt of any person, subject to certain conditions. The Subsidiary Borrowers are required to comply with certain financial tests and maintain certain financial ratios, including, among others, a ratio of total 49 debt to contributed capital, certain minimum revenues, maximum EBITDA losses and minimum EBITDA, maximum capital expenditures and minimum access lines, a maximum total leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio. The Company obtained a waiver of compliance, for the quarter ended September 30, 1999, with certain financial covenants (related to revenue and EBITDA) contained in the Senior Secured Credit Facility. In addition, the EBITDA covenant was amended for the fourth quarter of 1999 through the fourth quarter of 2000 and the revenue covenant was amended for the fourth quarter of 1999 through the first quarter of 2001 to less restrictive amounts. As of December 31, 1999, the Subsidiary Borrowers were in compliance with the covenants, as amended. Lucent Loan and Security Agreement KMC Telecom III entered into a Loan and Security Agreement (the "Lucent Facility") dated February 4, 1999 with Lucent Technologies Inc. ("Lucent") which provides for borrowings to be used to fund the acquisition of certain telecommunications equipment and related expenses. The Lucent Facility provides for an aggregate commitment of up to $600 million, of which $250 million is available at December 31, 1999 to purchase Lucent products. Further, up to an additional $350 million will be available upon (a) additional lenders participating in the Lucent Facility and making commitments to make loans so that Lucent's aggregate commitment does not exceed $250 million and (b) the Company satisfying certain other requirements, the most significant of which is KMC Holdings raising and contributing at least $300 million in high yield debt or equity (other than disqualified stock) to KMC Telecom III. The Lucent Facility places certain restrictions upon KMC Telecom III's ability to purchase non-Lucent equipment with proceeds from such facility. At December 31, 1999, no amounts had been borrowed under the Lucent Facility. As discussed further in Note 18, the Subsidiary Borrowers and KMC Telecom III amended, restated and combined the Senior Secured Credit Facility and the Lucent Loan and Security Agreement during the first quarter of 2000. Interest on borrowings under the Lucent Facility is charged, at the option of KMC Telecom III, at a floating rate of LIBOR plus the "Applicable LIBOR Margin", or at an alternative base rate plus the "Applicable Base Rate Margin" (as defined). Such margins will be increased by 0.25% until KMC Telecom III and its subsidiaries have completed systems in fourteen markets. The Lucent Facility contains a number of affirmative and negative covenants including, among others, covenants restricting the ability of KMC Telecom III to consolidate or merge with any person, sell or lease assets not in the ordinary course of business, sell or enter into any long-term leases of dark fiber, redeem stock, pay dividends or make any other payments (including payments of principal or interest on loans) to KMC Holdings, create subsidiaries, transfer any permits or licenses, or incur additional indebtedness or act as guarantor for the debt of any other person, subject to certain conditions. KMC Telecom III is required to comply with certain financial tests and maintain certain financial ratios, including, among others, a ratio of total debt to contributed capital, certain minimum revenues, maximum EBITDA losses and minimum EBITDA, maximum capital expenditures and minimum access lines, a maximum total leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio. Senior Discount Notes On January 29, 1998, KMC Holdings sold 460,800 units, each unit consisting of a 12 1/2% senior discount note with a principal amount at maturity of $1,000 due 2008 pursuant to the Senior Discount Note Indenture between KMC Holdings and the Chase Manhattan Bank, as trustee (the "Senior Discount Notes") and one warrant to purchase .21785 shares of Common Stock of KMC Holdings at an exercise price of $.01 per share. The gross and net proceeds of the offering were approximately $250 million and $236.4 million, respectively. A substantial portion of the net proceeds of the offering have been loaned by KMC Holdings to its subsidiaries. On August 11, 1998, KMC Holdings exchanged the notes issued on January 29, 1998 for $460.8 million aggregate principal amount at maturity of notes that had been registered under the Securities Act of 1933 (as used below and elsewhere herein, "Senior Discount Notes" includes the original notes and the exchange notes). The Senior Discount Notes are unsecured, unsubordinated obligations of the Company and mature on February 15, 2008. The Senior Discount Notes were sold at 50 a substantial discount from their principal amount at maturity, and there will not be any payment of interest on the Senior Discount Notes prior to August 15, 2003. The Senior Discount Notes will fully accrete to face value on February 15, 2003. From and after February 15, 2003, the Senior Discount Notes will bear interest, which will be payable in cash, at the rate of 12.5% per annum on February 15 and August 15 of each year, commencing August 15, 2003. The Company is accreting the initial carrying value of the Senior Discount Notes to their aggregate face value over the term of the debt at its effective interest rate of 13.7%. The Senior Discount Notes are redeemable, at the Company's option, in whole or in part, on or after February 15, 2003 and prior to maturity, at redemption prices equal to 106.25% of the aggregate principal amount at maturity, plus accrued and unpaid interest, if any, to the redemption date, declining to 100% of the aggregate principal amount at maturity, plus accrued and unpaid interest as of February 15, 2006. In addition, at any time prior to April 15, 2000, the Company may redeem up to 35% of the aggregate principal amount at maturity of the Senior Discount Notes with the net proceeds from the sale of common equity at a redemption price of 112.50% of their accreted value on the redemption date. The indebtedness evidenced by the Senior Discount Notes ranks pari passu in right of payment with all existing and future unsubordinated, unsecured indebtedness of KMC Holdings and senior in right of payment to all existing and future subordinated indebtedness of KMC Holdings. However, KMC Holdings is a holding company and the Senior Discount Notes are, therefore, effectively subordinated to all existing and future liabilities (including trade payables) of its subsidiaries. Within 30 days of the occurrence of a Change of Control (as defined in the Senior Discount Note Indenture), the Company must offer to purchase for cash all Senior Discount Notes then outstanding at a purchase price equal to 101% of the accreted value thereof, plus accrued interest. The Company's ability to comply with this requirement is subject to certain restrictions contained in the Senior Secured Credit Facility. The Senior Discount Note Indenture contains events of default, including, but not limited to, (i) defaults in the payment of principal, premium or interest, (ii) defaults in compliance with covenants contained in the Senior Discount Note Indenture, (iii) cross defaults on more than $5 million of other indebtedness, (iv) failure to pay more than $5 million of judgments that have not been stayed by appeal or otherwise and (v) the bankruptcy of KMC Holdings or certain of its subsidiaries. The Senior Discount Note Indenture restricts, among other things, the ability of KMC Holdings to incur additional indebtedness, create liens, engage in sale-leaseback transactions, pay dividends or make distributions in respect of capital stock, make investments or certain other restricted payments, sell assets of KMC Holdings, redeem capital stock, issue or sell stock of restricted subsidiaries, enter into transactions with stockholders or affiliates or effect a consolidation or merger. The Senior Discount Note Indenture permits KMC Holdings' subsidiaries to be deemed unrestricted subsidiaries and, thus, not subject to the restrictions of the Senior Discount Note Indenture. The Senior Discount Notes are "applicable high yield discount obligations" ("AHYDOs"), as defined in the Internal Revenue Code of 1986, as amended. Under the rules applicable to AHYDOs, a portion of the original issue discount ("OID") that accrues on the Senior Discount Notes will not be deductible by the Company at any time. Any remaining OID on the Senior Discount Notes will not be deductible by the Company until such OID is paid. Senior Notes On May 24, 1999, KMC Holdings issued $275.0 million aggregate principal amount of 13 1/2% Senior Notes due 2009. On December 30, 1999, KMC Holdings exchanged the notes issued on May 24, 1999 for $275.0 million aggregate principal amount of notes that had been registered under the Securities Act of 1933 (as used below and elsewhere herein, "Senior Notes" includes the original notes and the exchange notes). Interest on the Senior Notes is payable semi-annually in cash on May 15 and November 15 of each year, beginning November 15, 1999. A portion of the proceeds from the offering of the Senior Notes was used to purchase a portfolio of U.S. government securities that were pledged as security for the first six interest payments on the Senior Notes. The Senior Notes are redeemable, at the Company's option, in whole or in part, on or after May 15, 2004 and prior to maturity, at redemption prices equal to 51 106.75% of the aggregate principal amount at maturity, plus accrued and unpaid interest, if any, to the redemption date, declining to 100% of the aggregate principal amount at maturity, plus accrued and unpaid interest as of May 15, 2007. In addition, at any time prior to May 15, 2002, the Company may redeem up to 35% of the aggregate principal amount at maturity of the Senior Notes with the net proceeds from the sale of common equity at a redemption price of 113.5% of the principal amount on such date plus accrued and unpaid interest. Upon a change of control (as defined in the Senior Note Indenture), the Company must offer to purchase for cash the Senior Notes at a purchase price equal to 101% of the principal amount, plus accrued interest. The Company's ability to comply with this requirement is subject to certain restrictions contained in the Senior Secured Credit Facility. The Senior Notes were guaranteed by KMC Telecom Financing, Inc., a wholly-owned subsidiary. The Senior Notes are senior, unsecured unsubordinated obligations of KMC Holdings and rank pari passu in right of payment with all existing and future unsubordinated, unsecured indebtedness of KMC Holdings and senior in right of payment to all of existing and future subordinated indebtedness of KMC Holdings. However, KMC Holdings is a holding company and the Senior Notes are, therefore, effectively subordinated to all existing and future liabilities (including trade payables), of its subsidiaries. The Senior Note Indenture contains certain covenants that, among other things, limit the Company's ability to incur additional indebtedness, engage in sale-leaseback transactions, pay dividends or make certain other distributions, sell assets, redeem capital stock, effect a consolidation or merger of KMC Telecom Holdings, Inc. and enter into transactions with stockholders and affiliates and create liens on our assets. 7. INTEREST RATE SWAP AGREEMENT The Company has entered into an interest rate swap agreement with a commercial bank to reduce the impact of changes in interest rates on a portion of its outstanding variable rate debt. The agreement effectively fixes the Company's interest rate on $125 million of the outstanding variable rate borrowings under the Senior Secured Credit Facility due 2007. The interest rate swap agreement terminates in April 2004. The Company is exposed to credit loss in the event of nonperformance by the other party to the interest rate swap agreement. However, the Company does not anticipate nonperformance by the counterparty. 8. REDEEMABLE AND NONREDEEMABLE EQUITY KMC Telecom Preferred Stock On January 21, 1997, certain convertible notes were converted into 123,800 shares of Series A Cumulative Convertible Preferred Stock of KMC Telecom with an aggregate liquidation value of $12,380,000. Effective September 22, 1997, all of the shares of Series A Cumulative Convertible Preferred Stock of KMC Telecom were exchanged for an equal number of shares of Series A Cumulative Convertible Preferred Stock of KMC Holdings. Pursuant to an agreement with Nassau, all dividends accumulated on the Series A Cumulative Convertible Preferred Stock of KMC Telecom through September 22, 1997 ($592,000) were paid upon the closing of KMC Holdings' issuance of Senior Discount Notes and warrants on January 29, 1998. Series E Preferred Stock On February 4, 1999, the Company issued 25,000 shares of Series E Senior Redeemable, Exchangeable, PIK Preferred Stock (the "Series E Preferred Stock") to Newcourt Finance, generating aggregate gross proceeds of $22.9 million. On April 30, 1999, the Company issued an additional 35,000 shares of Series E Preferred Stock for gross proceeds of $25.9 million. The Series E Preferred Stock has a liquidation preference of $1,000 per share and an annual dividend equal to 14.5% of the liquidation preference, payable quarterly. On or before January 15, 2004, the Company may pay dividends in cash or in additional fully paid and nonassessable shares of Series E Preferred Stock. After January 15, 2004, dividends must be paid in cash, subject to certain conditions. Unpaid dividends accrue at the dividend rate of the Series E Preferred Stock, compounded quarterly. During 1999, the Company issued 5,004 shares of Series E Preferred Stock to pay the dividends due. The Series E Preferred Stock must be redeemed on February 1, 2011, subject to the legal availability of funds therefor, at a redemption price, payable in 52 cash, equal to the liquidation preference thereof on the redemption date, plus all accumulated and unpaid dividends to the date of redemption. After April 15, 2004, the Series E Preferred Stock may be redeemed, in whole or in part, at the option of the Company, at a redemption price equal to 110% of the liquidation preference of the Series E Preferred Stock plus all accrued and unpaid dividends to the date of redemption. The redemption price declines to an amount equal to 100% of the liquidation preference as of April 15, 2007. In addition, on or prior to April 15, 2002, the Company may, at its option, redeem up to 35% of the aggregate liquidation preference of Series E Preferred Stock with the proceeds of sales of its capital stock at a redemption price equal to 110% of the liquidation preference on the redemption date plus accrued and unpaid dividends. The holders of Series E Preferred Stock have voting rights in certain circumstances. Upon the occurrence of a change of control, the Company will be required to make an offer to repurchase the Series E Preferred Stock for cash at a purchase price of 101% of the liquidation preference thereof, together with all accumulated and unpaid dividends to the date of purchase. The Series E Preferred Stock is not convertible. The Company may, at the sole option of the Board of Directors (out of funds legally available), exchange all, but not less than all, of the Series E Preferred Stock then outstanding, including any shares of Series E Preferred Stock issued as payment for dividends, for a new series of subordinated debentures (the "Exchange Debentures") issued pursuant to an exchange debenture indenture. The holders of Series E Preferred Stock are entitled to receive on the date of any such exchange, Exchange Debentures having an aggregate principal amount equal to (i) the total of the liquidation preference for each share of Series E Preferred Stock exchanged, plus (ii) an amount equal to all accrued but unpaid dividends payable on such share. Series F Preferred Stock On February 4, 1999, the Company issued 40,000 shares of Series F Senior Redeemable, Exchangeable, PIK Preferred Stock (the "Series F Preferred Stock") to Lucent and Newcourt Finance, generating aggregate gross proceeds of $38.9 million. The Series F Preferred Stock has a liquidation preference of $1,000 per share and an annual dividend equal to 14.5% of the liquidation preference, payable quarterly. The Company may pay dividends in cash or in additional fully paid and nonassessable shares of Series F Preferred Stock. During 1999, the Company issued 4,177 shares of Series F Preferred Stock to pay the dividends due for such period. The Series F Preferred Stock may be redeemed at any time, in whole or in part, at the option of the Company, at a redemption price equal to 110% of the liquidation preference on the redemption date plus an amount in cash equal to all accrued and unpaid dividends thereon to the redemption date. Upon the occurrence of a change of control, the Company will be required to make an offer to purchase the Series F Preferred Stock for cash at a purchase price of 101% of the liquidation preference thereof, together with all accumulated and unpaid dividends to the date of purchase. The holders of Series F Preferred Stock have voting rights under certain circumstances. Upon the earlier of (i) the date that is sixty days after the date on which the Company closes an underwritten primary offering of at least $200 million of its Common Stock, pursuant to an effective registration statement under the Securities Act or (ii) February 4, 2001, any outstanding Series F Preferred Stock will automatically convert into Series E Preferred Stock, on a one for one basis. The Company may, at the sole option of the Board of Directors (out of funds legally available), exchange all, but not less than all, of the Series F Preferred Stock then outstanding, including any shares of Series F Preferred Stock issued as payment for dividends, for Exchange Debentures. The holders of Series F Preferred Stock are entitled to receive on the date of any such exchange, Exchange Debentures having an aggregate principal amount equal to (i) the total of the liquidation preference for each share of Series F Preferred Stock exchanged, plus (ii) an amount equal to all accrued but unpaid dividends payable on such share. Series A Preferred Stock There are 123,800 shares of Series A Cumulative Convertible Preferred Stock of KMC Holdings ("Series A Preferred Stock") authorized and outstanding. Such stock was issued to two entities, Nassau Capital Partners, L.P. and NAS Partners I L.L.C. ("Nassau Capital" and "Nassau Partners", respectively, collectively 53 referred to as "Nassau") in January 1997 upon the conversion of certain notes payable and related accrued interest due to Nassau aggregating $12,380,000. Series A Preferred Stock has a liquidation preference of $100 per share and an annual dividend equal to 7.0% of the liquidation preference, payable quarterly, when and if declared by the Board of Directors out of funds legally available therefor. Unpaid dividends accumulate and the unpaid amount increases at the annual rate of 7.0%, compounded quarterly. All accumulated but unpaid dividends will be paid upon the occurrence of a Realization Event (defined as (i) an initial public offering with gross proceeds of at least $40 million or (ii) sale of substantially all the assets or stock of the Company or the merger or consolidation of the Company into one or more other corporations). As of December 31, 1999, dividends in arrears on the Series A Preferred Stock aggregated $2,116,000. Notwithstanding the foregoing, pursuant to an agreement among Nassau and the Company, Nassau has agreed to forego the payment of dividends from September 22, 1997 through the date on which Nassau disposes of its interest in the Company; provided that at the time of such disposition, Nassau has received not less than a 10% annual compound rate of return during the period it held the Series A Preferred Stock. Series A Preferred Stock is convertible into Common Stock at a conversion price equal to $20.63 per share of Common Stock, subject to adjustment upon the occurrence of certain events. Holders of Series A Preferred Stock may convert all or part of such shares to Common Stock. Upon conversion, subject to the aforementioned agreement to forego the payment of dividends, the holders are entitled to receive a cash payment of the accumulated but unpaid dividends; provided, however, that the Company may substitute common shares having a fair market value equal to the amount of such cash payment if the conversion occurs before a Realization Event. Series A Preferred Stock will automatically convert into Common Stock upon the occurrence of a Qualified Public Offering (defined as the first sale of Common Stock pursuant to a registration statement filed under the Securities Act of 1933 in which the Company receives gross proceeds of at least $40 million, provided that the per share price at which such shares are sold in such offering is at least four times the conversion price of the Series A Preferred Stock). The holders of Series A Preferred Stock, except as otherwise provided in the Company's Certificate of Incorporation, are entitled to vote on all matters voted on by holders of Common Stock. Each share of Series A Preferred Stock is entitled to a number of votes equal to the number of shares of Common Stock into which such share is convertible. Without the prior consent of two-thirds of the shares of Series A Preferred Stock, among other things, the Company may not increase the number of shares of preferred stock (of whatever series) authorized for issuance, or declare or pay any dividends on shares of Common Stock or other junior shares. As discussed under "Redemption Rights" below, the holders of Series A Preferred Stock have certain redemption rights. Accordingly, such stock has been reflected as redeemable equity in the accompanying financial statements. Series C Preferred Stock There are 350,000 shares of Series C Cumulative Convertible Preferred Stock of KMC Holdings ("Series C Preferred Stock") authorized, of which 175,000 shares are outstanding at December 31, 1999. 150,000 of such shares were issued in November 1997, generating aggregate gross proceeds of $15 million and the remaining 25,000 shares were issued in January 1998 upon the conversion of an equal number of shares of Series D Preferred Stock. Series C Preferred Stock has a liquidation preference of $100 per share and an annual dividend equal to 7.0% of the liquidation preference, payable quarterly, when and if declared by the Board of Directors out of funds legally available therefor. Unpaid dividends accumulate and the unpaid amount increases at the annual rate of 7.0%, compounded quarterly. All accumulated but unpaid dividends will be paid upon the occurrence of a Realization Event. As of December 31, 1999, dividends in arrears on the Series C Preferred Stock aggregated $2,821,000. Notwithstanding the foregoing, pursuant to the Purchase Agreement among the Company, Nassau, GECC and First Union Corp. ("First Union"), each current holder of Series C Preferred Stock has agreed to forego the payment of dividends that accumulate during the period from issuance through the date on which such holder disposes of its interest in the Company; provided that at the time of such disposition, it has received not less than a 10% annual compound rate of return during such period. Series C Preferred Stock is convertible into Common Stock at a conversion price equal to (i) from the date of initial issuance to the date which is 30 months after the date of such initial issuance, $52.50 per share of Common Stock and (ii) from and after the date which is 30 months after the date of initial issuance, $42.18; provided that both such amounts are subject to adjustment upon the occurrence of certain events. Holders of Series C Preferred Stock may convert all or part of such shares to Common Stock. Upon conversion, subject to the aforementioned agreement to forego the payment of dividends, the holders are entitled to receive a cash payment of the accumulated but unpaid dividends; provided, however, that the Company may substitute common shares having a fair 54 market value equal to the amount of such cash payment if the conversion occurs before a Realization Event. Series C Preferred Stock will automatically convert into Common Stock upon the occurrence of a Qualified Public Offering. The holders of Series C Preferred Stock, except as otherwise provided in the Company's Certificate of Incorporation, are entitled to vote on all matters voted on by holders of Common Stock. Each share of Series C Preferred Stock is entitled to a number of votes equal to the number of shares of Common Stock into which such share is convertible. Without the prior consent of two-thirds of the shares of Series C Preferred Stock, among other things, the Company may not increase the number of shares of preferred stock (of whatever series) authorized for issuance, or declare or pay any dividends on shares of Common Stock or other junior shares. As discussed under "Redemption Rights" below, the holders of Series C Preferred Stock have certain redemption rights. Accordingly, such stock has been reflected as redeemable equity in the accompanying financial statements. The Series C Preferred Stock is subject to redemption at the option of the Company, in whole but not in part, in connection with an "Acquisition Event." An Acquisition Event is defined to mean any merger or consolidation of the Company with any other company, person or entity, whether or not the Company is the surviving entity, as a result of which the holders of the Company's Common Stock (determined on a fully diluted basis) will hold less than a majority of the outstanding shares of Common Stock or other equity interest of the Company, person or entity resulting from such transaction, or any parent of such entity. Series D Preferred Stock There are 25,000 shares of Series D Cumulative Convertible Preferred Stock of KMC Holdings ("Series D Preferred Stock") authorized, none of which are outstanding at December 31, 1999. There were 25,000 of such shares issued to Nassau in November 1997, generating aggregate gross proceeds of $2.5 million. In January 1998, Nassau exercised its conversion rights and converted all of its shares of Series D Preferred Stock into an equal number of shares of Series C Preferred Stock. Common Stock Holders of Common Stock of the Company are entitled to one vote for each share held on all matters submitted to a vote of stockholders, except with respect to the election of Directors. Except as otherwise required by law, actions at the Company's stockholders meetings (held at least annually), require the affirmative vote of a majority of the shares represented at the meeting, a quorum being present. Holders of Common Stock are entitled, subject to the preferences of preferred stock, to receive such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor. The Senior Discount Note Indenture and the Company's other indebtedness restrict the ability of the Company to pay dividends on its Common Stock. Without the prior consent of two-thirds of the shares of Series A Preferred Stock and two-thirds of the shares of Series C Preferred Stock, the Company may not declare or pay any dividends on its Common Stock. Except as discussed under "Redemption Rights" below, the holders of Common Stock have no preemptive, redemption or conversion rights. Pursuant to provisions contained in the Company's Certificate of Incorporation and an Amended and Restated Stockholders Agreement dated as of October 31, 1997, among the Company, Kamine, Nassau, Newcourt Communications Finance Corp., GECC, and First Union (the "Stockholders' Agreement"), until Kamine and Nassau cease to own Common Stock or preferred stock convertible into Common Stock representing at least five percent of the outstanding shares of Common Stock, assuming all convertible securities are converted, Kamine and Nassau have special rights entitling each to elect three Directors. A Director elected by Kamine's shares or Nassau's shares may not be removed except with the affirmative vote of a majority of the applicable shares of capital stock. If Kamine or Nassau transfer their shares of capital stock, the number of Directors their shares are entitled to elect decreases. The number of Directors which Kamine is entitled to elect would be reduced to two if the number of shares owned by him were to fall below two-thirds of the number of shares of the Company initially issued to him, and to one if the number of shares owned by him were to fall below one-third of the number of shares initially issued to him. If his ownership were to fall below 5% of the number of shares initially issued to him, Kamine would no longer be entitled to elect any Directors pursuant to such provisions. Comparable reductions would be made to the number of Directors which Nassau is entitled to elect if its ownership were to fall below the specified percentages. Directors other than those elected by vote of Kamine's shares or Nassau's shares are elected by holders of Common Stock and holders of preferred stock that are entitled to vote in the election of Directors. If a default relating to payment occurs under the Senior Secured Credit Facility and 55 continues uncured for 90 days, the holders of Series C Preferred Stock (currently Nassau, GECC and First Union) are entitled to elect two additional Directors, who will serve until the default is cured. Redemption Rights Pursuant to a stockholders agreement, certain of the Company's stockholders and warrant holders have "put rights" entitling them to have the Company repurchase their preferred and common shares and redeemable common stock warrants for the fair value of such securities if no Liquidity Event (defined as (i) an initial public offering with gross proceeds of at least $40 million, (ii) the sale of substantially all of the stock or assets of the Company or (iii) the merger or consolidation of the Company with one or more other corporations) has taken place by the later of (x) October 22, 2003 or (y) 90 days after the final maturity date of the Senior Discount Notes. The restrictive covenants of the Senior Discount Notes limit the Company's ability to repurchase such securities. All of the securities subject to such "put rights" are presented as redeemable equity in the accompanying balance sheets. The redeemable preferred stock, redeemable common stock and redeemable common stock warrants, which are subject to the stockholders agreement, are being accreted up to their fair market values from their respective issuance dates to their earliest potential redemption date (October 22, 2003). At December 31, 1999, the aggregate redemption value of the redeemable equity was approximately $320 million, reflecting per share redemption amounts of $1,212 for the Series A Preferred Stock, $476 for the Series C Preferred Stock and $250 for the redeemable common stock and redeemable common stock warrants. Warrants In connection with KMC Telecom's 1996 Loan and Security Agreement, warrants representing a 2.5% ownership interest in the fully diluted common voting capital stock of KMC Telecom, including anti-dilution protection, were granted to the lenders. These warrants, at an exercise price of $.01 per share, were issued on January 21, 1997, concurrent with the initial borrowing under the AT&T Facility, at which date the fair value of such warrants was determined to be $1.5 million, which was reflected as a charge to deferred financing costs and credited to redeemable equity in January 1997. On September 22, 1997, such warrants were exercised, and an aggregate of 28,000 shares of Class A Common Stock of KMC Telecom were issued to the warrant holders. These shares were subsequently exchanged for an equal number of shares of Common Stock of KMC Holdings. In connection with the AT&T Facility, warrants to purchase 10,000 shares of Common Stock were issued to GECC in 1997. These warrants, at an exercise price of $.01 per share, are exercisable from issuance through January 21, 2005. The fair value of such warrants was determined to be $525,000, which was reflected as a charge to deferred financing costs and credited to redeemable equity. Pursuant to the Stockholders' Agreement, GECC may put the shares of Common Stock issuable upon the exercise of such warrants back to the Company. These warrants have been presented as redeemable common stock warrants in the accompanying balance sheet at December 31, 1999. In connection with the sale of Senior Discount Notes in January 1998, the Company issued warrants to purchase an aggregate of 100,385 shares of Common Stock at an exercise price of $.01 per share. The net proceeds of $10,446,000 represented the fair value of the warrants at the date of issuance. The warrants are exercisable through January 2008. In connection with the February 4, 1999 issuances of the Series E Preferred Stock and the Series F Preferred Stock, warrants to purchase an aggregate of 24,660 shares of Common Stock were sold to Newcourt Finance and Lucent. The aggregate gross proceeds from the sale of these warrants was approximately $3.2 million. These warrants, at an exercise price of $.01 per share, are exercisable from February 4, 2000 through February 1, 2009. In addition, the Company also delivered to the Warrant Agent certificates representing warrants to purchase an aggregate of an additional 107,228 shares of Common Stock at an exercise price of $.01 per share (the "Springing Warrants"). The Springing Warrants may become issuable under the circumstances described in the following paragraph. If the Company fails to redeem all shares of Series F Preferred Stock prior to the date (the "Springing Warrant Date") which is the earlier of (i) the date that is sixty days after the date on which the Company closes an underwritten primary offering of at least $200 million of its Common Stock pursuant to an 56 effective registration statement under the Securities Act or (ii) February 4, 2001, the Warrant Agent is authorized to issue the Springing Warrants to the Eligible Holders (as defined in the warrant agreement) of the Series E and Series F Preferred Stock. In the event the Company has redeemed all outstanding shares of Series F Preferred Stock prior to the Springing Warrant Date, the Springing Warrants will not be issued and the Warrant Agent will return the certificates to the Company. To the extent the Company exercises its option to exchange all of the Series F Preferred Stock for Exchange Debentures prior to the Springing Warrant Date, the Springing Warrants will not become issuable. Therefore, as the future issuance of the Springing Warrants is entirely within the control of the Company and the likelihood of their issuance is deemed to be remote, no value has been ascribed to the Springing Warrants. In connection with the April 30, 1999 issuance of additional shares of the Series E Preferred Stock, warrants to purchase an aggregate of 60,353 shares of Common Stock were issued to Newcourt Finance and First Union. The aggregate gross proceeds from the sale of these warrants was approximately $9.1 million. These warrants, at an exercise price of $.01 per share, are exercisable from February 4, 2000 through February 1, 2009. Options Prior to the establishment of the present holding company structure, during 1996 and 1997, KMC Telecom granted options to purchase shares of its common stock, par value $.01 per share ("KMC Telecom Common Stock"), to employees pursuant to the KMC Telecom Stock Option Plan. In order to reflect the establishment of the holding company structure, on June 26, 1998, the Board of Directors adopted a new stock option plan, the KMC Holdings Stock Option Plan (the "1998 Plan"), which authorizes the grant of options to purchase Common Stock of the Company. The 1998 Plan was approved by the stockholders, effective July 15, 1998. In September 1998, the Company replaced the options to purchase KMC Telecom Common Stock previously granted under the KMC Telecom Stock Option Plan with options to purchase Common Stock of the Company granted under the 1998 Plan and granted options to additional employees of the Company under the 1998 Plan. The 1998 Plan, which is administered by the Compensation Committee of the Board of Directors of KMC Holdings, provides for various grants to key employees, directors, affiliated members or other persons having a unique relationship with the Company excluding Kamine and any person employed by Nassau Capital or any Nassau affiliate. Grants may include, without limitation, incentive stock options, non-qualified stock options, stock appreciation rights, dividend equivalent rights, restricted stocks, purchase stocks, performance shares and performance units. The Compensation Committee has the power and authority to designate recipients of the options and to determine the terms, conditions, and limitations of the options. Under the 1998 Plan, options to purchase 600,000 shares of Common Stock of KMC Holdings are available for grant, all of which were allocated to the Plan as of December 31, 1999. No individual may receive options for more than 75,000 shares. The exercise price of all incentive stock options granted under the 1998 Plan must be at least equal to the fair market value of the shares on the date of grant. The exercise price of all non-qualified stock options granted under the 1998 Plan must be at least 50% of the fair market value of the shares on the date of grant. Options granted pursuant to the 1998 Plan will have terms not to exceed 10 years and become exercisable over a vesting period as specified in such options. The 1998 Plan will terminate no later than 2008. Options granted under the 1998 Plan are nontransferable, other than by will or by the laws of descent and distribution, and may be exercised during the optionee's lifetime, only by the optionee. The 1998 Plan provides for an adjustment of the number of shares exercisable in the event of a merger, consolidation, recapitalization, change of control, stock split, stock dividend, combination of shares or other similar changes, exchange or reclassification of the Common Stock at the discretion of the Compensation Committee. Pursuant to the agreements adopted under the 1998 Plan, the greater of 25% of the shares granted or fifty percent of all unvested options granted become fully vested upon a change-in-control of the Company, as defined. Under certain circumstances, such percentages may increase. The holders of options to acquire shares of Common Stock of KMC Holdings are required to enter into agreements with KMC Holdings which place certain restrictions upon their ability to sell or otherwise transfer such shares. In the event of termination of employment of the option holder by the Company or 57 the affiliates, the Company can repurchase all of the shares or options held by such individuals, generally for an amount equal to the fair value of such shares or the excess of the fair value of such options over their exercise price. Information on stock options is as follows:
WEIGHTED NUMBER OF SHARES AVERAGE EXERCISE -------------------------------- OUTSTANDING EXERCISABLE PRICE OF OPTIONS ------------------------------------------------------- Balances, January 1, 1997...................... 95,385 - $ 65 Granted...................................... 63,115 - $ 65 Became exercisable........................... - 22,000 Cancelled.................................... (17,000) (3,000) $ (65) -------------------------------- Balances, December 31, 1997.................... 141,500 19,000 $ 65 Granted...................................... 262,500 - $ 26 Became exercisable........................... - 117,000 Cancelled.................................... (141,500) (19,000) $ (65) -------------------------------- Balances, December 31, 1998.................... 262,500 117,000 $ 26 Granted...................................... 82,342 - $147 Became exercisable........................... - 51,669 Exercised.................................... (15,600) (15,600) $ 22 Cancelled.................................... (27,200) (2,000) $ (26) ================================ Balances, December 31, 1999.................... 302,042 151,069 $ 59 ================================
The weighted-average exercise price of options exercisable at December 31, 1997, 1998 and 1999 is $50, $22 and $26, respectively, and the weighted-average fair value of options granted during 1997, 1998 and 1999 were $49, $114 and $134 per share, respectively. The range of exercise prices, number of shares and the weighted-average remaining contractual life for options outstanding as of December 31, 1999 were as follows:
WEIGHTED- WEIGHTED- AVERAGE NUMBER AVERAGE REMAINING RANGE OF NUMBER OF SHARES EXERCISE CONTRACTUAL EXERCISE PRICES OF SHARES EXERCISABLE PRICE LIFE - - ----------------------------------------------------------------------------------------------- $20 - $40 219,700 144,025 $ 21 8.66 years $125 67,509 6,751 125 9.0 years $225 - $250 14,833 293 225 9.70 years Total $20 - $250 302,042 151,069 26 8.79 years
During the year ended December 31, 1999, non-qualified options to purchase an aggregate of 82,342 shares were granted to employees at exercise prices of $125 (67,509), $225 (2,933) and $250 (11,900). All options have 10 year terms and become exercisable over a five year period in equal six month increments. During the year ended December 31, 1998, non-qualified options to purchase an aggregate of 262,500 shares were granted at exercise prices of $20 (157,500 options), $30 (52,500 options) and $40 (52,500 options). The options granted during 1998 are comprised of 230,500 options granted to employees and 32,000 options granted to individuals employed by certain affiliates of the Company. All such options have 10 year terms. The $20 options become exercisable over a three year period in six month intervals commencing six months after the grant date in increments of 26,250 options each. The $30 options become exercisable in two increments of 26,250 options each, forty-two and forty-eight months after the grant date. The $40 options become exercisable in two increments of 26,250 options each, fifty-four and sixty months after the grant date. For purposes of vesting, options granted in 1998 under the 1998 Plan to replace options granted in 1997 and 1996 under the KMC Telecom Stock Option Plan are deemed to have been granted on the date of grant of the options which they replace. 58 As a result of certain anti-dilution provisions governing the conversion of shares of Class C Common Stock into shares of Class A Common Stock, KMC Telecom was required to account for the KMC Telecom Stock Option Plan as a variable stock option plan. Additionally, as a result of restrictions upon the holders of options granted under the 1998 Plan, including their ability to sell or otherwise transfer the related shares, the 1998 Plan is required to be accounted for as a variable stock option plan. Generally accepted accounting principles for variable stock option plans require the recognition of a non-cash compensation charge for these options (amortized over the vesting period of the employee options and recognized in full as of the grant date for the non-employee options). Such charge is determined by the difference between the fair value of the common stock underlying the options and the option price as of the end of each period. Accordingly, compensation expense will be charged or credited periodically through the date of exercise or cancellation of such stock options, based on changes in the value of the Company's stock as well as the vesting schedule of such options. These compensation charges or credits are non-cash in nature, but could have a material effect on the Company's future reported results of operations. The Company, upon cancellation of the outstanding options under the KMC Telecom Stock Option Plan, reversed all compensation expense previously recorded with respect to such options. Additionally, to the extent the fair value of the Common Stock of the Company exceeded the exercise price of the options granted under the 1998 Plan, the Company recognized compensation expense related to such options over their vesting period. Based on the estimated fair value of the Common Stock of KMC Telecom at December 31, 1997 and KMC Holdings at December 31, 1998 and December 31, 1999, cumulative deferred compensation obligations of $15,579,000, $27,906,000 and $50,972,000, respectively, have been established. The Company has recognized compensation expense aggregating $13,870,000, $7,080,000 and $29,833,000, for the years ended December 31, 1997, 1998 and 1999, respectively. The 1998 stock option compensation expense of $7,080,000 reflects charges of $7,236,000 under the KMC Telecom Stock Option Plan through its termination in September 1998 and charges of $21,190,000 related to the 1998 Plan, partially offset by a credit as a result of the September 1998 cancellation of the KMC Telecom stock options, reflecting the reversal of $21,346,000 of cumulative compensation previously recognized for options granted under the KMC Telecom Stock Option Plan. In accordance with the provisions of Statement 123, the Company applies APB 25 and related interpretations in accounting for its stock option plan. If the Company had elected to recognize compensation expense based on the fair value of the options granted at the grant date as prescribed by Statement 123, net loss and net loss per common share would have been the following:
DECEMBER 31 1997 1998 1999 ---------------------------------------------- (in thousands, except per share amounts) Net loss: As reported............................ $(32,685) $(76,753) $(225,716) ============================================== Pro forma.............................. $(20,542) $(76,869) $(219,599) ============================================== Net loss per common share: As reported............................ $(64.93) $(114.42) $(360.88) ============================================== Pro forma.............................. $(45.97) $(114.56) $(353.70) ==============================================
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
1997 1998 1999 ------------------------------------------- Expected dividend yield..................... 0% 0% 0% Expected stock price volatility............. 50% 50% 70% Risk-free interest rate..................... 6% 6% 6.5% Expected life of options.................... 7 years 7 years 7 years
59 The expected stock price volatility factors were determined based on an average of such factors as disclosed in the financial statements of peer companies. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 9. SERVICE REVENUES The Company provides on-net switched and dedicated services and resells switched services previously purchased from the incumbent local exchange carrier. On-net services include both services provided through direct connections to our own networks and services provided by means of unbundled network elements leased from the incumbent local exchange carrier. The Company's service revenues consist of the following:
YEAR ENDED DECEMBER 31 1997 1998 1999 ------------------------------------------------------ (in thousands) On-net.................................... $1,093 $ 8,248 $44,615 Resale.................................... 2,324 14,177 19,698 ====================================================== Total..................................... $3,417 $22,425 $64,313 ======================================================
10. INCOME TAXES As of December 31, 1999, the Company and its subsidiaries had consolidated net operating loss carryforwards for United States income tax purposes ("NOLs") of approximately $215 million which expire through 2013. Under Section 382 of the Internal Revenue Code of 1986, as amended, if the Company undergoes an "ownership change," its ability to use its preownership change NOLs (NOLs accrued through the date of the ownership change) would generally be limited annually to an amount equal to the product of (i) the long-term tax-exempt rate for ownership changes prescribed monthly by the Treasury Department and (ii) the value of the Company's equity immediately before the ownership change, excluding certain capital contributions. Any allowable portion of the preownership change NOLs that is not used in a particular taxable year following the ownership change could be carried forward to subsequent taxable years until the NOLs expire, usually 15 years after they are generated. As a result of the cumulative effect of issuances of preferred and common stock through September 22, 1997, KMC Telecom has undergone an ownership change. For financial reporting purposes, the Company has an aggregate of approximately $109 million and $311 million of loss carryforwards and net temporary differences at December 31, 1998 and 1999, respectively. At existing federal and state tax rates, the future benefit of these items approximates $42 million at December 31, 1998 and $121 million at December 31, 1999. Valuation allowances have been established equal to the entire net tax benefit associated with all carryforwards and temporary differences at both December 31, 1998 and 1999 as their realization is uncertain. 60 The composition of expected future tax benefits at December 31, 1998 and 1999 is as follows:
1998 1999 ----------------------------- (in thousands) Net operating loss carryforwards............................ $ 22,914 $ 83,762 Temporary differences: Stock option compensation................................ 8,264 19,528 Interest accretion....................................... 9,797 21,127 Other, net............................................... 1,513 (3,244) ----------------------------- Total deferred tax assets................................... 42,488 121,173 Less valuation allowance.................................... (42,488) (121,173) ============================= Net deferred tax assets..................................... $ - $ - =============================
A reconciliation of the expected tax benefit at the statutory federal rate of 35% is as follows:
1997 1998 1999 ----------------------------------------------------- Expected tax benefit at statutory rate.......... (35.0)% (35.0)% (35.0)% State income taxes, net of federal benefit...... (2.9) (2.6) (3.8) Non-deductible interest expense................. - 2.0 1.1 Other........................................... .1 .1 .1 Change in valuation allowance................... 37.8 35.5 37.6 ----------------------------------------------------- -% -% -% =====================================================
11. COMMITMENTS AND CONTINGENCIES Leases The Company leases various facilities and equipment under operating leases. Minimum rental commitments are as follows (in thousands): Year ending December 31: 2000............................. $ 4,434 2001............................. 5,317 2002............................. 4,754 2003............................. 4,145 2004............................. 3,302 Thereafter............................ 13,219 ----------------- $35,171 ================= Rent expense under operating leases was $478,000, $1,299,000 and $3,815,000, for the years ended December 31, 1997, 1998 and 1999, respectively. Litigation There are a number of lawsuits and regulatory proceedings related to the Telecommunications Act of 1996, decisions of the Federal Communications Commission related thereto and rules and regulations issued thereunder which may affect the rights, obligations and business of incumbent local exchange carriers, competitive local exchange carriers and other participants in the telecommunications industry in general, including the Company. 61 Purchase Commitments As of December 31, 1999, the Company has outstanding commitments aggregating approximately $96.5 million related to purchases of telecommunications equipment and fiber optic cable and its obligations under its agreements with certain suppliers and service providers. Employment Agreements The Company has entered into employment agreements with certain of its executives. In addition to a base salary, these agreements also provide for certain incentive compensation payments, based upon completion of construction and attainment of specified revenues for additional networks. The Company has also agreed to make similar incentive compensation payments to certain other key employees. Arbitration Award During the second quarter of 1999, the Company recorded a $4.3 million charge to other expense in connection with an unfavorable arbitration award. The net amount due under the terms of the award was paid in full in June 1999. 12. ACQUISITION On July 11, 1997, KMC Telecom acquired a network in Melbourne, Florida for a purchase price of $2 million in cash. The acquisition was accounted for under the purchase method and the purchase price approximated the fair value of the fixed assets acquired. Assuming the Melbourne Network had been acquired as of January 1, 1997, the Company's pro forma consolidated revenue and net loss for the year ended December 31, 1997 would have been $3,655,000 and $33,212,000, respectively. 13. RELATED PARTY TRANSACTIONS The Company and certain affiliated companies owned by Kamine share certain administrative services. The entity which bears the cost of the service is reimbursed by the other for the other's proportionate share of such expenses. The Company reimbursed Kamine-affiliated companies for these shared services an aggregate of approximately $281,000, $136,000 and $60,000, of expense for the years ended December 31, 1997, 1998 and 1999, respectively. During 1999, the Company purchased approximately $180,000 of office furniture and leasehold improvements from an entity controlled by Kamine. From May 1, 1996 through January 29, 1998, an affiliate of the Company was paid a fee at an annual rate of $266,000 as reimbursement for the services of Kamine as Chairman of the Board of the Company. The amount of this fee was reduced to $100,000 per annum as of January 29, 1998 and it was terminated effective December 31, 1998. The fees paid for these services are included in the shared services payment described in the immediately preceding paragraph. The Company leases its headquarters office through January 2007 from an entity controlled by Kamine. The lease provides for a base annual rental cost of approximately $217,000, adjusted periodically for changes in the consumer price index, plus operating expenses. Rent expense recognized under this lease for the years ended December 31, 1997, 1998 and 1999 was $207,000, $217,000 and $217,000, respectively. Effective January 1, 1999, the Company is entitled to utilize a Citation III business jet, chartered by Bedminster Aviation, LLC, a limited liability company wholly-owned by Kamine, for a fixed price per hour of flight time. During 1999, the Company paid approximately $210,000 for the use of the Citation III. The Company has agreed to use its best efforts to utilize the Citation III fifty hours per quarter during 2000. The Company is under no obligation to do so and has not guaranteed any financial arrangements with respect to the aircraft or to Bedminster Aviation, LLC. Pursuant to an agreement among the Company, Kamine and Nassau, for 1997, 1998 and 1999 Nassau received $100,000, $100,000 and $450,000, respectively, as a financial advisory fee and as compensation for the Nassau designees who served on the Board of Directors of the Company. Nassau will be paid $450,000 as a financial advisory fee for 2000. 62 As of December 31, 1998 and 1999, the Company has made loans aggregating $760,000 and $575,000, respectively, to certain of its executives. Such loans bear interest at a rate of 6% per annum and are included in other assets. 14. NET LOSS PER COMMON SHARE The following table sets forth the computation of net loss per common share:
1997 1998 1999 ------------------------------------------------------ (in thousands, except per share amounts) Numerator: Net loss................................... $(32,686) $(76,753) $(225,716) Dividends and accretion on redeemable preferred stock........................... (8,904) (18,285) (81,633) ====================================================== Numerator for net loss per common share.... $(41,590) $(95,038) $(307,349) ====================================================== Denominator: Denominator for net loss per common share - weighted average number of common shares outstanding............................... 641 831 852 ====================================================== Net loss per common share.................. $(64.93) $ (114.42) $ (360.88) ======================================================
Options and warrants to purchase an aggregate of 242,768, 372,885 and 496,729 shares of common stock were outstanding as of December 31, 1997, 1998 and 1999, respectively, but a computation of diluted net loss per common share has not been presented, as the effect of such securities would be anti-dilutive. 15. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Information with respect to noncash investing and financing activities is as follows: In connection with the Senior Discounts Notes, the Company recognized noncash interest expense of $29.6 and $36.4 million in 1998 and 1999, respectively. During 1999, the Company issued stock dividends to the holders of the Series E Preferred Stock and Series F Preferred Stock of 5,004 shares and 4,177 shares, respectively. In 1997, certain convertible notes, including accrued interest, aggregating approximately $12,380,000 were converted into 123,800 shares of Series A Cumulative Convertible Preferred Stock of KMC Telecom. In 1997, warrants with a fair value of $1.5 million were granted to Newcourt and warrants with a fair value of $525,000 were granted to GECC. In connection with options granted to employees under the KMC Holdings Stock Option Plan in 1998 and 1999, and under the KMC Telecom Stock Option Plan in 1997, cumulative deferred compensation obligations of $15,579,000, $27,906,000 and $50,972,000, have been established in 1997, 1998 and 1999, respectively, with offsetting credits to additional paid-in capital. Noncash compensation expense of $9,014,000, $23,758,000 and $23,947,000 in 1997, 1998 and 1999, respectively, was recognized in connection with such options. In connection with options granted to individuals employed by certain affiliates of the Company in 1997, 1998 and 1999, the Company recognized noncash compensation expense of $4,856,000, $4,668,000 and $5,886,000, respectively. In addition, during 1998 the Company cancelled all of the then outstanding options granted under the KMC Telecom Stock Option Plan, resulting in the reversal of previously recognized compensation expense of $21.3 million. 63 16. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Cash and Cash Equivalents The carrying amounts approximate fair value because of the short-term maturity of the instruments. Investments Held for Future Capital Expenditures The carrying amounts and fair value are reported at amortized cost since these securities are to be held to maturity. Long-Term Debt The carrying amount of floating-rate long-term debt approximates its fair value. The fair value of the Company's fixed-rate long-term debt is estimated using discounted cash flows at the Company's incremental borrowing rates. Redeemable Equity The fair value of the Company's redeemable equity instruments are estimated to be the amounts at which the holders may require the Company to redeem such securities, adjusted using discounted cash flows. Interest Rate Swap At December 31, 1999, the Company had an interest rate swap agreement to reduce the impact on interest expense of fluctuations in interest rates on a portion of its variable rate debt. The effect of this agreement is to limit the Company's interest rate exposure on a notional amount of debt of $125 million. The fair value was estimated as the amount the Company would receive if the swap agreement was terminated at December 31, 1999. Estimated Fair Values The carrying amounts and estimated fair values of the Company's financial instruments are as follows (in millions):
1998 1999 --------------------------------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE --------------------------------------------------- Cash and cash equivalents...................... $ 21.1 $ 21.1 $ 86.0 $ 86.0 Investments held for future capital expenditures................................... 27.9 27.9 - - Long-term debt: Floating rate................................ 41.4 41.4 235.0 235.0 Fixed rate - Senior Discount Notes........... 267.8 249.6 301.1 275.7 Fixed rate - Senior Notes.................... - - 275.0 263.5 Redeemable equity instruments: Series E Preferred Stock..................... - - 50.8 57.7 Series F Preferred Stock..................... - - 41.4 39.2 Series A Preferred Stock..................... 30.4 38.9 71.3 86.5 Series C Preferred Stock..................... 21.6 21.6 40.3 48.0 Redeemable common stock...................... 22.3 14.5 33.8 34.4 Redeemable common stock warrants............. .7 .7 12.9 13.7 Interest rate swap (asset)..................... - - - 3.9
Concentrations of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and accounts receivable. The Company places its cash investments with major 64 financial institutions. With respect to accounts receivable, the Company performs ongoing credit evaluations of its customers' financial conditions and generally does not require collateral. No individual customer accounted for more than 10% of revenue, excluding reciprocal compensation revenue, as described below, for any of the years ended December 31, 1997, 1998 or 1999. The Company maintains interconnection agreements with the major incumbent local exchange carriers ("ILECs") in each state in which it operates. Among other things, these contracts govern the reciprocal amounts to be billed by competitive carriers for terminating local traffic of Internet service providers ("ISPs") in each state. ILECs around the country have been contesting whether the obligation to pay reciprocal compensation to competitive local exchange carriers should apply to local telephone calls from an ILEC's customers to ISPs served by competitive local exchange carriers. The ILECs claim that this traffic is interstate in nature and therefore should be exempt from compensation arrangements applicable to local intrastate calls. Competitive local exchange carriers have contended that the interconnection agreements provide no exception for local calls to ISPs and reciprocal compensation is therefore applicable. The ILECs have threatened to withhold, and in many cases have withheld, reciprocal compensation to competitive local exchange carriers for the transport and termination of these calls. During 1998 and 1999, the Company recognized revenue from these ILECs of approximately $2.9 million and $9.7 million, or 12.9% and 15.1% of 1998 and 1999 revenue, respectively, for these services. Payments of approximately $135,000 and $1.6 million were received from the ILECs during 1998 and 1999, respectively. The Company determined to recognize this revenue because management concluded, based upon all of the facts and circumstances available to them at the time, including numerous state public service commission and state and federal court decisions upholding competitive local exchange carriers' entitlement to reciprocal compensation for such calls, that realization of those amounts was reasonably assured. On October 13, 1999, however, the Louisiana Public Service Commission ruled that local traffic to Internet service providers in Louisiana is not eligible for reciprocal compensation. As a result of that ruling, management determined that the Company could no longer conclude that realization of amounts attributable to reciprocal compensation for termination of local calls to Internet service providers in Louisiana was reasonably assured. Accordingly, the Company recorded an adjustment to reduce revenue in the quarter ended September 30, 1999, which reversed all reciprocal compensation revenue previously recognized related to Internet service provider traffic in Louisiana for the entire year of 1998 and for the first nine months of 1999. The adjustment amounted to $4.4 million, of which $1.1 million relates to the year ended December 31, 1998 and $3.3 million relates to the nine months ended September 30, 1999. South Carolina has also ruled that ILECs are not obligated to pay reciprocal compensation for termination of local calls to ISPs. As a result, unless that decision is reversed we will not recognize revenue for such calls in South Carolina. Currently, over 30 state commissions and several federal and state courts have ruled that reciprocal compensation arrangements do apply to calls to ISPs, while four jurisdictions have ruled to the contrary. A number of these rulings are subject to appeal. Additional disputes over the appropriate treatment of ISP traffic are pending in other states. On February 26, 1999, the Federal Communications Commission issued a declaratory ruling determining that ISP traffic is interstate for jurisdictional purposes, but that its current rules neither require nor prohibit the payment of reciprocal compensation for such calls. In the absence of a federal rule, the Federal Communications Commission determined that state commissions have authority to interpret and enforce the reciprocal compensation provisions of existing interconnection agreements, and to determine the appropriate treatment of ISP traffic in arbitrating new agreements. The Federal Communications Commission also requested comment on alternative federal rules to govern compensation for such calls in the future. In response to the Federal Communications Commission ruling some ILECs have asked state commissions to reopen previous decisions requiring the payment of reciprocal compensation on ISP calls. Some ILECs and some competitive local exchange carriers appealed the Federal Communications Commission's declaratory ruling to the United States Court of Appeals for the District of Columbia Circuit, which issued a decision on March 24, 2000, vacating the declaratory ruling. The court stated that the Federal Communications Commission had not adequately explained its conclusion that calls to ISPs should not be treated as local traffic for reciprocal compensation purposes. Management views this decision as favorable, but the court's direction to the Federal Communications Commission to re-examine the issue will likely result in further delay in the resolution of pending compensation disputes, and there can be no assurance as to the ultimate outcome of these proceedings. The Company accounts for reciprocal compensation with the ILECs, including the activity associated with the disputed ISP traffic, as local traffic pursuant to the terms of its interconnection agreements in all jurisdictions other than Louisiana and South Carolina. Accordingly, revenue is recognized in the period 65 that the traffic is terminated. The circumstances surrounding the disputes are considered by management periodically in determining whether reserves against unpaid balances are warranted. As of December 31, 1999, no reserves have been considered necessary by management. 17. SUPPLEMENTAL GUARANTOR INFORMATION In May 1999, KMC Holdings sold $275,000,000 aggregate principal amount of Senior Notes. KMC Telecom Financing Inc. (the "Guarantor"), a wholly-owned subsidiary of the Company, has fully and unconditionally guaranteed the Company's obligations under these notes. Separate financial statements and other disclosures of the Guarantor are not presented because management determined the information is not material to investors. No restrictions exist on the ability of the Guarantor to make distributions to the Company except to the extent provided by law generally (adequate capital to pay dividends under corporate laws) and restrictions contained in the Company's credit facilities. The following condensed consolidating financial information presents the results of operations, financial position and cash flows of KMC Holdings (on a stand alone basis), the guarantor subsidiary (on a stand alone basis), the non-guarantor subsidiaries (on a combined basis) and the eliminations necessary to arrive at the consolidated results for the Company at December 31, 1999 and for the year then ended. The non-guarantor subsidiaries include KMC Telecom, KMC Telecom II, KMC Telecom III, KMC Telecom Virginia, Inc. and KMC Telecom Financial Services LLC (collectively, the "Non-Guarantor Subsidiaries"). 66 GUARANTOR/NON-GUARANTOR CONSOLIDATING BALANCE SHEET DECEMBER 31, 1999 (IN THOUSANDS)
KMC TELECOM NON- CONSOLIDATED HOLDINGS, INC. GUARANTOR KMC TELECOM PARENT CO. GUARANTOR SUBSIDIARIES ELIMINATIONS HOLDINGS, INC. ---------- --------- ------------ --------------------------- ASSETS Current assets: Cash and cash equivalents (overdraft)............$ (833) $ -- $ 86,799 $ -- $ 85,966 Restricted investments........................... -- 37,125 -- -- 37,125 Accounts receivable, net......................... 6 -- 27,367 -- 27,373 Prepaid expenses and other current assets........ 1,249 -- 126 -- 1,375 Amounts due from subsidiaries.................... 72,972 -- (72,972) -- -- ------ ---------- ----------- -------- --------- Total current assets 73,394 37,125 41,320 -- 151,839 Long-term restricted investments................... .-- 51,446 -- -- 51,446 Networks and equipment, net ....................... 58,531 -- 580,793 -- 639,324 Intangible assets, net ............................ 1,388 -- 2,214 -- 3,602 Deferred financing costs, net...................... 21,031 -- 17,785 -- 38,816 Loans receivable from subsidiaries................. 590,103 (85,329) (504,774) -- -- Other assets....................................... 825 -- 188 -- 1,013 ------- ---------- ----------- ------- ---------- Total assets....................................... $ 745,272 $ 3,242 $ 137,526 $ -- $ 886,040 ======= =========== ========== ======== ========== LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY) Current liabilities: Accounts payable.............................. $ 40,984 $ -- $ 126,506 $ -- $ 167,490 Accrued expenses.............................. 14,967 -- 22,080 -- 37,047 Deferred revenue.............................. -- -- 4,309 -- 4,309 -------- ------------- ------------- --------- ------------- Total current liabilities......................... 55,951 -- 152,895 -- 208,846 Notes payable..................................... -- -- 235,000 -- 235,000 Senior notes payable.............................. 275,000 -- -- -- 275,000 Senior discount notes payable..................... 301,137 -- -- -- 301,137 Losses of subsidiaries in excess of basis......... 247,127 -- -- (247,127) -- ------- ------------ ------------- --------- ----------- Total liabilities................................. 879,215 -- 387,895 (247,127) 1,019,983 Redeemable equity: Senior redeemable, exchangeable, PIK preferred stock: Series E.................................. 50,770 -- -- -- 50,770 Series F.................................. 41,370 -- -- -- 41,370 Redeemable cumulative convertible preferred stock: Series A.................................. 71,349 -- -- -- 71,349 Series C.................................. 40,301 -- -- 40,301 Redeemable common stock....................... 33,755 -- -- -- 33,755 Redeemable common stock warrants.............. 12,925 -- -- -- 12,925 ------ ------------ ------------ --------- ----------- Total redeemable equity .......................... 250,470 -- -- -- 250,470 Nonredeemable equity (deficiency): Common stock ................................. 6 -- -- 6 Additional paid-in capital.................... -- -- -- -- -- Unearned compensation......................... (9,163) -- -- -- (9,163) Accumulated deficit........................... (375,256) (250,369) 247,127 (375,256) --------- --------- ------------ -------- ------------- 3,242 Total nonredeemable equity (deficiency) (384,413) (250,369) 247,127 (384,413) --------- --------- ------------ -------- ---------- 3,242 $ 745,272 $ 3,242 $ 137,526 $ -- $ 886,040 ========== =========== ========== ======== ==========
67 GUARANTOR/NON-GUARANTOR CONSOLIDATING STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
KMC TELECOM NON- CONSOLIDATED HOLDINGS, INC. GUARANTOR KMC TELECOM PARENT CO. GUARANTOR SUBSIDIARIES ELIMINATIONS HOLDINGS, INC. ---------- --------- ------------ --------------------------- Revenue............................................ $ -- $ -- $ 64,352 $ (39) $ 64,313 Operating expenses: Network operating costs........................ -- -- 110,348 (39) 110,309 Selling, general and administrative............ 40,714 -- 15,089 -- 55,803 Stock option compensation expense.............. 29,833 -- -- -- 29,833 Depreciation and amortization.................. 3,104 -- 25,973 -- 29,077 ----- ---------- ------------- --------- ------------ Total operating expenses........................... 73,651 -- 151,410 (39) 225,022 ------ ---------- ---------- --------- ---------- Loss from operations............................... (73,651) -- (87,058) -- (160,709) Intercompany charges............................... 72,972 -- (72,972) -- -- Other expense...................................... (4,297) -- -- -- (4,297) Interest income.................................... 1,872 3,242 3,587 -- 8,701 Interest expense................................... (36,729) -- (32,682) -- (69,411) Equity in net loss of subsidiaries................. (185,883) -- -- 185,883 -- --------- ---------- ------------- ------- ------------ Net income (loss).................................. (225,716) 3,242 (189,125) 185,883 (225,716) Dividends and accretion on redeemable preferred stock............................................. (81,633) -- -- -- (81,633) ---------- ---------- -------------- ---------- ------------- Net income (loss) applicable to common shareholders $ (307,349) $ 3,242 $ (189,125) $185,883 $ (307,349) =========== ========== =========== ======== ===========
68 GUARANTOR/NON-GUARANTOR CONSOLIDATING STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1999 (IN THOUSANDS)
KMC TELECOM NON- CONSOLIDATED HOLDINGS, INC. GUARANTOR KMC TELECOM PARENT CO. GUARANTOR SUBSIDIARIES ELIMINATIONS HOLDINGS, INC. ---------- --------- ------------ --------------------------- OPERATING ACTIVITIES Net loss.......................................... $ (225,716) $ 3,242 $ (189,125) $185,883 $ (225,716) Adjustments to reconcile net loss to net cash used in operating activities: Equity in net loss of subsidiaries............. 185,883 -- -- (185,883) -- Depreciation and amortization.................. 3,104 -- 25,973 -- 29,077 Non-cash interest expense...................... 36,963 -- (5,822) -- 31,141 Non-cash stock option compensation expense..... 29,833 -- -- -- 29,833 Changes in assets and liabilities: Accounts receivable.......................... (6) -- (19,828) -- (19,834) Prepaid expenses and other current assets.... (917) -- 857 -- (60) Accounts payable............................. 441 -- 28,878 -- 29,319 Accrued expenses............................. 9,075 -- 15,152 -- 24,227 Amounts due from subsidiaries................ (52,050) -- 52,050 -- -- Other assets................................. 1,128 -- 2,592 -- 3,720 ------------ ---------- ---------- -------- ---------- Net cash provided by (used in) operating activities........................................ (12,262) 3,242 (89,273) -- (98,293) ------------ ---------- ----------- -------- ----------- INVESTING ACTIVITIES Loans receivable from subsidiaries................ (324,390) 85,329 239,061 -- -- Construction of networks and purchases of equipment......................................... (18,327) -- (300,209) -- (318,536) Acquisitions of franchises, authorizations and related assets.................................. (796) -- (1,196) -- (1,992) Redemption (purchase) of investments.............. -- (88,571) 27,920 104,101 43,450 ------------ ----------- ---------- --------- ---------- Net cash used in investing activities............. (343,513) (3,242) (34,424) 104,101 (277,078) ------------- ----------- ---------- --------- ----------- FINANCING ACTIVITIES Proceeds from issuance of preferred stock and related warrants, net of issuance costs......... 91,001 -- -- -- 91,001 Proceeds from exercise of stock options........... 333 -- -- -- 333 Proceeds from issuance of senior notes, net of issuance costs and purchase of portfolio of restricted investments......................... 262,387 -- -- (104,101) 158,286 Proceeds from senior secured credit facility, net of issuance costs.............................. -- -- 192,836 -- 192,836 Issuance costs of Lucent facility................. -- -- (2,300) -- (2,300) ------------ ---------- ----------- -------- ----------- Net cash provided by financing activities......... 353,721 -- 190,536 (104,101) 440,156 ------------ ---------- ---------- -------- ---------- Net increase (decrease) in cash and cash equivalents....................................... (2,054) -- 66,839 -- 64,785 Cash and cash equivalents, beginning of year...... 1,221 -- 19,960 -- 21,181 ------------ ---------- ---------- --------- ---------- Cash and cash equivalents, end of year............ $ (833) $ -- $ 86,799 $ -- $ 85,966 ============= ========== ========== ========= ==========
18. SUBSEQUENT EVENTS Amended Senior Secured Credit Facility During the first quarter of 2000, KMC Telecom, KMC Telecom II, KMC Telecom of Virginia and KMC Telecom III (the "Borrowers"), amended, restated and combined the Senior Secured Credit Facility and the Lucent Facility by entering into a $700 million Loan and Security Agreement (the "Amended Senior Secured Credit Facility") with a group of lenders led by Newcourt Commercial Finance Corporation, GE Capital, Canadian Imperial Bank of Commerce ("CIBC"), First Union National Bank and Lucent Technologies, Inc. (the "Lenders"). 69 The Amended Senior Secured Credit Facility includes a $175 million reducing revolver facility (the "Revolver"), a $75 million term loan (the "Term Loan") and a $450 million term loan facility (the "Lucent Term Loan"). The Revolver will mature on April 1, 2007. Proceeds from the Revolver can be used to finance the purchase of certain equipment, transaction costs and, upon attainment of certain financial conditions, for working capital and other general corporate purposes. The aggregate commitment of the Lenders under the Revolver will be reduced on each payment date beginning April 1, 2003. The initial quarterly commitment reduction is 5.0%, reducing to 3.75% on July 1, 2003 and increasing to 6.25% on July 1, 2004, and further increasing to 7.50% on July 1, 2006. Commencing with the fiscal year ending December 31, 2001, the aggregate Revolver commitment will be further reduced by an amount equal to 50% of excess operating cash flows (as defined in the Facility) for the prior fiscal year until the Borrowers achieve certain financial conditions. The Borrowers must pay an annual commitment fee on the unused portion of the Revolver ranging from .75% to 1.25%. The Term Loan is payable in twenty consecutive quarterly installments of $188,000 beginning on April 1, 2002 and two final installments of $35.6 million each on April 1, 2007 and July 1, 2007. Proceeds from the Term Loan can be used to finance the purchase of certain equipment, transaction costs, working capital and other general corporate purposes. The Lucent Term Loan provides for an aggregate commitment of up to $450 million. Proceeds from the Lucent Term Loan can be used to purchase Lucent products or to reimburse the Borrowers for Lucent products previously purchased with cash or other sources of liquidity. The Lucent Term Loan will mature on July 1, 2007 and has required quarterly amortization beginning on July 1, 2003 of 5%. The amortization decreases to 3.75% per quarter beginning on October 1, 2003, increases to 6.25% on October 1, 2004 and further increases to 7.50% on October 1, 2006. An annual commitment fee of 1.50% is payable for any unused portion of the Lucent Term Loan. The Amended Senior Secured Credit Facility will bear interest payable at the Borrowers' option, at (a) the "Applicable Base Rate Margin" (which generally ranges from 2.00% to 3.25%) plus the greater of (i) the administrative agent's prime rate or (ii) the overnight federal funds rate plus .5% or (b) the "Applicable LIBOR Margin" (which generally ranges from 3.00% to 4.25%) plus LIBOR, as defined. "Applicable Base Rate Margin" interest is payable quarterly while "Applicable LIBOR Margin" interest is payable at the end of each applicable interest period or at least every three months. If a payment default were to occur, the interest rate will be increased by four percentage points. If any other event of default shall occur, the interest rate will be increased by two percentage points. KMC Holdings has unconditionally guaranteed the repayment of the Amended Senior Secured Credit Facility when such repayment is due, whether at maturity, upon acceleration, or otherwise. KMC Holdings has pledged the shares of each of the Borrowers to the Lenders to collateralize its obligations under the guaranty. In addition, the Borrowers have each pledged all of their assets to the Lenders. The Amended Senior Secured Credit Facility contains a number of affirmative and negative covenants, including a covenant requiring the Borrowers to obtain cash capital contributions from KMC Holdings of at least $185 million prior to April 1, 2001. KMC Holdings has secured a financing commitment from Lucent for $100 million in PIK Preferred Stock towards this requirement and currently contemplates raising the $85 million balance through private or public sales of securities in the capital markets. Additional affirmative and negative covenants include, among others, restricting the ability of the Borrowers to consolidate or merge with any person, sell or lease assets not in the ordinary course of business, sell or enter into long term leases of dark fiber, redeem stock, pay dividends or make any other payments (including payments of principal or interest on loans) to KMC Holdings, create subsidiaries, transfer any permits or licenses, or incur additional indebtedness or act as guarantor for the debt of any person, subject to certain conditions. The Borrowers are required to comply with certain financial tests and maintain certain financial ratios, including, among others, a ratio of total debt to contributed capital, certain minimum revenues, maximum EBITDA losses and minimum EBITDA, maximum capital expenditures and minimum access lines, a maximum total leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio. The covenants become more restrictive upon the earlier of (i) March 31, 2002 and (ii) after the Borrowers achieve positive EBITDA on a combined basis for two consecutive fiscal quarters and a total leverage ratio (as defined) equal to or less than 8 to 1. 70 Failure to satisfy any of the financial covenants will constitute an event of default under the Amended Senior Secured Credit Facility permitting the Lenders, after notice, to terminate the commitment and/or accelerate payment of outstanding indebtedness. The Amended Senior Secured Credit Facility also includes other customary events of default, including, without limitation, a cross-default to other material indebtedness, material undischarged judgments, bankruptcy, loss of a material franchise or material license, breach of representations and warranties, a material adverse change, and the occurrence of a change of control. 71 Independent Auditors' Report on Schedules The Board of Directors and Stockholders KMC Telecom Holdings, Inc. We have audited the consolidated balance sheets of KMC Telecom Holdings, Inc. as of December 31, 1998 and 1999 and the related consolidated statements of operations, redeemable and nonredeemable equity and cash flows for the years then ended. Our audit report issued thereon dated January 31, 2000, except for Note 18, as to which the date is March 28, 2000, is included elsewhere in this Form 10-K. Our audit also included the financial statement schedules listed in Item 14(a) of this Form 10-K. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP MetroPark, New Jersey January 31, 2000, except for Note 8, as to which the date is March 28, 2000 72 SCHEDULE I - Condensed Financial Information of Registrant KMC Telecom Holdings, Inc. (Parent Company) Condensed Balance Sheets (in thousands)
DECEMBER 31 ----------- 1998 1999 ---- ---- ASSETS Current assets: Cash and cash equivalents (overdraft).................................... $ 1,221 $ (833) Amounts due from subsidiaries............................................ 20,922 72,972 Prepaid expenses and other current assets................................ 332 1,255 -------- ------- Total current assets........................................................ 22,475 73,394 Loans receivable from subsidiaries.......................................... 265,713 590,103 Networks and equipment, net................................................. 4,775 58,531 Intangible assets, net...................................................... 625 1,388 Deferred financing costs.................................................... 12,055 21,031 Other assets................................................................ 1,952 825 -------- ------- $307,595 $745,272 ======== ======= LIABILITIES, REDEEMABLE AND NONREDEEMABLE EQUITY (DEFICIENCY) Current liabilities: Accounts payable......................................................... $ 2,043 $ 40,984 Accrued expenses......................................................... 5,838 14,967 -------- ------- Total current liabilities................................................... 7,881 55,951 Senior notes payable........................................................ -- 275,000 Senior discount notes payable............................................... 267,811 301,137 Losses of subsidiaries in excess of basis................................... 61,244 247,127 -------- ------- Total liabilities........................................................... 336,936 879,215 Redeemable equity: Senior redeemable, exchangeable, PIK preferred stock, par value $.01 per share; authorized: -0- shares in 1998 and 630 shares in 1999; shares issued and outstanding: Series E, -0- in 1998 and 65 shares in 1999 ($65,004 liquidation preference)..................................................... -- 50,770 Series F, -0- in 1998 and 44 shares in 1999 ($44,177 liquidation preference)..................................................... -- 41,370 Redeemable cumulative convertible preferred stock, par value $.01 per share; 499 shares authorized; shares issued and outstanding: Series A, 124 shares in 1998 and 1999 ($12,380 liquidation preference).. 30,390 71,349 Series C, 175 shares in 1998 and 1999 ($17,500 liquidation preference).. 21,643 40,301 Redeemable common stock, shares issued and outstanding, 224 in 1998 and in 1999................................................................. 22,305 33,755 Redeemable common stock warrants......................................... 674 12,925 -------- ------- Total redeemable equity..................................................... 75,012 250,470 Nonredeemable equity (deficiency): Common stock, par value $.01 per share, 3,000 shares authorized; shares issued and outstanding: 614 shares in 1998 and 629 shares in 1999.................................................................. 6 6 Additional paid-in capital............................................... 13,750 -- Unearned compensation.................................................... (5,824) (9,163) Accumulated deficit...................................................... (112,285) (375,256) -------- -------- Total nonredeemable equity (deficiency)..................................... (104,353) (384,413) -------- -------- $307,595 $745,272 ======== ========
See accompanying notes. 73 KMC Telecom Holdings, Inc. (Parent Company) Condensed Statements of Operations (in thousands)
SEPTEMBER 22, 1997 YEAR ENDED DECEMBER 31 (FORMATION) TO DECEMBER --------------------------------- 31, 1997 1998 1999 ---------------- -------------- ------------- Operating expenses: Selling, general and administrative................ $ -- $ 19,624 $ 40,714 Stock option compensation expense.................. -- 21,190 29,833 Depreciation and amortization...................... -- 1,197 3,104 --------- ---------- ---------- Total operating expenses.............................. -- 42,011 73,651 --------- ---------- ---------- Loss from operations.................................. -- (42,011) (73,651) Other expense......................................... -- -- (4,297) Intercompany charges.................................. -- 20,922 72,972 Interest income....................................... -- 8,575 1,872 Interest expense...................................... -- (23,104) (36,729) Equity in net loss of subsidiaries.................... (21,860) (41,135) (185,883) Net loss.............................................. (21,860) (76,753) (225,716) Dividends and accretion on redeemable preferred stock. (8,904) (18,285) (81,633) --------- ---------- ---------- Net loss applicable to common shareholders............ $(30,764) $(95,038) $(307,349) ========= ========== ==========
See accompanying notes. 74 KMC Telecom Holdings, Inc. (Parent Company) Condensed Statements of Cash Flows (in thousands)
SEPTEMBER 22, 1997 YEAR ENDED DECEMBER 31 (FORMATION) TO DECEMBER --------------------------------- 31, 1997 1998 1999 ---------------- -------------- ------------- OPERATING ACTIVITIES Net loss................................................................ $(21,860) $(76,753) $ (225,716) Adjustments to reconcile net loss to net cash used in operating activities: Equity in net loss of subsidiaries................................. 21,860 41,135 185,883 Depreciation and amortization...................................... -- 1,197 3,104 Non-cash interest expense.......................................... -- 23,104 36,963 Non-cash stock option compensation expense......................... -- 21,190 29,833 Changes in assets and liabilities: Prepaid expenses and other current assets....................... -- (332) (923) Accounts payable................................................ -- 2,043 441 Accrued expenses................................................ -- 5,838 9,075 Amounts due from subsidiaries................................... -- (20,922) (52,050) Other assets.................................................... -- (1,952) 1,128 ----------- ----------- ---------- Net cash provided by (used in) operating activities..................... -- (5,452) (12,262) ----------- ----------- ---------- INVESTING ACTIVITIES Loans receivable from subsidiaries...................................... (24,623) (233,685) (324,390) Purchases of equipment.................................................. -- (5,845) (18,327) Acquisitions of intangible assets....................................... (506) (166) (796) ----------- ----------- ---------- Net cash used in investing activities................................... (25,129) (239,696) (343,513) ----------- ----------- ---------- FINANCING ACTIVITIES Proceeds from issuance of preferred stock and related warrants, net of issuance costs........................................................ 16,498 - 91,001 Proceeds from exercise of stock options................................. -- - 333 Proceeds from issuance of senior notes, net of issuance costs and purchase of portfolio of restricted investments...................... -- - 262,387 Proceeds from issuance of common stock and warrants, net of issuance costs................................................................. 9,363 20,446 - Proceeds from issuance of senior discount notes, net of issuance costs.. (732) 225,923 - ----------- ---------- ---------- Net cash provided by financing activities............................... 25,129 246,369 353,721 ----------- ---------- ---------- Net increase (decrease) in cash and cash equivalents.................... -- 1,221 (2,054) Cash and cash equivalents, beginning of year............................ -- - 1,221 ----------- ---------- ----------- Cash and cash equivalents, end of year.................................. $ -- $ 1,221 $ (833) =========== ========== =========== See accompanying notes.
75 SCHEDULE I - Condensed Financial Information of Registrant KMC Telecom Holdings, Inc. (Parent Company) Notes to Condensed Financial Statements December 31, 1999 1. BASIS OF PRESENTATION In the parent company only financial statements, KMC Telecom Holdings, Inc.'s (the "Company") investment in subsidiaries is stated at cost less equity in losses of subsidiaries since date of formation. These parent company financial statements should be read in conjunction with the Company's consolidated financial statements. The Company's operating subsidiaries are KMC Telecom Inc. ("KMC Telecom"), KMC Telecom II, Inc. ("KMC Telecom II"), KMC Telecom III, Inc. ("KMC Telecom III") and KMC Telecom of Virginia, Inc. On September 22, 1997, the stockholders of KMC Telecom exchanged all of their KMC Telecom common and preferred stock for equal numbers of shares of common and preferred stock of the Company. Pursuant to a management agreement among the Company and its subsidiaries, the Company provides management and other services and incurs certain operating expenses on behalf of its subsidiaries. Such costs are allocated to the subsidiaries by the Company and reimbursed on a current basis. At December 31, 1998 and 1999, an aggregate of $20.9 and $73.0 million, respectively, was due from the subsidiaries for such costs and is included in the accompanying condensed balance sheet at December 31, 1998 and 1999 as a current receivable. Such reimbursements are permitted under the debt agreements of the Company's subsidiaries. 2. SENIOR SECURED CREDIT FACILITY On December 22, 1998, KMC Telecom, KMC Telecom II and KMC Telecom of Virginia (the "Subsidiary Borrowers"), refinanced and expanded the Amended and Restated Loan and Security Agreement (the "AT&T Facility") by entering into a Loan and Security Agreement (the "Senior Secured Credit Facility") with AT&T Commercial Finance Corporation ("AT&T Finance"), First Union National Bank, General Electric Capital Corporation ("GECC") and Canadian Imperial Bank of Commerce (the "Creditors"). The Company has unconditionally guaranteed the repayment of the Senior Secured Credit Facility when such repayment is due, whether at maturity, upon acceleration, or otherwise. The Company has agreed to pay all amounts outstanding under the Senior Secured Credit Facility, on demand, upon the occurrence and during the continuation of any event of default (as defined therein). The Company has pledged the shares of each of the Subsidiary Borrowers to the Creditors to collateralize its obligations under the guaranty. In addition, the Subsidiary Borrowers have pledged all of their assets to the Creditors. Accordingly, if there were an event of default under the Senior Secured Credit Facility, the lenders thereunder would be entitled to payment in full and could foreclose on the assets of the Subsidiary Borrowers, and the holders of the Senior Discount Notes and Senior Notes would have no right to share in such assets. At December 31, 1999, an aggregate of $235.0 million was outstanding under this facility. Additionally, the Senior Secured Credit Facility restricts the ability of the Subsidiary Borrowers to pay dividends to, or to pay principal or interest on loans from, the Company. Such restrictions could adversely affect the Company's liquidity and ability to meets its cash requirements, including its ability to repay the Senior Discount Notes and the Senior Notes. At December 31, 1999, an aggregate of $504.8 million has been loaned by the Company to the Subsidiary Borrowers to be used for the construction and expansion of fiber optic telecommunications networks and for working capital and general corporate purposes. As discussed further in Note 8, the Subsidiary Borrowers amended, restated and combined the Senior Secured Credit Facility and the Lucent Loan and Security Agreement during the first quarter of 2000. 76 3. SENIOR DISCOUNT NOTES On January 29, 1998, the Company sold 460,800 units, each consisting of 12 1/2% senior discount notes with a principal amount at maturity of $1,000 due 2008 pursuant to the Senior Discount Note Indenture between KMC Holdings and the Chase Manhattan Bank, as trustee (the "Senior Discount Notes") and one warrant to purchase .21785 shares of Common Stock of the Company at an exercise price of $.01 per share. The gross and net proceeds of the offering were approximately $250.0 million and $236.4 million, respectively. A substantial portion of the net proceeds of the offering have been loaned by the Company to its subsidiaries. On August 11, 1998, KMC Holdings consummated an offer to exchange the notes issued on January 29, 1998 for $460.8 million aggregate principal amount at maturity of notes that had been registered under the Securities Act of 1933 (as used below and elsewhere herein, "Senior Discount Notes" includes the original notes and the exchange notes). The Senior Discount Notes are unsecured, unsubordinated obligations of the Company and mature on February 15, 2008. The Senior Discount Notes will fully accrete to face value on February 15, 2003. From and after February 15, 2003, the Senior Discount Notes will bear interest, which will be payable in cash, at the rate of 12.5% per annum on February 15 and August 15 of each year, commencing August 15, 2003. The Company is accreting the initial carrying value of the Senior Discount Notes to their aggregate face value over the term of the debt at its effective interest rate of 13.7%. The indebtedness evidenced by the Senior Discount Notes ranks pari passu in right of payment with all existing and future unsubordinated, unsecured indebtedness of KMC Holdings and senior in right of payment to all existing and future subordinated indebtedness of KMC Holdings. However, KMC Holdings is a holding company and the Senior Discount Notes are, therefore, effectively subordinated to all existing and future liabilities (including trade payables) of its subsidiaries. The Senior Discount Note Indenture restricts, among other things, the ability of the Company to incur additional indebtedness, create liens, engage in sale-leaseback transactions, pay dividends or make distributions in respect of capital stock, make investments or certain other restricted payments, sell assets of the Company, redeem capital stock, issue or sell stock of restricted subsidiaries, enter into transactions with stockholders or affiliates or effect a consolidation or merger. 4. LUCENT LOAN AND SECURITY AGREEMENT KMC Telecom III entered into a Loan and Security Agreement (the "Lucent Facility") dated February 4, 1999 with Lucent Technologies Inc. ("Lucent") which provides for borrowings to be used to fund the acquisition of certain telecommunications equipment and related expenses. The Company has unconditionally guaranteed the repayment of the Lucent Facility when such repayment is due, whether at maturity, upon acceleration, or otherwise. The Company has agreed to pay all amounts outstanding under the Lucent Facility, on demand, upon the occurrence and during the continuation of any event of default (as defined therein). The Company has pledged the shares of KMC Telecom III to Lucent to collateralize its obligations under the guaranty. In addition, KMC Telecom III has pledged all of its assets to Lucent. Accordingly, if there were an event of default under the Lucent Facility, Lucent thereunder would be entitled to payment in full and could foreclose on the assets of KMC Telecom III and the holders of the Senior Discount Notes and Senior Notes would have no right to share in such assets. At December 31, 1999, no amounts were outstanding under this facility. Additionally, the Lucent Facility restricts the ability of KMC Telecom III to pay dividends to, or to pay principal or interest on loans from, the Company. Such restrictions could adversely affect the Company's liquidity and ability to meet its cash requirements, including its ability to repay the Senior Discount Notes and the Senior Notes. 5. SENIOR NOTES On May 24, 1999, the Company issued $275.0 million aggregate principal amount of 13 1/2% Senior Notes due 2009. On December 30, 1999, the Company exchanged the 77 notes issued on May 24, 1999 for $275.0 million aggregate principal amount of notes that had been registered under the Securities Act of 1933 (as used below, "Senior Notes" includes the original notes and the exchange notes). Interest on the Senior Notes is payable semi-annually in cash on May 15 and November 15 of each year, beginning November 15, 1999. A portion of the proceeds from the offering of the Senior Notes was used to purchase a portfolio of U.S. government securities that were pledged as security for the first six interest payments on the Senior Notes. The Senior Notes are guaranteed by KMC Telecom Financing, Inc., a wholly-owned subsidiary. The Senior Notes are senior, unsubordinated unsecured obligations of KMC Holdings and rank pari passu in right of payment with all existing and future unsubordinated, unsecured indebtedness of KMC Holdings and senior in right of payment to all of existing and future subordinated indebtedness of KMC Holdings. However, KMC Holdings is a holding company and the Senior Notes are, therefore, effectively subordinated to all existing and future liabilities (including trade payables) of its subsidiaries. The Senior Note Indenture contains certain covenants that, among other things, limit the Company's ability to incur additional indebtedness, engage in sale-leaseback transactions, pay dividends or make certain other distributions, sell assets, redeem capital stock, effect a consolidation or merger of KMC Telecom Holdings, Inc. and enter into transactions with stockholders and affiliates and create liens on our assets. 6. REDEEMABLE EQUITY Series E Preferred Stock On February 4, 1999, the Company issued 25,000 shares of Series E Senior Redeemable, Exchangeable PIK Preferred Stock (the "Series E Preferred Stock") to Newcourt Commercial Finance Corporation ("Newcourt Finance"), generating aggregate gross proceeds of $22.9 million. The Series E Preferred Stock has a liquidation preference of $1,000 per share and an annual dividend equal to 14.5% of the liquidation preference, payable quarterly. On or before January 15, 2004, the Company may pay dividends in cash or in additional fully paid and nonassessable shares of Series E Preferred Stock. After January 15, 2004, dividends must be paid in cash, subject to certain conditions. Unpaid dividends accrue at the dividend rate of the Series E Preferred Stock, compounded quarterly. During 1999, the Company issued 5,004 shares of Series E Preferred Stock to pay the dividends due. The Series E Preferred Stock must be redeemed on February 1, 2011, subject to the legal availability of funds therefor, at a redemption price, payable in cash, equal to the liquidation preference thereof on the redemption date, plus all accumulated and unpaid dividends to the date of redemption. The Series E Preferred Stock is not convertible. The Company may, at the sole option of the Board of Directors (out of funds legally available), exchange all, but not less than all, of the Series E Preferred Stock then outstanding, for a new series of subordinated debentures (the "Exchange Debentures") issued pursuant to an exchange debenture indenture. Series F Preferred Stock On February 4, 1999, the Company issued 40,000 shares of Series F Senior Redeemable, Exchangeable PIK Preferred Stock (the "Series F Preferred Stock") to Lucent and Newcourt Finance, generating aggregate gross proceeds of $38.9 million. The Series F Preferred Stock has a liquidation preference of $1,000 per share and an annual dividend equal to 14.5% of the liquidation preference, payable quarterly. The Company may pay dividends in cash or in additional fully paid and nonassessable shares of Series F Preferred Stock. During 1999, the Company issued 4,177 shares of Series F Preferred Stock to pay the dividends due for such period. Upon the earlier of (i) the date that is sixty days after the date on which the Company closes an underwritten primary offering of at least $200 million of its Common Stock, pursuant to an effective registration statement under the Securities Act or (ii) February 4, 2001, any outstanding Series F Preferred Stock will automatically convert into Series E Preferred Stock, on a one for one basis. 78 The Company may, at the sole option of the Board of Directors (out of funds legally available), exchange all, but not less than all, of the Series F Preferred Stock then outstanding for Exchange Debentures. Warrants In connection with the February 4, 1999 issuances of the Series E Preferred Stock and the Series F Preferred Stock, warrants to purchase an aggregate of 24,660 shares of Common Stock were sold to Newcourt Finance and Lucent. The aggregate gross proceeds from the sale of these warrants was approximately $3.2 million. These warrants, at an exercise price of $.01 per share, are exercisable from February 4, 2000 through February 1, 2009. In addition, the Company also delivered to the Warrant Agent certificates representing warrants to purchase an aggregate of an additional 107,228 shares of Common Stock at an exercise price of $.01 per share (the "Springing Warrants"). The Springing Warrants may become issuable under the circumstances described in the following paragraph. If the Company fails to redeem all shares of Series F Preferred Stock prior to the date (the "Springing Warrant Date") which is the earlier of (i) the date that is sixty days after the date on which the Company closes an underwritten primary offering of at least $200 million of its Common Stock pursuant to an effective registration statement under the Securities Act or (ii) February 4, 2001, the Warrant Agent is authorized to issue the Springing Warrants to the Eligible Holders (as defined in the warrant agreement) of the Series E and Series F Preferred Stock. In the event the Company has redeemed all outstanding shares of Series F Preferred Stock prior to the Springing Warrant Date, the Springing Warrants will not be issued and the Warrant Agent will return the certificates to the Company. To the extent the Company exercises its option to exchange all of the Series F Preferred Stock for Exchange Debentures prior to the Springing Warrant Date, the Springing Warrants will not become issuable. Therefore, as the future issuance of the Springing Warrant is entirely within the control of the Company and the likelihood of their issuance is deemed to be remote, no value has been ascribed to the Springing Warrants. Redemption Rights Pursuant to a stockholders agreement, certain of the Company's stockholders and warrant holders have "put rights" entitling them to have the Company repurchase their preferred and common shares and redeemable common stock warrants for the fair value of such securities if no Liquidity Event (defined as (i) an initial public offering with gross proceeds of at least $40 million, (ii) the sale of substantially all of the stock or assets of the Company or (iii) the merger or consolidation of the Company with one or more other corporations) has taken place by the later of (x) October 22, 2003 or (y) 90 days after the final maturity date of the Senior Discount Notes. The restrictive covenants of the Senior Discount Notes limit the Company's ability to repurchase such securities. All of the securities subject to such "put rights" are presented as redeemable equity in the accompanying balance sheets. The redeemable preferred stock, redeemable common stock and redeemable common stock warrants, which are subject to the stockholders agreement, are being accreted up to their fair market values from their respective issuance dates to their earliest potential redemption date (October 22, 2003). At December 31, 1999, the aggregate redemption value of the redeemable equity was approximately $320 million, reflecting per share redemption amounts of $1,212 for the Series A Preferred Stock, $476 for the Series C Preferred Stock and $250 for the redeemable common stock and redeemable common stock warrants. 7. ARBITRATION AWARD During the second quarter of 1999, the Company recorded a $4.3 million charge to other expense in connection with an unfavorable arbitration award. The net amount due under the terms of the award was paid in full in June 1999. 8. SUBSEQUENT EVENTS On February 15, 2000, KMC Telecom, KMC Telecom II, KMC Telecom of Virginia and KMC Telecom III (the "Borrowers"), amended, restated and combined the Senior Secured Credit Facility and the Lucent Facility by entering into a $700 million 79 Loan and Security Agreement (the "Amended Senior Secured Credit Facility") with a group of lenders led by Newcourt Commercial Finance Corporation, GE Capital, Canadian Imperial Bank of Commerce ("CIBC"), First Union National Bank and Lucent Technologies, Inc. (the "Lenders"). The Amended Senior Secured Credit Facility includes a $175 million reducing revolver facility (the "Revolver"), a $75 million term loan (the "Term Loan") and a $450 million term loan facility (the "Lucent Term Loan"). The Revolver will mature on April 1, 2007. Proceeds from the Revolver can be used to finance the purchase of certain equipment, transaction costs and upon attainment of certain financial condition, for working capital and other general corporate purposes. The aggregate commitment of the Lenders under the Revolver will be reduced on each payment date beginning April 1, 2003. The initial quarterly commitment reduction is 5.0%, reducing to 3.75% on July 1, 2003 and increasing to 6.25% on July 1, 2004, and further increasing to 7.50% on July 1, 2006. Commencing with the fiscal year ending December 31, 2001, the aggregate Revolver commitment will be further reduced by an amount equal to 50% of excess operating cash flows (as defined in the Facility) for the prior fiscal year until the Borrowers achieve certain financial conditions. The Borrowers must pay an annual commitment fee on the unused portion of the Revolver ranging from .75% to 1.25%. The Term Loan is payable in twenty consecutive quarterly installments of $188,000 beginning on April 1, 2002 and two final installments of $35.6 million each on April 1, 2007 and July 1, 2007. Proceeds from the Term Loan can be used to finance the purchase of certain equipment, transaction costs, working capital and other general corporate purposes. The Lucent Term Loan provides for an aggregate commitment of up to $450 million. Proceeds from the Lucent Term Loan can be used to purchase Lucent products or to reimburse the Borrowers for Lucent products previously purchased with cash or other sources of liquidity. The Lucent Term Loan will mature on July 1, 2007 and has required quarterly amortization beginning on July 1, 2003 of 5%. The amortization decreases to 3.75% per quarter beginning on October 1, 2003, increases to 6.25% on October 1, 2004 and further increases to 7.50% on October 1, 2006. An annual commitment fee of 1.50% is payable for any unused portion of the Lucent Term Loan. The Amended Senior Secured Credit Facility will bear interest payable at the Borrowers' option, at (a) the "Applicable Base Rate Margin" (which generally ranges from 2.00% to 3.25%) plus the greater of (i) the administrative agent's prime rate or (ii) the overnight federal funds rate plus .5% or (b) the "Applicable LIBOR Margin" (which generally ranges from 3.00% to 4.25%) plus LIBOR, as defined. "Applicable Base Rate Margin" interest is payable quarterly while "Applicable LIBOR Margin" interest is payable at the end of each applicable interest period or at least every three months. If a payment default were to occur, the interest rate will be increased by four percentage points. If any other event of default shall occur, the interest rate will be increased by two percentage points. KMC Holdings has unconditionally guaranteed the repayment of the Amended Senior Secured Credit Facility when such repayment is due, whether at maturity, upon acceleration, or otherwise. KMC Holdings has pledged the shares of each of the Borrowers to the Lenders to collateralize its obligations under the guaranty. In addition, the Borrowers have each pledged all of their assets to the Lenders. The Amended Senior Secured Credit Facility contains a number of affirmative and negative covenants including, a covenant requiring the Borrowers to obtain cash capital contributions from KMC Holdings of at least $185 million prior to April 1, 2001. KMC Holdings has secured a financing commitment for $100 million in PIK preferred stock from Lucent towards this requirement and currently contemplates raising the balance of $85 million through sales of private and public securities in the capital markets. Additional affirmative and negative covenants include, among others, restricting the ability of the Borrowers to consolidate or merge with any person, sell or lease assets not in the ordinary course of business, sell or enter into long term leases of dark fiber, redeem stock, pay dividends or make any other payments (including payments of principal or interest on loans) to KMC Holdings, create subsidiaries, transfer any permits or licenses, or incur additional indebtedness or act as guarantor for the debt of any person, subject to certain conditions. The Borrowers are required to comply with certain financial tests and maintain certain financial ratios, including, among others, a ratio of total debt to contributed capital, certain minimum revenues, maximum EBITDA losses and minimum 80 EBITDA, maximum capital expenditures and minimum access lines, a maximum total leverage ratio, a minimum debt service coverage ratio, a minimum fixed charge coverage ratio and a maximum consolidated leverage ratio. The covenants become more restrictive upon the earlier of (i) March 31, 2002 and (ii) after the Borrowers achieve positive EBITDA on a combined basis for two consecutive fiscal quarters and a total leverage ratio (as defined) equal to or less than 8 to 1. Failure to satisfy any of the financial covenants will constitute an event of default under the Amended Senior Secured Credit Facility permitting the Lenders, after notice, to terminate the commitment and/or accelerate payment of outstanding indebtedness. The Amended Senior Secured Credit Facility also includes other customary events of default, including, without limitation, a cross-default to other material indebtedness, material undischarged judgments, bankruptcy, loss of a material franchise or material license, breach of representations and warranties, a material adverse change, and the occurrence of a change of control 81 KMC Telecom Holdings, Inc. SCHEDULE II - Valuation and Qualifying Accounts (in thousands)
ADDITIONS ------------------------------ CHARGED TO BALANCE AT CHARGED TO OTHER BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - BALANCE AT DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD - - ----------------------------------------- ----------------- ---------------- ----------------- ---------------- ----------------- YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts $ -- $ 34 $ -- $ -- $ 34 ================= ================ ================= ================ ================= YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts $ 34 $ 370 $ -- $ 54(1) $350 ================= ================ ================= ================ ================= YEAR ENDED DECEMBER 31, 1999: Allowance for doubtful accounts $ 350 $5,263 $ -- $ 62(1) $5,551 ================= ================ ================= ================ =================
(1) Uncollectible accounts written-off. 82 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth certain information with respect to the persons who are members of the Board of Directors or are executive officers of the Company as of March 29, 2000.
NAME AGE POSITION ---- --- -------- Harold N. Kamine................ 43 Chairman of the Board of Directors Gary E. Lasher.................. 64 Vice Chairman of the Board of Directors Roscoe C. Young II............. 49 President, Chief Operating Officer and Director William H. Stewart.............. 33 Executive Vice President, Chief Financial Officer and Director Tricia Breckenridge............. 53 Executive Vice President - Business Development James L. Barwick................ 67 Senior Vice President and Chief Technology Officer John G. Quigley................. 46 Director Richard H. Patterson............ 41 Director Randall A. Hack................. 52 Director
The business experience of each of the directors and executive officers of the Company is as follows: HAROLD N. KAMINE is the Chairman of the Board of the Company and its founder and has been a director of the Company since 1994. He is also chief executive officer and sole owner of Kamine Development Corp. and associated companies in the independent power industry. Mr. Kamine has successfully financed a number of unregulated non-utility power generation projects. Companies owned by Mr. Kamine owned substantial interests in and managed six power generation plants in the Northeastern United States. Mr. Kamine devotes approximately eighty percent of his time to the affairs of the Company. GARY E. LASHER joined the Company as its Vice Chairman of the Board effective November 1, 1997. He was the founder, Chief Executive Officer and President of Eastern TeleLogic Corporation from 1987 to 1997. Eastern TeleLogic was a leading competitive local exchange carrier operating in greater Philadelphia, Delaware and southern New Jersey before its purchase by TCG (Teleport Communications Group) in October 1996. Prior to Eastern TeleLogic, from 1984-1986, Mr. Lasher was Chief Operating Officer of Private Satellite Network, a company which built and operated video satellite networks for major corporations. Mr. Lasher spent 20 years with Continental Telephone holding various positions including Corporate Vice President, President of the International Engineering and Construction Company, and various senior positions with Continental Telephone's regulated subsidiaries. Mr. Lasher is one of the founding members of the Association for Local Telecommunications Services ("ALTS") and served for three years as Chairman of the Association. ROSCOE C. YOUNG II has over 20 years experience in the field of telecommunications with both new venture and Fortune 500 companies. He has served as a director of the Company since December 1999. He was elected President and Chief Operating Officer of the Company in March 2000. Previously he had been Executive Vice President and Chief Operating Officer. Prior to joining the Company in November 1996, Mr. Young served as Vice President, Network Component Services for Ameritech Corporation from June 1994 to October 1996. From March 1988 to June 1994, Mr. Young served as Senior Vice President, Network Services for MFS Communications. From October 1977 to March 1988, Mr. Young served in a number of senior operations, sales and marketing, engineering, financial management, and human resource positions for AT&T Corp. WILLIAM H. STEWART has served as a director of the Company since August 1997. Mr. Stewart joined the Company as Executive Vice President and Chief Financial Officer in March 2000. Mr. Stewart is Managing Director of Nassau Capital L.L.C. and joined that firm in June 1995. From 1989 until joining Nassau, Mr. Stewart was a portfolio manager and equity analyst at the Bank of New York. He is a Chartered Financial Analyst and a member of the New York Society of Security Analysts. 83 TRICIA BRECKENRIDGE joined the Company in April 1995. From January 1993 to April 1995 she was Vice President and General Manager of FiberNet USA's Huntsville, Alabama operations. Previously she had served as Vice President, External Affairs and later Vice President, Sales and Marketing of Diginet, Inc. She was co-founder of Chicago Fiber Optic Corporation, the predecessor of Metropolitan Fiber Systems. Earlier she was Director of Regulatory Affairs for Telesphere Corporation. JAMES L. BARWICK has 40 years of experience in the telecommunications industry. Mr. Barwick joined the Company in March 1997. Prior to joining the Company, Mr. Barwick had been self-employed since 1986 as a telecommunications consultant with expertise in equipment application engineering, radio path engineering, analog and digital Mux, switching and transport systems in the long distance carrier and incumbent local exchange carrier areas, technical writing, project management and computer assisted design systems. JOHN G. QUIGLEY has served as a director of the Company since August 1996. Mr. Quigley is a founding member of Nassau Capital L.L.C., which is the general partner of Nassau Capital Partners. Between 1980 and the formation of Nassau Capital in 1995, Mr. Quigley was an attorney with the law firm of Kirkland & Ellis in Chicago; a partner at Adler & Shaykin; and a partner at Clipper Capital Partners. RICHARD H. PATTERSON has served as a director of the Company since May 1997. From May 1986 to January 1999, Mr. Patterson served as a Partner of Waller Capital Corporation, a media and communications investment banking firm. Since August 1997, he has served as a Vice President of Waller-Sutton Media LLC and Vice President of Waller-Sutton Management Group, Inc., two entities which manage a media and telecommunications private equity fund. Since January 2000, Mr. Patterson has served as a founding principal of a second media and telecommunications private equity fund managed by Spire Capital Partners LLC and Spire Capital Management, Inc. Mr. Patterson is a member of the Board of Directors of Regent Communications, Inc., which owns and operates radio stations in mid-to-small size markets. RANDALL A. HACK has served as a director of the Company since August 1996. Since January 1995, Mr. Hack has been a member of Nassau Capital L.L.C., an investment management firm. From 1990 to 1994, he was the President and Chief Executive Officer of Princeton University Investment Company, which manages the endowment for Princeton University. Mr. Hack also serves on the Boards of Directors of Sweetwater, Inc., OmniCell Technologies, Inc., Castle Tower Holding Corp. and Mezzanine Capital Property Investors, Inc. Pursuant to provisions contained in both the Company's certificate of incorporation and a stockholders agreement, Mr. Kamine and the Nassau entities are currently entitled to elect all of the Directors, three of whom are nominated by Mr. Kamine (one of whom must be the President and Chief Executive Officer), three of whom are nominated by Nassau and two of whom are nominated by agreement of Mr. Kamine, Nassau and either Newcourt Communications Finance Corporation or the holders of a majority of the outstanding shares of the Company's Series C Cumulative Convertible Preferred Stock. The number of Directors which Mr. Kamine is entitled to elect would be reduced to two if the number of shares owned by him were to fall below two-thirds of the number of shares of the Company initially issued to him, and to one if the number of shares owned by him were to fall below one-third of the number of shares initially issued to him. If his ownership were to fall below 5% of the number of shares initially issued to him, Mr. Kamine would no longer be entitled to elect any Directors pursuant to such provisions. Comparable reductions would be made to the number of Directors which Nassau is entitled to elect if its ownership were to fall below the specified fractions. If a default relating to payment occurs under our Amended Senior Secured Credit Facility, and continues uncured for 90 days, the holders of Series C Cumulative Convertible Preferred Stock (currently Nassau, General Electric Capital Corporation and First Union) will be entitled to elect two additional Directors, who will serve until the default is cured. Kamine/Besicorp Allegany L.P., an independent power company 50% owned by corporations which Mr. Kamine owns, filed a voluntary petition to reorganize its business under Chapter 11 of the Federal Bankruptcy Code in November 1995. In October 1998, the bankruptcy court confirmed a plan of liquidation for this entity. Directors hold office until the next Annual Meeting of stockholders or until their successors are duly elected and qualified. Executive officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors. 84 COMMITTEES OF THE BOARD The Board of Directors of the Company has authorized a Compensation Committee to be composed of three members. The present members of the Compensation Committee are Messrs. Kamine, Quigley and Patterson. The Board of Directors has created an Executive Committee consisting of Mr. Kamine and Mr. Quigley, or, in Mr. Quigley's absence, Mr. Stewart. The Board of Directors has also created an Audit Committee consisting of Messrs. Lasher, Patterson and Quigley. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth information concerning compensation for services in all capacities awarded to, earned by, or paid to, any person acting as the Company's Chief Executive Officer during 1999, regardless of the amount of compensation paid, and the other four most highly compensated executive officers of the Company whose aggregate cash and cash equivalent compensation exceeded $100,000 during the fiscal year ended December 31, 1999 (collectively, the "Named Executive Officers"):
LONG TERM ANNUAL COMPENSATION COMPENSATION -------------------------------------------------- ------------ OTHER ANNUAL SECURITIES COMPENSATION UNDERLYING NAME AND POSITION YEAR SALARY($) BONUS ($) ($)(1) OPTIONS(#)(2) - - ----------------- ---- --------- --------- ------------- ------------- Harold N. Kamine................... 1999 $450,000 - - - Chairman of the Board Michael A. Sternberg(3)............ 1999 $496,539 $272,500 - - President and Chief Executive 1998 $275,000 $407,500 - 65,000 Officer 1997 $240,385 $187,500 $45,909 9,228 Roscoe C. Young II................. 1999 $446,539 $362,500 $18,750 - Executive Vice President 1998 $218,270 $497,500 $52,189 32,500 and Chief Operating Officer 1997 $180,000 $182,046 $198,180 2,309 James D. Grenfell(4)............... 1999 $222,692 $120,000 $55,403 18,000 Executive Vice President, Chief Financial Officer and Secretary Tricia Breckenridge................ 1999 $193,212 $86,000 - 1,000 Executive Vice President - 1998 $155,577 $75,000 - 5,000 Business Development 1997 $104,138 $49,000 - 691
- - ----------------------------------------------- (1) The amount reported in this column for Mr. Sternberg in 1997 includes relocation related expenses of $39,662 and personal use of a Company automobile of $6,247. The amounts reported in this column for Mr. Young include relocation related expenses of $18,750 in 1999, relocation related expenses of $47,377 and personal use of a Company automobile of $4,812 for 1998, and relocation related expenses of $196,029 and personal use of a Company automobile of $2,151 for 1997. The amounts reported in this column for Mr. Grenfell include relocation related expenses of $49,265 and personal use of a company automobile of $6,138 for 1999. The aggregate value of the perquisites and other personal benefits, if any, received by Mr. Sternberg in 1999 and 1998 and by each of Mr. Kamine and Ms. Breckenridge in 1999, 1998 and 1997 have not been reflected in this table because the amount was below the Securities and Exchange Commission's threshold for disclosure (i.e., the lesser of $50,000 or 10% of the total of annual salary and bonus for the executive officer for the year). (2) The options granted in 1997 were options to purchase shares of common stock of the Company's principal operating subsidiary KMC Telecom Inc. All of the options shown as granted in 1997 were cancelled during the third quarter of 1998 and replaced by options to purchase Common Stock of the Company. See "Stock Option Grants." All options granted during 1998 are options to purchase shares of Common Stock of the Company. 85 (3) Mr. Sternberg served in the capacities indicated throughout the year ended December 31, 1999. (4) Mr. Grenfell joined the Company as Executive Vice President and Chief Financial Officer in March 1999 and the compensation figures for him are for the period from that date to the end of the year. William H. Stewart became Executive Vice President and Chief Financial Officer in March 2000. STOCK OPTION GRANTS The following table sets forth information regarding grants of options to purchase shares of Common Stock made by the Company during 1999 to each of the Named Executive Officers. OPTION GRANTS IN FISCAL YEAR 1999
INDIVIDUAL GRANTS -------------------------------------------------------------- ------------------------------------- PERCENT OF NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE AT SECURITIES OPTIONS ASSUMED ANNUAL RATES OF STOCK UNDERLYING GRANTED TO MARKET PRICE PRICE APPRECIATION FOR OPTIONS EMPLOYEES EXERCISE OR OF COMMON OPTION TERM (3) GRANTED IN FISCAL BASE PRICE STOCK ON DATE EXPIRATION --------------------------------------- NAME (#)(1) 1999 ($/SHARE) OF GRANT (2) DATE (0%) (5%) (10%) - - ----------------------- --------- -------- --------- ------------ --------- -------- -------------- ----------- Harold N. Kamine.......... - - - - - - - - Michael A. Sternberg ..... - - - - - - - - Roscoe C. Young II....... - - - - - - - - James D. Grenfell......... 18,000 21.9% $125 $130 01/01/09 $90,000 $1,566,000 $3,816,000 Tricia Breckenridge....... 1,000 1.2% $125 $130 01/01/09 $ 5,000 $ 87,000 $ 212,000
- - ----------------------------------------------- (1) 10% of the aggregate amount of each such option vests on each subsequent six-month anniversary of the date of grant. (2) There is no active trading market for the Company's Common Stock. The market price shown is based upon management's estimate of the fair value of the Company's Common Stock on the date in January, 1999 when these options were granted. (3) Amounts reported in these columns represent amounts that may be realized upon exercise of options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (0%, 5% and 10%) on Common Stock over the term of the options. These assumptions are based on rules promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price appreciation. Actual gains, if any, on the stock option exercises and Common Stock holdings are dependent on the timing of such exercises and the future value of the Common Stock. There can be no assurance that the rates of appreciation assumed in this table can be achieved or that the amounts reflected will be received by the option holders. OPTION EXERCISES AND OPTION YEAR-END VALUE TABLE No options were exercised during 1999 by any of the Named Executive Officers. The following table sets forth information regarding the number and year-end value of unexercised options to purchase shares of Common Stock held at December 31, 1999 by each of the Named Executive Officers. 86 FISCAL 1999 YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED "IN-THE-MONEY" SHARES VALUE OPTIONS AT OPTIONS AT ACQUIRED ON REALIZED DECEMBER 31, 1999 DECEMBER 31, 1999 NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1) - - ------------------------- ----------- ------- ------------------------- ---------------------------- Harold N. Kamine - - - $ - /$ - Michael A. Sternberg - - 39,000/26,000 $8,970,000/$5,590,000 Roscoe C. Young II - - 19,500/13,000 $4,485,000/$2,795,000 James D. Grenfell - - 1,800/16,200 $225,000/$2,025,000 Tricia Breckenridge - - 4,600/1,400 $1,027,500/$217,500
- - ----------------------------------------------- (1) Options are "In-the-Money" if the fair market value of the underlying securities exceeds the exercise price of the options. There is no active trading market for the Company's Common Stock. The fair market value of the option grants at December 31, 1999 was determined on the basis of management's estimate of the fair value of the Company's Common Stock on that date. DIRECTOR COMPENSATION The Company's Directors do not currently receive any compensation for their services in such capacity, except that Mr. Lasher receives $25,000 per year in connection with his services as Vice Chairman of the Board and Mr. Patterson receives $25,000 per year in connection with his services as a Director. EXECUTIVE EMPLOYMENT CONTRACTS The Company has an employment contract with Harold N. Kamine, the Chairman of its Board of Directors. The Company's employment agreement with Mr. Kamine provides for a term of four years, effective as of January 1, 1999. Under the agreement, Mr. Kamine's base salary is $450,000 per annum, and Mr. Kamine is required to devote at least fifty percent of his time and attention to the performance of his duties under the agreement. Mr. Kamine is entitled to receive benefits generally received by senior executives of the Company, including reimbursement of expenses incurred on behalf of the Company, and participation in group plans. If Mr. Kamine's employment agreement is terminated as a result of Mr. Kamine's death or permanent disability, or upon the Company's breach of the agreement, he, or his estate, is entitled to a severance payment in an amount equal to the lesser of (i) two times his annual base salary and (ii) the aggregate unpaid base salary that would have been paid to him during the remaining balance of the term of the employment contract, subject to a minimum of one-half of his annual base salary. The Company has an employment contract with Roscoe C. Young, II, President and Chief Operating Officer. The Company's employment agreement with Mr. Young provides for a term of four years, effective as of January 1, 1999. Under the agreement, Mr. Young's base salary is $450,000 per annum and he is entitled to be considered for an annual bonus in an amount to be determined by the Compensation Committee of the Company's Board of Directors. Mr. Young is entitled to receive benefits generally received by Company officers, including options to purchase Company Stock, reimbursement of expenses incurred on behalf of the Company, and a leased automobile. Upon termination of the agreement, Mr. Young is subject to a confidentiality covenant and a twenty-four month non-competition agreement. If the Company terminates Mr. Young's employment without cause, he is entitled to a severance payment in an amount equal to the lesser of (i) two times his annual base salary and (ii) the aggregate unpaid base salary that would have been paid to him during the remaining balance of the term of the employment contract, subject to a minimum of one-half of his annual base salary. SEPARATION AGREEMENTS On March 7, 2000, the Company entered into a separation agreement and release with Michael A. Sternberg, pursuant to which Mr. Sternberg's employment as the Company's President and Chief Executive Officer was terminated, by mutual agreement, effective March 8, 2000. Under the separation agreement, Mr. Sternberg was paid $500,000 and is entitled to an additional $500,000 which will be paid in semi-monthly installments between April 1, 2000 and March 31, 2001, 87 subject to acceleration in certain circumstances. Mr. Sternberg was also reimbursed for accrued vacation time. Pursuant to the agreement, the Company will pay the costs associated with Mr. Sternberg's current enrollment in the Company's health care plans through December 31, 2001. Mr. Sternberg will also retain 65,000 stock options previously granted to him under the KMC Holdings Stock Option Plan. Mr. Sternberg has agreed to vote any shares of common stock owned by him in accordance with the shares owned by Mr. Kamine and Nassau. Mr. Sternberg has agreed to make himself available to consult with the Company on a non-exclusive basis through December 31, 2001. On March 7, 2000, the Company entered into a separation agreement and release with James D. Grenfell, pursuant to which Mr. Grenfell's employment as the Company's Executive Vice President, Chief Financial Officer and Secretary was terminated, by mutual agreement, effective March 8, 2000. Under the separation agreement, Mr. Grenfell was paid $500,000 and is entitled to an additional $300,000 which will be paid in semi-monthly installments to be paid over a twelve month period in accordance with the Company's payroll practices. Mr. Grenfell is also entitled to a payment of $200,000 on March 1, 2001. Pursuant to the agreement, the Company will pay the costs associated with Mr. Grenfell's current enrollment in the Company's health care plans through December 31, 2001. Mr. Grenfell will also retain 3,600 stock options previously granted to him under the KMC Holdings Stock Option Plan. Mr. Grenfell has agreed to vote any shares of common stock owned by him in accordance with the shares owned by Mr. Kamine and Nassau. The Company will also pay Mr. Grenfell up to $40,000 for certain relocation and other services. EMPLOYEE PLANS KMC Holdings Stock Option Plan. Employees, directors or other persons having a unique relationship with the Company or any of its affiliates are eligible to participate in the KMC Holdings Stock Option Plan. However, neither Mr. Kamine nor any person employed by Nassau or any affiliate of Nassau is eligible for grants under the plan. The KMC Holdings Stock Option Plan is administered by the Compensation Committee of the Board of Directors of the Company. The Compensation Committee is authorized to grant (i) options intended to qualify as Incentive Options, (ii) Non-Qualified Options, (iii) stock appreciation rights, (iv) restricted stock, (v) performance units, (vi) performance shares and (vii) certain other types of awards. The number of shares of Company Common Stock available for grant under the KMC Holdings Stock Option Plan is 600,000. No participant may receive more than 75,000 shares of Company Common Stock under the KMC Holdings Stock Option Plan. The Compensation Committee has the power and authority to designate recipients of grants under the KMC Holdings Stock Option Plan, to determine the terms, conditions and limitations of grants under the plan and to interpret the provisions of the plan. The exercise price of all Incentive Options granted under the KMC Holdings Stock Option Plan must be at least equal to the Fair Market Value (as defined in the plan) of Company Common Stock on the date the options are granted and the exercise price of all Nonqualified Options granted under the KMC Holdings Stock Option Plan must be at least equal to 50% of the Fair Market Value of Company Common Stock on the date the options are granted. The maximum term of each Option granted under the KMC Holdings Stock Option Plan will be 10 years. Options will become exercisable at such times and in such installments as the Compensation Committee provides in the terms of each individual Option. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Kamine, the Chairman of the Board of the Company, and Messrs. Quigley and Patterson, Director of the Company, served as members of the Compensation Committee of the Board of Directors during 1999. Mr. Quigley is also a member of Nassau Capital Partners L.P. which, through its affiliates, beneficially owns more than five percent (5%) of the Company's voting securities. The Company and certain affiliated companies owned by Mr. Kamine share certain administrative services. The entity which bears the cost of the service is reimbursed by the other for the other's proportionate share of such expenses. These shared services do not include the rent paid by the Company for its headquarters offices to an affiliate of Mr. Kamine under the lease described in the next succeeding paragraph. The Company reimbursed Kamine-affiliated companies for these shared services an aggregate of approximately $60,000, for 1999. Effective June 1, 1996, the Company entered into a lease agreement with Kamine Development Corp. (an entity controlled by Mr. Kamine) pursuant to which the Company leases its headquarters office in Bedminster, New Jersey. The lease 88 expires in January 2007. The lease provides for a base annual rental of approximately $217,000 (adjusted periodically for changes in the consumer price index), plus operating expenses. Pursuant to an agreement, the Company is entitled to utilize a Citation III business jet chartered by Bedminster Aviation, LLC, a limited liability company wholly owned by Mr. Kamine, for a fixed price of $2,800 per hour of flight time. The Citation III will enable up to eight employees, guests or representatives of the Company to utilize local airfields and visit multiple cities in which the Company either has an operating system or is building a system, without the necessity of returning to commercial hubs such as Atlanta or St. Louis. The Company has agreed to use its best efforts to utilize the Citation III fifty hours per quarter during 2000. However, the Company is under no obligation to do so and has not guaranteed any financial arrangements with respect to the aircraft or to Bedminster Aviation, LLC. During 1999 the Company paid $210,000 for the use of the Citation III. On July 1, 1999, the Company acquired all of the membership interests of KMC Services LLC from Harold N. Kamine, the Chairman of the Board of Directors, for nominal consideration. KMC Services LLC was formed to provide services to the Company and its customers, initially offering a leasing program for equipment physically installed at the customer's premises. The acquisition was accounted for as a combination of entities under common control, and no changes were made to the historical cost basis of KMC Services LLC's assets. During the second quarter of 1999, the Company had reduced the carrying value of its $709,000 loan receivable from KMC Services LLC to an amount equal to the value of KMC Services LLC's net assets at the acquisition date. KMC Services LLC has been consolidated with the Company since July 1, 1999. Pursuant to an Agreement among the Company, Mr. Kamine and Nassau, for 1999 Nassau received $450,000 as a financial advisory fee and as compensation for the Nassau designees who served on the Board of Directors of the Company. Nassau will be paid $450,000 as a financial advisory fee for 2000. In December 1999, the Company purchased $180,000 of office equipment and leasehold improvements from Kamine Development Corp. (an entity controlled by Mr. Kamine). The Company determined that the purchase of such equipment was upon fair and reasonable terms no less favorable to the Company than could be obtained in a comparable arm's-length transaction with a person that is not an affiliate of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the Common Stock, as of March 29, 2000, by (i) each person known to the Company to be the beneficial owner of more than 5% of the Common Stock, (ii) each of the Company's directors, (iii) each of the Named Executive Officers, and (iv) all directors and executive officers as a group. All information with respect to beneficial ownership has been furnished to the Company by the respective stockholders of the Company.
NUMBER OF PERCENTAGE NAME AND ADDRESS OF BENEFICIAL OWNER SHARES (1) OWNERSHIP (1) ------------------------------------ ----------- -------------- Harold N. Kamine................................................ 573,835 67.2% c/o Kamine Development Corp. 1545 Route 206 Bedminster, NJ 07921 Nassau Capital Partners L.P..................................... 661,454(2) 44.1% c/o Nassau Capital L.L.C. 22 Chambers Street Princeton, NJ 08542 Newcourt Capital, Inc........................................... 191,033.2(3) 21.6% 2 Gate Hall Drive Parsipany, NJ 07054 First Union Corp. .............................................. 146,742.6(4) 14.8% 301 South College St. Charlotte, NC 28288 89 General Electric Capital Corporation............................ 200,476(5) 19.0% 120 Long Ridge Road Stamford, CT 06927 CIBC Inc. ...................................................... 44,104 5.2% 425 Lexington Avenue New York, New York 10017 Michael A. Sternberg ........................................... 65,000(6) 7.1% c/o KMC Telecom Holdings, Inc. 1545 Route 206, Suite 300 Bedminster, New Jersey 07921 Gary E. Lasher.................................................. 10,000(6) 1.2% c/o KMC Telecom Holdings, Inc. 1545 Route 206, Suite 300 Bedminster, New Jersey 07921 John G. Quigley................................................. 661,454(7) 44.1% c/o Nassau Capital L.L.C. 22 Chambers Street Princeton, NJ 08542 Richard H. Patterson............................................ 3,000(6) 0.4% c/o Waller Capital Corporation 30 Rockefeller Center Suite 4350 New York, NY 10112 Randall A. Hack................................................. 661,454(7) 44.1% c/o Nassau Capital L.L.C. 22 Chambers Street Princeton, NJ 08542 Roscoe C. Young II............................................. 22,750(6) 2.6% c/o KMC Telecom Holdings, Inc. 1545 Route 206, Suite 300 Bedminster, NJ 07921 James D. Grenfell............................................... 3,600(6) 0.4% c/o KMC Telecom Holdings, Inc. 1545 Route 206, Suite 300 Bedminster, NJ 07921 William H. Stewart.............................................. 661,454(8) 44.1% c/o KMC Telecom Holdings, Inc. 1545 Route 206, Suite 300 Bedminster, NJ 07921 Tricia Breckenridge............................................. 5,200(6) 0.6% c/o KMC Telecom Holdings, Inc. 1545 Route 206, Suite 300 Bedminster, NJ 07921 Directors and Officers of the Company as a Group (10 persons)... 1,344,839(2) 83.5%
- - ----------------------------------------------- (1) Beneficial ownership is determined in accordance with the rules of the Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares subject to options, warrants and convertible securities held by that person that are 90 currently exercisable or exercisable within 60 days of March 29, 2000 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, each shareholder named in the table has sole voting and investment power with respect to the shares set forth opposite such shareholder's name. (2) Includes 600,000 shares of Common Stock which Nassau and NAS Partners I L.L.C., of which Messrs. Quigley and Hack are members, have the right to acquire upon conversion of 122,708 and 1,092 shares of Series A Cumulative Convertible Preferred Stock, respectively, and 47,619 shares of Common Stock which Nassau and NAS Partners I, L.L.C. have the right to acquire upon conversion of 24,778 and 222 shares of Series C Cumulative Convertible Preferred Stock, respectively. These are the same shares listed for Messrs. Quigley and Hack. (3) Includes 159,184.5 shares of Common Stock held by Newcourt Communications Finance Corporation, a subsidiary of Newcourt Capital, Inc. and 31,848.7 shares of Common Stock which Newcourt Commercial Finance Corporation, also a subsidiary of Newcourt Capital, Inc., has the right to acquire upon the exercise of warrants. (4) Includes 95,238 shares of Common Stock which First Union has the right to acquire upon conversion of 50,000 shares of Series C Cumulative Convertible Preferred Stock of the Company, and 44,587 shares which First Union Corp. has the right to acquire upon the exercise of warrants. (5) Includes 190,476 shares of Common Stock which General Electric Capital Corporation has the right to acquire upon conversion of 100,000 shares of Series C Cumulative Convertible Preferred Stock of the Company and 10,000 shares of Common Stock which General Electric Capital Corporation has the right to acquire upon exercise of a warrant. (6) Represents shares of Common Stock which the holder has the right to acquire upon the exercise of options that are exerciseable within sixty days of March 29, 2000 pursuant to the KMC Holdings Stock Option Plan. (7) Messrs. Quigley and Hack, Directors of the Company, are members of Nassau Capital L.L.C., the general partner of Nassau; accordingly Messrs. Quigley and Hack may be deemed to be beneficial owners of such shares and for purposes of this table they are included. Messrs. Quigley and Hack disclaim beneficial ownership of all such shares within the meaning of Rule 13d-3 under the Exchange Act. Messrs. Quigley and Hack are also members of NAS Partners I, L.L.C.; accordingly Messrs. Quigley and Hack may be deemed to be beneficial owners of such shares and for purposes of this table they are included. Messrs. Quigley and Hack disclaim beneficial ownership of all such shares within the meaning of Rule 13d-3 under the Exchange Act. (8) All of the shares indicated as owned by Mr. Stewart are owned directly or indirectly by Nassau and are included because of Mr. Stewart's affiliation with Nassau. Mr. Stewart is also a member of NAS Partners I, L.L.C.; accordingly, Mr. Stewart may be deemed to be the beneficial owner of such shares and for purposes of this table they are included. Mr. Stewart disclaims beneficial ownership of all of these shares within the meaning of Rule 13d-3 under the Exchange Act. Stockholders Agreement. The Amended and Restated Stockholders Agreement, dated as of October 31, 1997, restricts the ability of the parties to that agreement to transfer shares in the Company to persons not affiliated with or related to such parties. Pursuant to such Stockholders Agreement and the Company's certificate of incorporation, Mr. Kamine and Nassau are currently entitled to elect all of the Directors, three of whom are nominated by Mr. Kamine (one of whom must be the President and Chief Executive Officer), three of whom are nominated by Nassau and two of whom are nominated by agreement of Mr. Kamine, Nassau and either Newcourt Communications Finance Corporation or the holders of a majority of the outstanding shares of the Company's Series C Cumulative Convertible Preferred Stock. The number of Directors which Mr. Kamine is entitled to elect would be reduced to two if the number of shares owned by him were to fall below two-thirds of the number of shares of the Company initially issued to him, and to one if the number of shares owned by him were to fall below one-third of the number of shares initially issued to him. If his ownership were to fall below 5% of the number of shares initially issued to him, Mr. Kamine would no longer be entitled to elect any Directors pursuant to such provisions. Comparable reductions would be made to the number of Directors which Nassau is entitled to elect if its ownership were to fall below the specified percentages. If a default relating to payment occurs under the Amended Senior Secured Credit Facility, and continues uncured for 90 days, the holders of Series C Cumulative Convertible Preferred Stock (currently Nassau, NAS Partners I, L.L.C., General Electric Capital Corporation and First Union) will be entitled to elect two additional Directors, who will serve until the default is cured. Each of Nassau, NAS Partners I, L.L.C, First Union, General Electric Capital Corporation and Newcourt Communications Finance Corporation has a "put right" entitling it to have the Company repurchase its shares for the fair market value of such shares if no Liquidity Event (defined as (i) an initial public offering with gross proceeds of at least $40.0 million, (ii) the sale of substantially all of the stock or assets of the Company or (iii) the merger or 91 consolidation of the Company with one or more other corporations) has taken place by the later of (x) October 22, 2003 or (y) 90 days after the final maturity date of the Company's 12 1/2% Senior Discount Notes. First Union, General Electric Capital Corporation and Newcourt Communications Finance Corporation may not exercise such put rights unless Nassau has exercised its put right. The indenture applicable to the Company's 13 1/2% Senior Notes, 12 1/2% Senior Discount Notes and the Company's other indebtedness will limit the Company's ability to repurchase such shares. Certain of the current stockholders have demand registration rights with respect to their shares of Common Stock of the Company commencing on the earlier of June 5, 2000 (in the case of Mr. Kamine or Nassau) and the date on which the Company completes an initial public offering of Common Stock (and any related holdback period expires). Each of the holders of registrable securities also has certain piggyback registration rights. The parties to the Stockholders Agreement have agreed not to effect any public sale or distribution of Common Stock of the Company, or securities convertible into such Common Stock, within 180 days of the effective date of any demand or piggyback registration. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In February, 1998, the Company loaned to Roscoe C. Young II, the Company's President, Chief Operating Officer and Director, the principal sum of $350,000. The loan is evidenced by a promissory note which bears interest at the rate of 6% per annum. Interest and principal are payable at maturity on February 13, 2003. In June 1998, the Company loaned Mr. Young an additional $110,000. The largest aggregate amount of loans outstanding to Mr. Young at any time during 1999 was $405,000. The aggregate amount of loans outstanding to Mr. Young at March 29, 2000 was $350,000. Mr. Young repaid $55,000 of this loan within thirty (30) days and repaid the $55,000 balance in December 1999. Pursuant to agreements entered into in September and October 1997, between the Company and each of the holders of Series A Cumulative Convertible Preferred Stock and Series C Cumulative Convertible Preferred Stock each such holder has agreed to forego the payment of accumulated dividends on its shares of Series A Cumulative Convertible Preferred Stock and Series C Cumulative Convertible Preferred Stock of the Company from the date of such Dividend Agreement through the date on which such holder disposes of its interest in the Company; provided, that, upon such disposition, such holder realizes not less than a ten percent (10%) compound rate of return on its investment for the period from the date of such Dividend Agreement to the date of such disposition. Mr. Kamine, Nassau, Newcourt Communications Finance Corporation, First Union and General Electric Capital Corporation are parties to the Stockholders Agreement. Pursuant to the Stockholder's Agreement and the Company's certificate of incorporation, Mr. Kamine and Nassau are currently entitled to elect all of the Company's eight Directors, with each entitled to nominate three Directors, and two to be nominated by agreement of Mr. Kamine, Nassau and either Newcourt Communications Finance Corporation or the holders of a majority of the outstanding shares of the Company's Series C Cumulative Convertible Preferred Stock. The number of Directors which Mr. Kamine is entitled to elect would be reduced to two if the number of shares owned by him were to fall below two-thirds of the number of shares of the Company initially issued to him, and to one if the number of shares owned by him were to fall below one-third of the number of shares initially issued to him. If his ownership were to fall below 5% of the number of shares initially issued to him, Mr. Kamine would no longer be entitled to elect any Directors pursuant to such provisions. Comparable reductions would be made to the number of Directors which Nassau is entitled to elect if its ownership were to fall below the specified fractions. Newcourt Commercial Finance Corporation (an affiliate of Newcourt Capital, Inc.) has provided financing for the Company as one of the lenders under the Amended Senior Secured Credit Facility. Pursuant to the Amended Senior Secured Credit Facility, the lenders have agreed to make available, subject to certain conditions, up to a total of $700.0 million, for construction and development of the Company's twenty-three existing networks. The Company paid Newcourt Capital and its affiliates an aggregate of $5,000,000 in fees, discounts and commissions during the year ended December 31, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) 1. Financial Statements. The financial statements are included in Part II, Item 8. of this Report. 2. Financial Statement Schedules and Supplementary Information Required to be Submitted. 92 Independent Auditors' Report on Schedules Schedule I - Condensed Financial Information of Registrant Schedule II - Valuation and Qualifying Accounts These schedules are included in Part II, Item 8. of this Report. All other schedules have been omitted because they are inapplicable or the required information is shown in the consolidated financial statements or notes. (B) Reports on Form 8-K. None. (C) Index to Exhibits. The following is a list of all Exhibits filed as part of this Report: EXHIBIT NUMBER DESCRIPTION OF DOCUMENT *3.1 Certificate of Incorporation of KMC Telecom Holdings, Inc., as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.2 Certificate of Powers, Designations, Preferences and Rights of the Series A Cumulative Convertible Preferred Stock, Par Value $.01 Per Share, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.3 Certificate of Powers, Designations, Preferences and Rights of the Series C Cumulative Convertible Preferred Stock, Par Value $.01 Per Share, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.4 Certificate of Powers, Designations, Preferences and Rights of the Series D Cumulative Convertible Preferred Stock, Par Value $.01 Per Share, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.4 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.5 Certificate of Voting Powers, Designations, Preferences and Relative Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions Thereof of the Series E Senior Redeemable, Exchangeable, PIK Preferred Stock, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.6 Certificate of Voting Powers, Designations, Preferences and Relative Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions Thereof of the Series F Senior Redeemable, Exchangeable, PIK Preferred Stock, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.6 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.7 By-Laws of KMC Telecom Holdings, Inc. (incorporated herein by reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 333-50475) filed on April 20, 1998. (hereinafter referred to as the "KMC Holdings' S-4")). *4.1 Amended and Restated Stockholders Agreement dated as of October 31, 1997 by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.1 to KMC Holdings' S-4). 93 *4.2 Amendment No. 1 dated as of January 7, 1998 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.2 to KMC Holdings' S-4). *4.3 Amendment No. 2 dated as of January 26, 1998 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Holdings' S-4). *4.4 Amendment No. 3 dated as of February 25, 1998 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc. , Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.4 to KMC Holdings' S-4). *4.5 Amendment No. 4 dated as of February 4, 1999 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *4.6 Amendment No. 5 dated as of April 30, 1999 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.11 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.7 Amendment No. 6 dated as of June 1, 1999 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.12 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). 4.8 Amendment No. 7 dated as of January 1, 2000 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. *4.9 Indenture dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Trustee, including specimen of KMC Telecom Holdings, Inc.'s 12 1/2% Senior Discount Note due 2008. (incorporated herein by reference to Exhibit 4.5 to KMC Holdings' S-4). 94 *4.10 First Supplemental Indenture dated as of May 24, 1999 among KMC Telecom Holdings, Inc., KMC Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee, to the Indenture dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Trustee. (incorporated herein by reference to Exhibit 4.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.11 Indenture dated as of May 24, 1999 among KMC Telecom Holdings, Inc., KMC Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee, including specimen of KMC Telecom Holdings, Inc.'s 13 1/2% Senior Notes due 2009. (incorporated herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.12 Purchase Agreement dated as of May 19, 1999 among KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, First Union Capital Markets Corp., CIBC World Markets Corp., BancBoston Robertson Stephens Inc. and Wasserstein Perella Securities, Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.13 Collateral Pledge and Security Agreement made and entered into as of May 24, 1999 by KMC Telecom Financing, Inc. in favor of The Chase Manhattan Bank as Trustee. (incorporated herein by reference to Exhibit 4.4 to KMC Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended September 30, 1999). *4.14 Registration Rights Agreement dated as of January 26, 1998, between KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated. (incorporated herein by reference to Exhibit 4.6 to KMC Holdings' S-4). *4.15 Registration Rights Agreement dated as of May 19, 1999 among KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, First Union Capital Markets Corp., CIBC World Markets Corp., BancBoston Robertson Stephens Inc. and Wasserstein Perella Securities, Inc. (incorporated herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.16 Warrant Agreement dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Warrant Agent, including a specimen of Warrant Certificate (incorporated herein by reference to Exhibit 4.7 to KMC Holdings' S-4). *4.17 Warrant Agreement dated as of February 4, 1999 among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.2 to KMC Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended March 31, 1999). *4.18 Warrant Agreement dated as of April 30, 1999 among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, First Union Investors, Inc., Harold N. Kamine and Nassau Capital Partners L.P. (incorporated herein by reference to Exhibit 4.4 to KMC Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended June 30, 1999). *4.19 Amendment No. 1 dated as of April 30, 1999 to the Warrant Agreement dated as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance Corporation, Lucent Technologies Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.7 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.20 Amendment No. 2 dated as of June 1, 1999 to the Warrant Agreement dated as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance Corporation, Lucent Technologies Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.8 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). 95 *4.21 Securities Purchase Agreement dated as of February 4, 1999 among KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended March 31, 1999). *4.22 Securities Purchase Agreement dated as of April 30, 1999 between KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.23 Amendment No. 1 dated as of June 1, 1999 to Securities Purchase Agreement among KMC Telecom Holdings, Inc., First Union Investors, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.24 Warrant Registration Rights Agreement dated as of January 26, 1998 between KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated. (incorporated herein by reference to Exhibit 4.8 to KMC Holdings' S-4). *4.25 Warrant Registration Rights Agreement dated as of February 4, 1999 among KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended March 31, 1999). *4.26 Warrant Registration Rights Agreement dated as of April 30, 1999 between KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.27 Amendment No. 1 dated as of April 30, 1999 to Warrant Registration Rights Agreement among KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 4.6 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.28 Preferred Stock Registration Rights Agreement dated as of April 30, 1999 between KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.9 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.29 Amendment No. 1 dated as of June 1, 1999 to Preferred Stock Registration Rights Agreement among KMC Telecom Holdings, Inc., First Union Investors, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 4.10 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated (incorporated herein by reference to Exhibit 10.1 to KMC Holdings' S-4). *10.2 Loan and Security Agreement dated as of December 22, 1998 among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional subsidiaries from time to time parties thereto, the financial institutions signatory thereto from time to time as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Corporation), as Collateral Agent for the Lenders. (incorporated herein by reference to Exhibit 10.2 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). 96 *10.3 Amendment No. 1 to Loan and Security Agreement dated as of March 3, 1999 to Loan and Security Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional subsidiaries from time to time parties thereto, the financial institutions signatory thereto from time to time as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Corporation), as Collateral Agent for the Lenders. (incorporated herein by reference to Exhibit 10.3 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.4 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of October 29, 1999 to Loan and Security Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the financial institutions from time to time parties thereto as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), as Collateral Agent for the Lenders. (incorporated herein by reference to Exhibit 10.4 to KMC Telecom Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 333-91237 and 333-91237-01) filed on November 18, 1999 (the "KMC Holdings 1999 S-4"). 10.5 Amendment No. 4 to Loan and Security Agreement dated as of December 31, 1999 to Loan and Security Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the financial institutions from time to time parties thereto as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), an affiliate of The CIT Group, Inc., as Collateral Agent for the Lenders. 10.6 Amended and Restated Loan and Security Agreement dated as of February 15, 2000 by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom.com, Inc., KMC III Services LLC, the financial institutions from time to time parties thereto as "Lenders", First Union National Bank as Administrative Agent for the Lenders, First Union National Bank, as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), an affiliate of The CIT Group, Inc., as Collateral Agent for the Lenders. *10.7 General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc. and Lucent Technologies Inc. dated September 24, 1997, as amended on October 15, 1997 (incorporated herein by reference to Exhibit 10.7 to KMC Holdings' S-4). 10.8 Amendment Number Two to the General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC and Lucent Technologies Inc. dated as of December 22, 1998. 10.9 Amendment Number Three to the General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC and Lucent Technologies Inc. dated as of November 15, 1999. 10.10 Amendment Number Four to the General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom Leasing IV LLC, KMC III Services LLC and Lucent Technologies Inc. dated as of February 15, 2000. *10.11 Professional Services Agreement between KMC Telecom Inc. and Lucent Technologies, Inc. dated September 4, 1997. (incorporated herein by reference to Exhibit 10.8 to KMC Holdings' S-4). 97 *10.12 Memorandum of Agreement between KMC Telecom Holdings, Inc. and EFTIA OSS Solutions Inc., dated as of October 26, 1998. (incorporated herein by reference to Exhibit 10.6 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.13 Master License Agreement dated December 31, 1998 by and between Billing Concepts Systems, Inc. and KMC Telecom Holdings, Inc. (incorporated herein by reference to Exhibit 10.7 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.14 Lease Agreement dated January 1, 1996 between Cogeneration Services Inc. (now known as Kamine Development Corp.) and KMC Telecom Inc. (incorporated herein by reference to Exhibit 10.8 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.15 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates. (incorporated herein by reference to Exhibit 4 to KMC Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1998).+ *10.16 Specimen of Non-Qualified Stock Option Agreement for options granted under the 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates. (incorporated herein by reference to Exhibit 10.10 to KMC Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1998).+ *10.17 Amendment No. 1 made as of June 7, 1999 to 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates (incorporated herein by reference to Exhibit 10.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999).+ **21.1 Subsidiaries of KMC Telecom Holdings, Inc. **24.1 Powers of Attorney (Appears on signature page). **27.1 Financial Data Schedule. - - --------------------------- * Incorporated herein by reference. ** Filed herewith. + Management contract or compensatory plan or arrangement. 98 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Bedminster, State of New Jersey, on the 30th day of March, 2000. KMC TELECOM HOLDINGS, INC. By: /s/ ROSCOE C. YOUNG II -------------------------------------------- Roscoe Young II President and Chief Operating Officer KNOW BY ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roscoe C. Young II and William H. Stewart his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 30th day of March, 2000. SIGNATURE TITLE(S) President, Chief Operating Officer /s/ ROSCOE C. YOUNG II and Director (Principal Executive - - ---------------------------------------- Officer) /s/ WILLIAM H. STEWART Executive Vice President, Chief - - ---------------------------------------- Financial Officer and Director William H. Stewart (Principal Financial Officer) /s/ ROBERT F. HAGAN Senior Vice President, Finance - - ---------------------------------------- (Principal Accounting Officer) Robert F. Hagan /s/ HAROLD N. KAMINE Chairman of the Board of Directors - - ---------------------------------------- Harold N. Kamine /s/ GARY E. LASHER Vice Chairman of the Board of - - ---------------------------------------- Directors Gary E. Lasher /s/ RICHARD H. PATTERSON Director - - ---------------------------------------- Richard H. Patterson /s/ JOHN G. QUIGLEY Director - - ---------------------------------------- John G. Quigley 99 EXHIBIT NUMBER DESCRIPTION OF DOCUMENT *3.1 Certificate of Incorporation of KMC Telecom Holdings, Inc., as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.2 Certificate of Powers, Designations, Preferences and Rights of the Series A Cumulative Convertible Preferred Stock, Par Value $.01 Per Share, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.3 Certificate of Powers, Designations, Preferences and Rights of the Series C Cumulative Convertible Preferred Stock, Par Value $.01 Per Share, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.4 Certificate of Powers, Designations, Preferences and Rights of the Series D Cumulative Convertible Preferred Stock, Par Value $.01 Per Share, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.4 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.5 Certificate of Voting Powers, Designations, Preferences and Relative Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions Thereof of the Series E Senior Redeemable, Exchangeable, PIK Preferred Stock, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.6 Certificate of Voting Powers, Designations, Preferences and Relative Participating, Optional or Other Special Rights and Qualifications, Limitations and Restrictions Thereof of the Series F Senior Redeemable, Exchangeable, PIK Preferred Stock, as amended, dated as of April 30, 1999. (incorporated herein by reference to Exhibit 3.6 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *3.7 By-Laws of KMC Telecom Holdings, Inc. (incorporated herein by reference to Exhibit 3.3 to KMC Telecom Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 333-50475) filed on April 20, 1998. (hereinafter referred to as the "KMC Holdings' S-4")). *4.1 Amended and Restated Stockholders Agreement dated as of October 31, 1997 by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.1 to KMC Holdings' S-4). *4.2 Amendment No. 1 dated as of January 7, 1998 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.2 to KMC Holdings' S-4). *4.3 Amendment No. 2 dated as of January 26, 1998 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Holdings' S-4). 100 *4.4 Amendment No. 3 dated as of February 25, 1998 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc. , Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, KMC Telecommunications L.P., Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.4 to KMC Holdings' S-4). *4.5 Amendment No. 4 dated as of February 4, 1999 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, CoreStates Bank, N.A. and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *4.6 Amendment No. 5 dated as of April 30, 1999 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.11 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.7 Amendment No. 6 dated as of June 1, 1999 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. (incorporated herein by reference to Exhibit 4.12 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). 4.8 Amendment No. 7 dated as of January 1, 2000 to the Amended and Restated Stockholders Agreement dated as of October 31, 1997, by and among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (formerly known as AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. *4.9 Indenture dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Trustee, including specimen of KMC Telecom Holdings, Inc.'s 12 1/2% Senior Discount Note due 2008. (incorporated herein by reference to Exhibit 4.5 to KMC Holdings' S-4). *4.10 First Supplemental Indenture dated as of May 24, 1999 among KMC Telecom Holdings, Inc., KMC Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee, to the Indenture dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Trustee. (incorporated herein by reference to Exhibit 4.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.11 Indenture dated as of May 24, 1999 among KMC Telecom Holdings, Inc., KMC Telecom Financing, Inc. and The Chase Manhattan Bank, as Trustee, including specimen of KMC Telecom Holdings, Inc.'s 13 1/2% Senior Notes due 2009. (incorporated herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.12 Purchase Agreement dated as of May 19, 1999 among KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, First Union Capital Markets Corp., CIBC World Markets Corp., BancBoston Robertson Stephens Inc. and Wasserstein Perella Securities, Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). 101 *4.13 Collateral Pledge and Security Agreement made and entered into as of May 24, 1999 by KMC Telecom Financing, Inc. in favor of The Chase Manhattan Bank as Trustee. (incorporated herein by reference to Exhibit 4.4 to KMC Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended September 30, 1999). *4.14 Registration Rights Agreement dated as of January 26, 1998, between KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated. (incorporated herein by reference to Exhibit 4.6 to KMC Holdings' S-4). *4.15 Registration Rights Agreement dated as of May 19, 1999 among KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated, Credit Suisse First Boston Corporation, First Union Capital Markets Corp., CIBC World Markets Corp., BancBoston Robertson Stephens Inc. and Wasserstein Perella Securities, Inc. (incorporated herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1999). *4.16 Warrant Agreement dated as of January 29, 1998 between KMC Telecom Holdings, Inc. and The Chase Manhattan Bank, as Warrant Agent, including a specimen of Warrant Certificate (incorporated herein by reference to Exhibit 4.7 to KMC Holdings' S-4). *4.17 Warrant Agreement dated as of February 4, 1999 among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.2 to KMC Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended March 31, 1999). *4.18 Warrant Agreement dated as of April 30, 1999 among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, First Union Investors, Inc., Harold N. Kamine and Nassau Capital Partners L.P. (incorporated herein by reference to Exhibit 4.4 to KMC Telecom Holdings, Inc. 's Form 10-Q for the quarterly period ended June 30, 1999). *4.19 Amendment No. 1 dated as of April 30, 1999 to the Warrant Agreement dated as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance Corporation, Lucent Technologies Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.7 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.20 Amendment No. 2 dated as of June 1, 1999 to the Warrant Agreement dated as of February 4, 1999, among KMC Telecom Holdings, Inc., The Chase Manhattan Bank, as Warrant Agent, Newcourt Commercial Finance Corporation, Lucent Technologies Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.8 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.21 Securities Purchase Agreement dated as of February 4, 1999 among KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended March 31, 1999). *4.22 Securities Purchase Agreement dated as of April 30, 1999 between KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.2 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.23 Amendment No. 1 dated as of June 1, 1999 to Securities Purchase Agreement among KMC Telecom Holdings, Inc., First Union Investors, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 4.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.24 Warrant Registration Rights Agreement dated as of January 26, 1998 between KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated. (incorporated herein by reference to Exhibit 4.8 to KMC Holdings' S-4). 102 *4.25 Warrant Registration Rights Agreement dated as of February 4, 1999 among KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.3 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended March 31, 1999). *4.26 Warrant Registration Rights Agreement dated as of April 30, 1999 between KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.5 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.27 Amendment No. 1 dated as of April 30, 1999 to Warrant Registration Rights Agreement among KMC Telecom Holdings, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 4.6 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.28 Preferred Stock Registration Rights Agreement dated as of April 30, 1999 between KMC Telecom Holdings, Inc. and First Union Investors, Inc. (incorporated herein by reference to Exhibit 4.9 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *4.29 Amendment No. 1 dated as of June 1, 1999 to Preferred Stock Registration Rights Agreement among KMC Telecom Holdings, Inc., First Union Investors, Inc., Newcourt Commercial Finance Corporation and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 4.10 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). *10.1 Purchase Agreement dated January 26, 1998 by and between KMC Telecom Holdings, Inc. and Morgan Stanley & Co. Incorporated (incorporated herein by reference to Exhibit 10.1 to KMC Holdings' S-4). *10.2 Loan and Security Agreement dated as of December 22, 1998 among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional subsidiaries from time to time parties thereto, the financial institutions signatory thereto from time to time as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Corporation), as Collateral Agent for the Lenders. (incorporated herein by reference to Exhibit 10.2 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.3 Amendment No. 1 to Loan and Security Agreement dated as of March 3, 1999 to Loan and Security Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the additional subsidiaries from time to time parties thereto, the financial institutions signatory thereto from time to time as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Corporation), as Collateral Agent for the Lenders. (incorporated herein by reference to Exhibit 10.3 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.4 Waiver and Amendment No. 3 to Loan and Security Agreement dated as of October 29, 1999 to Loan and Security Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the financial institutions from time to time parties thereto as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), as Collateral Agent for the Lenders. (incorporated herein by reference to Exhibit 10.4 to KMC Telecom Holdings, Inc.'s Registration Statement on Form S-4 (Registration No. 333-91237 and 333-91237-01) filed on November 18, 1999 (the "KMC Holdings 1999 S-4"). 103 10.5 Amendment No. 4 to Loan and Security Agreement dated as of December 31, 1999 to Loan and Security Agreement dated as of December 22, 1998, among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, the financial institutions from time to time parties thereto as "Lenders", First Union National Bank as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), an affiliate of The CIT Group, Inc., as Collateral Agent for the Lenders. 10.6 Amended and Restated Loan and Security Agreement dated as of February 15, 2000 by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom.com, Inc., KMC III Services LLC, the financial institutions from time to time parties thereto as "Lenders", First Union National Bank as Administrative Agent for the Lenders, First Union National Bank, as Administrative Agent for the Lenders and Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), an affiliate of The CIT Group, Inc., as Collateral Agent for the Lenders. *10.7 General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc. and Lucent Technologies Inc. dated September 24, 1997, as amended on October 15, 1997 (incorporated herein by reference to Exhibit 10.7 to KMC Holdings' S-4). 10.8 Amendment Number Two to the General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC and Lucent Technologies Inc. dated as of December 22, 1998. 10.9 Amendment Number Three to the General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC and Lucent Technologies Inc. dated as of November 15, 1999. 10.10 Amendment Number Four to the General Agreement by and among KMC Telecom Inc., KMC Telecom II, Inc., KMC Telecom III, Inc., KMC Telecom IV, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC, KMC Telecom Leasing III LLC, KMC Telecom Leasing IV LLC, KMC III Services LLC and Lucent Technologies Inc. dated as of February 15, 2000. *10.11 Professional Services Agreement between KMC Telecom Inc. and Lucent Technologies, Inc. dated September 4, 1997. (incorporated herein by reference to Exhibit 10.8 to KMC Holdings' S-4). *10.12 Memorandum of Agreement between KMC Telecom Holdings, Inc. and EFTIA OSS Solutions Inc., dated as of October 26, 1998. (incorporated herein by reference to Exhibit 10.6 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.13 Master License Agreement dated December 31, 1998 by and between Billing Concepts Systems, Inc. and KMC Telecom Holdings, Inc. (incorporated herein by reference to Exhibit 10.7 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.14 Lease Agreement dated January 1, 1996 between Cogeneration Services Inc. (now known as Kamine Development Corp.) and KMC Telecom Inc. (incorporated herein by reference to Exhibit 10.8 to KMC Telecom Holdings, Inc.'s Form 10-K for the fiscal year ended December 31, 1998). *10.15 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates. (incorporated herein by reference to Exhibit 4 to KMC Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1998). *10.16 Specimen of Non-Qualified Stock Option Agreement for options granted under the 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates. (incorporated herein by reference to Exhibit 10.10 to KMC Holdings, Inc.'s Form 10-Q for the quarterly period ended September 30, 1998). 104 *10.17 Amendment No. 1 made as of June 7, 1999 to 1998 Stock Purchase and Option Plan for Key Employees of KMC Telecom Holdings, Inc. and Affiliates (incorporated herein by reference to Exhibit 10.1 to KMC Telecom Holdings, Inc.'s Form 10-Q for the quarterly period ended June 30, 1999). 21.1 Subsidiaries of KMC Telecom Holdings, Inc. 24.1 Powers of Attorney (Appears on signature page). 27.1 Financial Data Schedule. - - ----------------------------------------------- * EXHIBITS FILED PREVIOUSLY. 105 EX-4.8 2 AMENDMENT NO. 7 AMENDMENT NO. 7 TO THE AMENDED AND RESTATED STOCKHOLDERS AGREEMENT AMENDMENT NO. 7 dated as of January 1, 2000 to the Amended and Restated Stockholders Agreement, dated as of October 31, 1997 (as heretofore amended, the "Stockholders Agreement") among KMC Telecom Holdings, Inc., Nassau Capital Partners L.P., NAS Partners I L.L.C., Harold N. Kamine, Newcourt Commercial Finance Corporation (as successor to AT&T Credit Corporation), General Electric Capital Corporation, First Union National Bank (as successor to CoreStates Bank, N.A.) and CoreStates Holdings, Inc. W I T N E S S E T H WHEREAS, the parties hereto desire to make certain amendment to the Stockholders Agreement; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, all capitalized terms defined in the Stockholders Agreement and used herein are so used as so defined. 2. AMENDMENTS TO SECTION 4.3.1 OF THE STOCKHOLDERS AGREEMENT. Section 4.3 of the Stockholders Agreement is amended to read as follows: 4.3. ELECTION OF DIRECTORS. 4.3.1 NUMBER AND COMPOSITION. Subject to Section 4.3.2, each Stockholder agrees that the number of directors shall be eight (8) and each Stockholder shall vote its or his Shares at any Stockholders Meeting, or act by Written Consent with respect to such Shares, and take all other actions necessary to ensure that the number of directors constituting the entire Board of Directors shall be eight (8), as provided for below. Each Stockholder shall vote its or his Shares at any Stockholders Meeting called for the purpose of filling the positions on the Board of Directors, or in any Written Consent executed for such purpose, and to take all other actions necessary to ensure, including, without limitation, using its or his best efforts to cause the Board of Directors to take such actions to ensure: (i) the election to the Board of Directors of (w) three individuals designated by Nassau to serve initially as Nassau Directors, (x) subject to paragraph (b) of Section 4.4, three individuals (one of whom shall be the President and chief executive officer of the Company from time to time, elected pursuant to Article IV of the By-Laws) designated by Kamine to serve initially as Kamine Directors, (y) one independent director who shall be mutually acceptable to Nassau, Kamine and either AT&T or the Majority Series C Holders, provided that it is agreed that Gary E. Lasher shall be an independent director beginning November 1, 1997, and (z) one additional director who shall mutually acceptable to Nassau, Kamine and either AT&T or the Majority Series C Holders, provided that it is agreed that Roscoe C. Young II shall be mutually acceptable to each of the foregoing; (ii) the election to each committee of the Board of Directors of an equal number of Nassau Directors and Kamine Directors; and (iii) the election of an independent director to the compensation committee of the Board of Directors. 3. Except as expressly amended hereby, all of the provisions of the Stockholders Agreement are hereby affirmed and shall continue in full force and effect in accordance with their terms. 4. This Amendment shall be governed and construed in accordance with the laws of the state of Delaware applicable to agreements made and to be performed entirely within such state, without regard to the principles of conflicts of laws thereof. 5. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the undersigned have executed, or caused to be executed, this Agreement as of the date first above written. KMC TELECOM HOLDINGS, INC. By: /s/ ----------------------------- Name: Harold N. Kamine Title:Chairman of the Board NASSAU CAPITAL PARTNERS L.P. By: Nassau Capital L.L.C., its General Partner By: /s/ --------------------------- Name: John G. Quigly Title: Member NAS PARTNERS I L.L.C. By: /s/ ----------------------------- Name: John G. Quigley Title:Member HAROLD N. KAMINE in his individual capacity /s/ --------------------------------- Harold N. Kamine NEWCOURT COMMERCIAL FINANCE CORPORATION By: /s/ ----------------------------- Name: Charles Brown Title:Vice President FIRST UNION NATIONAL BANK By: /s/ ----------------------------- Name: Pearce Landry Title:Vice President CORESTATES HOLDINGS, INC. By: /s/ ----------------------------- Name: Tracey M. Chaffin Title:Vice President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ ----------------------------- Name: Mark F. Mylon Title:Manager - Operations EX-10.5 3 AMENDMENT NO. 4 AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT ("AMENDMENT") dated as of December 31, 1999, is among KMC TELECOM INC., a Delaware corporation ("KMC"), KMC TELECOM II, INC., a Delaware corporation ("KMC II"), KMC TELECOM OF VIRGINIA, INC., a Virginia public service company ("KMC VIRGINIA"), KMC TELECOM LEASING I LLC, a Delaware limited liability company ("LEASING I"), KMC TELECOM LEASING II LLC, a Delaware limited liability company ("LEASING II"; KMC, KMC II, KMC Virginia, Leasing I and Leasing II being hereinafter collectively referred to hereinafter as the "BORROWERS"), the financial institutions from time to time parties thereto (the "LENDERS"), FIRST UNION NATIONAL BANK, as administrative agent for the Lenders (the "AGENT") and NEWCOURT COMMERCIAL FINANCE CORPORATION (f/k/a AT&T COMMERCIAL FINANCE CORPORATION), an affiliate of The CIT Group, Inc., as collateral agent for the Lenders (the "COLLATERAL AGENT"; the Agent together with the Collateral Agent being referred to as the "AGENTS"). WHEREAS, the Borrowers, the Agents and the Lenders are parties to that certain Loan and Security Agreement (the "LOAN AGREEMENT"; undefined capitalized terms used herein shall have the meanings assigned thereto in the Loan Agreement) dated as of December 22, 1998, as amended by Amendment No.1 thereto dated as of March 3, 1999, Amendment No. 2 thereto dated as of August 13, 1999, and Waiver and Amendment No. 3 thereto dated as of October 29, 1999, pursuant to which the Lenders have agreed to make certain "Loans" and other financial accommodations to the Borrowers; and WHEREAS, the Borrowers have requested that the Agents and the Lenders amend the Loan Agreement in the manner set forth herein, and the Agents and the Lenders have agreed to such request; NOW, THEREFORE, in consideration of the premises set forth above, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrowers, the Agents and the Lenders agree as follows: 1. AMENDMENT TO THE LOAN AGREEMENT. Effective as of the date first above written and subject to the execution of this Amendment by the parties hereto, the Loan Agreement shall be and hereby is amended as follows: 1.1 SECTION 7.01(b) is hereby amended to add the following proviso thereto: --------------- "PROVIDED, HOWEVER, that as of the last day of each fiscal quarter occurring on or after December 31, 1999, the Borrowers shall on a combined basis have revenues at least equal to the amount set forth below for such date: FISCAL QUARTER ENDING MINIMUM REVENUES December 31, 1999 $18,000,000 March 31, 2000 $23,821,000 June 30, 2000 $31,338,000 September 30, 2000 $37,803,000 December 31, 2000 $44,482,000 March 31, 2001 $54,678,000" 1.2 SECTION 7.01(c)(i) is hereby amended to delete the proviso thereto and to substitute the following proviso therefor: "PROVIDED, HOWEVER, that as of the last day of each fiscal quarter occurring on or after December 31, 1999 through and including December 31, 2000, the Borrowers shall not permit the EBITDA losses for all the Borrowers on a combined basis for the two fiscal quarters then ending to exceed the amount set forth below for such date: FISCAL QUARTER ENDING EBITDA LOSSES December 31, 1999 ($50,400,000) March 31, 2000 ($38,700,000) June 30, 2000 ($25,001,000) September 30, 2000 ($13,823,000) December 31, 2000 ($4,157,000)" 1.3 SECTION 7.01(c)(ii) shall be deleted in its entirety and replaced with the following new SECTION 7.01(c)(ii): "As of the last day of the fiscal quarter ending March 31, 2001, the Borrowers shall not permit EBITDA for all the Borrowers on a combined basis for the two fiscal quarters then ending to be less than $1,688,000." 2. CONDITIONS PRECEDENT. This Amendment shall become effective as of the date above written, if, and only if, the Agents have received duly executed originals of this Amendment from the Borrowers, the Requisite Lenders and the Agents on or prior to January __, 2000. 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. The Borrowers hereby represent and warrant as follows: (a) This Amendment and the Loan Agreement, as amended hereby, constitute legal, valid and binding obligations of the Borrowers and are enforceable against the Borrowers in accordance with their terms. (b) Upon the effectiveness of this Amendment, the Borrowers hereby reaffirm all representations and warranties made in the Loan Agreement, and to the extent the same are not amended hereby, agree that all such representations and warranties shall be deemed to have been remade as of the date of delivery of 2 this Amendment, unless and to the extent that any such representation and warranty is stated to relate solely to an earlier date, in which case such representation and warranty shall be true and correct as of such earlier date. (c) As of the date hereof, and after giving effect to this Amendment, each Borrower shall be in compliance with all the terms and provisions set forth in the Loan Agreement, as amended hereby, on its part to be observed or performed, and no Event of Default or Default shall have occurred and be continuing. 4. REFERENCE TO AND EFFECT ON THE LOAN AGREEMENT. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof, each reference in the Loan Agreement to "this Loan Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as amended hereby, and each reference to the Loan Agreement in any other document, instrument or agreement shall mean and be a reference to the Loan Agreement as modified hereby. (b) The Loan Agreement, as amended hereby, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly provided herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Agents or the Lenders, nor constitute a waiver of any provision of the Loan Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE OTHER REMAINING TERMS OF THE LOAN AGREEMENT AND THE INTERNAL LAWS (AS OPPOSED TO CONFLICT OF LAW PROVISIONS) OF THE STATE OF NEW YORK. 6. PARAGRAPH HEADINGS. The paragraph headings contained in this Amendment are and shall be without substance, meaning or content of any kind whatsoever and are not a part of the agreement among the parties thereto. 7. COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 3 IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written. THE BORROWERS: KMC TELECOM INC. KMC TELECOM II, INC. KMC TELECOM OF VIRGINIA, INC. In each case: By: /s/ ----------------------- Name: James D. Grenfell Title: CFO KMC TELECOM LEASING I LLC By: KMC TELECOM INC., as its Sole Member By: /s/ ----------------------- Name: James D. Grenfell Title: CFO KMC TELECOM LEASING I LLC By: KMC TELECOM II, INC., as its Sole Member By: /s/ ----------------------- Name: James D. Grenfell Title: CFO 4 FIRST UNION NATIONAL BANK, as the Agent and as a Lender By: /s/ ------------------------- Name: Elizabeth Elmore Title: Senior Vice President NEWCOURT COMMERCIAL FINANCE CORPORATION (f/k/a AT&T COMMERCIAL FINANCE CORPORATION), an affiliate of The CIT Group, Inc., as the Collateral Agent and as a Lender By: /s/ ------------------------- Name: Michael Monahan Title: Vice President CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender By: /s/ ------------------------- Name: Tefta Chilaga Title: Executive Director, CIBC World Markets Corp. As Agent GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: /s/ ------------------------- Name: Mark F. Mylon Title: Manager-Operations BANKBOSTON, N.A., as a Lender By: /s/ -------------------------- Name: Michael A. Ashton Title: Vice President 5 CREDIT SUISSE FIRST BOSTON, as a Lender By: /s/ -------------------------- Name: Jeffery Ulmer Title: Vice President By: /s/ -------------------------- Name: Douglas E. Maher Title: Vice President DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCHES, as a Lender By: /s/ -------------------------- Name: John P. Fleseler Title: Senior Vice President By: /s/ -------------------------- Name: Constance Loosemore Title: Assistant Vice President MORGAN STANLEY SENIOR FUNDING, INC., as a Lender By: /s/ -------------------------- Name: T. Morgan Edwards II Title: Vice President By: -------------------------- Name: Title: MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST, as a Lender By: /s/ -------------------------- Name: Shelia Finnely Title: Senior Vice President 6 UNION BANK OF CALIFORNIA, N.A., as a Lender By: /s/ -------------------------- Name: Keith M. Wilson Title: Vice President KEYPORT LIFE INSURANCE COMPANY, as a Lender By: /s/ -------------------------- Name: Brian W. Good Title: Vice President & Portfolio Manager STEIN ROE FLOATING RATE LIMITED LIABILITY COMPANY, as a Lender By: /s/ -------------------------- Name: Brian W. Good Title: Vice President Stein Roe & Farnham Incorporated, Advisor to the Stein Roe Floating Rate Limited Liability Company 7 REAFFIRMATION OF GUARANTY Reference is hereby made to (i) that certain Guaranty dated as of December 22, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "GUARANTY") by KMC Telecom Holdings, Inc., a Delaware corporation (the "GUARANTOR"), in favor of Newcourt Commercial Finance Corporation (formerly known as AT&T Commercial Finance Corporation), an affiliate of The CIT Group, Inc., as collateral agent for the ratable benefit of the "Lenders" (defined below) (in such capacity, the "COLLATERAL AGENT"), (ii) that certain Loan and Security Agreement dated as of December 22, 1998 (as amended, restated, supplemented or otherwise modified from time to time, the "LOAN AGREEMENT") among KMC Telecom, Inc., KMC Telecom II, Inc., KMC Telecom of Virginia, Inc., KMC Telecom Leasing I LLC, KMC Telecom Leasing II LLC (each of the foregoing being referred to collectively as the "BORROWERS"), the financial institutions from time to time parties thereto (the "Lenders"), First Union National Bank, as administrative agent for the Lenders (the "Agent"), and the Collateral Agent, and (iii) that certain Amendment No. 4 to Loan and Security Agreement dated as of December 31, 1999 (the "AMENDMENT") among the Borrowers, the Lenders, the Agent and the Collateral Agent. The Guarantor, by its signature below, without in any way establishing a course of dealing, hereby (i) acknowledges and consents to the execution and delivery of the Amendment by the parties thereto, (ii) agrees that the Amendment shall not limit or diminish the obligations of the Guarantor to guarantee all of the "Obligations" of each Borrower under and as defined in the Loan Agreement and such other amounts as are more specifically described in the Guaranty, (iii) reaffirms all of its obligations under the Guaranty, and (iv) agrees that the Guaranty remains in full force and effect and is hereby ratified and confirmed. IN WITNESS WHEREOF, this instrument has been executed and delivered as of this 31st day of December, 1999. KMC TELECOM HOLDINGS, INC. By: /s/ -------------------------- Name: James D. Grenfell Title: CFO, Executive Vice President and Secretary 8 EX-10.6 4 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT - - ------------------------------------------------------------------------------ AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED AS OF FEBRUARY 15, 2000 AMONG KMC TELECOM INC., KMC TELECOM II, INC., KMC TELECOM III, INC., KMC TELECOM OF VIRGINIA, INC., KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC, KMC TELECOM LEASING III LLC, KMC TELECOM.COM, INC. AND KMC III SERVICES LLC AS BORROWERS, THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTIES HERETO, AS LENDERS, AND FIRST UNION NATIONAL BANK AS ADMINISTRATIVE AGENT FOR THE LENDERS AND NEWCOURT COMMERCIAL FINANCE CORPORATION, AN AFFILIATE OF THE CIT GROUP, INC., AS COLLATERAL AGENT FOR THE LENDERS TABLE OF CONTENTS PAGE ARTICLE I AMENDMENT AND RESTATEMENT; DEFINITIONS.....................................2 SECTION 1.01. Amendment and Restatement...................................2 SECTION 1.02. Definitions.................................................2 SECTION 1.03. Accounting Terms...........................................23 SECTION 1.04. Others Defined in New York Uniform Commercial Code.........23 ARTICLE II LOANS AND LETTERS OF CREDIT...............................................23 SECTION 2.01. Agreement to Lend..........................................24 SECTION 2.02. Loans......................................................24 SECTION 2.03. Procedure for Loan Request and Borrowing Commitment........25 SECTION 2.04. The Notes..................................................27 SECTION 2.05. Interest on Loans..........................................28 SECTION 2.06. Conversion or Continuation.................................29 SECTION 2.07. Special Provisions Governing LIBOR Loans...................30 SECTION 2.08. Payments...................................................32 SECTION 2.09. Optional and Mandatory Prepayment of Loans; Optional and Mandatory Reduction of Revolving Loan Commitment Amount.....................................................33 SECTION 2.10. Letters of Credit..........................................35 SECTION 2.11. Fees.......................................................40 SECTION 2.12. Manner of Payment; Special Tax Considerations..............41 SECTION 2.13. Maximum Lawful Interest Rate...............................46 SECTION 2.14. Funding Issues.............................................46 SECTION 2.15. Joint and Several Liability; Contribution..................47 ARTICLE III REPRESENTATIONS AND WARRANTIES............................................48 SECTION 3.01. Organization; Powers.......................................48 SECTION 3.02. Corporate Authorization....................................48 SECTION 3.03. Financial Statements.......................................49 SECTION 3.04. No Material Adverse Change.................................49 SECTION 3.05. Litigation.................................................49 SECTION 3.06. Tax Returns................................................49 SECTION 3.07. No Defaults................................................49 SECTION 3.08. Properties.................................................49 SECTION 3.09. Licenses, Material Agreements, Intellectual Property.......49 SECTION 3.10. Compliance With Laws.......................................50 SECTION 3.11. ERISA......................................................50 SECTION 3.12. Investment Company Act; Public Utility Holding Company Act................................................51 SECTION 3.13. Federal Reserve Regulations................................51 i SECTION 3.14. Collateral.................................................51 SECTION 3.15. Chief Place of Business....................................52 SECTION 3.16. Other Corporate Names......................................52 SECTION 3.17. Insurance..................................................52 SECTION 3.18. Milestone Plan.............................................52 SECTION 3.19. Capitalization and Subsidiaries............................52 SECTION 3.20. Real Property, Leases and Easements........................52 SECTION 3.21. Solvency...................................................53 SECTION 3.22. Brokers, etc...............................................53 SECTION 3.23. No Material Misstatements..................................53 SECTION 3.24. Year 2000 Problems.........................................53 ARTICLE IV CONDITIONS FOR LOANS......................................................53 SECTION 4.01. Conditions Precedent to Initial Loan on or after the Closing Date...............................................54 SECTION 4.02. Conditions Precedent to All Loans..........................58 ARTICLE V AFFIRMATIVE COVENANTS.....................................................60 SECTION 5.01. Corporate and Franchise Existence..........................60 SECTION 5.02. Compliance with Laws, Etc..................................60 SECTION 5.03. Maintenance of Properties..................................60 SECTION 5.04. Insurance..................................................60 SECTION 5.05. Obligations and Taxes......................................65 SECTION 5.06. Financial Statements, Reports, etc.........................66 SECTION 5.07. Litigation and Other Notices...............................68 SECTION 5.08. Mortgages; Landlord Consents; Licenses and Other Agreements.................................................68 SECTION 5.09. ERISA......................................................69 SECTION 5.10. Access to Premises and Records.............................69 SECTION 5.11. Design and Construction....................................69 SECTION 5.12. Environmental Notices......................................69 SECTION 5.13. Amendment of Organizational Documents......................69 SECTION 5.14. Third Party Agreements and Delivery and Acceptance Certificates...............................................70 SECTION 5.15. Accounts Payable...........................................70 SECTION 5.16. Intellectual Property. Such Borrower shall enter into Intellectual Property Documents, in form and substance satisfactory to the Collateral Agent, with respect to all of the Intellectual Property owned by such Borrower....70 SECTION 5.17. Fiscal Year................................................70 SECTION 5.18. Required Contribution. The Borrowers shall obtain the Required Contribution on or prior to August 31, 2000.......70 SECTION 5.19. Subsidiary Guarantees and Pledges..........................70 SECTION 5.20. Accounting; Maintenance of Records.........................71 SECTION 5.21. Further Assurances.........................................71 ARTICLE VI NEGATIVE COVENANTS........................................................71 ii SECTION 6.01. Liens, etc.................................................71 SECTION 6.02. Use of Proceeds............................................72 SECTION 6.03. Sale of Assets, Consolidation, Merger, etc.................72 SECTION 6.04. Dividends and Distributions; Sale of Equity Interests......72 SECTION 6.05. Management Fees and Permitted Corporate Overhead...........73 SECTION 6.06. Guarantees; Third Party Sales and Leases...................73 SECTION 6.07. Investments................................................73 SECTION 6.08. Subsidiaries; Permitted Acquisitions.......................74 SECTION 6.09. Permitted Activities.......................................75 SECTION 6.10. Disposition of Licenses, etc...............................75 SECTION 6.11. Transactions with Affiliates...............................75 SECTION 6.12. ERISA......................................................75 SECTION 6.13. Indebtedness...............................................76 SECTION 6.14. Prepayment and Debt Documents..............................76 SECTION 6.15. Sale and Leaseback Transactions............................77 SECTION 6.16. Margin Regulation..........................................77 SECTION 6.17. Management and Tax Sharing Agreements......................77 ARTICLE VII FINANCIAL COVENANTS.......................................................77 SECTION 7.01. Financial Covenants Prior to Achieving Positive EBITDA.....77 SECTION 7.02. Financial Covenants After Achieving Positive EBITDA........78 ARTICLE VIII COLLATERAL SECURITY.......................................................80 SECTION 8.01. Collateral Security........................................80 SECTION 8.02. Preservation of Collateral and Perfection of Security Interests Therein..........................................81 SECTION 8.03. Appointment of the Collateral Agent as the Borrowers'Attorney-in-Fact.................................81 SECTION 8.04. Collection of Accounts and Restricted Account Arrangements...............................................81 SECTION 8.05. Cure Rights................................................82 ARTICLE IX EVENTS OF DEFAULT; REMEDIES...............................................82 SECTION 9.01. Events of Default..........................................82 SECTION 9.02. Termination of Commitment; Acceleration....................85 SECTION 9.03. Waivers....................................................85 SECTION 9.04. Rights and Remedies Generally..............................86 SECTION 9.05. Entry Upon Premises and Access to Information..............86 SECTION 9.06. Sale or Other Disposition of Collateral by the Agent.......86 SECTION 9.07. Governmental Approvals.....................................87 SECTION 9.08. Appointment of Receiver or Trustee.........................88 SECTION 9.09. Right of Setoff............................................88 ARTICLE X THE AGENT AND THE COLLATERAL AGENT........................................89 iii SECTION 10.01. Appointment of Agent......................................89 SECTION 10.02. Agent's Reliance, Etc.....................................90 SECTION 10.03. FUNB and Affiliates.......................................90 SECTION 10.04. Lender Credit Decision....................................90 SECTION 10.05. Indemnification...........................................91 SECTION 10.06. Successor Agent...........................................91 SECTION 10.07. Payments; Non-Funding Lenders; Information; Actions in Concert................................................92 SECTION 10.08. Collateral Matters........................................93 SECTION 10.09. Agency for Perfection.....................................94 SECTION 10.10. Concerning the Collateral and the Related Loan Documents and the Collateral Agent........................94 ARTICLE XI MISCELLANEOUS.............................................................94 SECTION 11.01. Notices; Action on Notices, etc...........................95 SECTION 11.02. No Waivers; Amendments....................................95 SECTION 11.03. Governing Law and Jurisdiction............................96 SECTION 11.04. Expenses..................................................96 SECTION 11.05. Equitable Relief..........................................97 SECTION 11.06. Indemnification; Limitation of Liability; Lucent Relationships.............................................97 SECTION 11.07. Survival of Representations and Warranties, etc...........98 SECTION 11.08. Successors and Assigns; Assignments; Participations.......98 SECTION 11.09. Severability.............................................101 SECTION 11.10. Cover Page, Table of Contents and Section Headings.......101 SECTION 11.11. Counterparts.............................................101 SECTION 11.12. Application of Payments..................................101 SECTION 11.13. Marshalling; Payments Set Aside..........................101 SECTION 11.14. SERVICE OF PROCESS.......................................102 SECTION 11.15. WAIVER OF JURY TRIAL, ETC................................102 SECTION 11.16. Confidentiality..........................................102 SECTION 11.17. Entire Agreement, etc....................................103 SECTION 11.18. No Strict Construction...................................103 iv EXHIBITS EXHIBIT A Milestone Plan EXHIBIT B Form of Collateral Assignment of Leases EXHIBIT C Form of Collateral Assignment of Licenses EXHIBIT D Form of Landlord Waiver EXHIBIT E-1 Form of Revolving Loan Note EXHIBIT E-2 Form of Term A Loan Note EXHIBIT E-3 Form of Term B Loan Note EXHIBIT F Form of Periodic Reporting Certificate EXHIBIT G Form of Guaranty EXHIBIT H-1 Form of Notice of Borrowing EXHIBIT H-2 Form of Notice of Continuation/Conversion EXHIBIT I Financials EXHIBIT J-1 Form of Secretary's Certificate of Borrower EXHIBIT J-2 Form of Secretary's Certificate of KMC Holdings EXHIBIT K-1 Form of Opinion of Borrowers' Special Counsel EXHIBIT K-2 Form of Opinion of Borrowers' Regulatory Counsel EXHIBIT K-3 Form of Opinion of Borrowers' Local Counsel EXHIBIT L Form of Pledge Agreement EXHIBIT M Form of Loss Payable Endorsement EXHIBIT N Form of Restricted Account Agreement EXHIBIT O Form of Assignment Agreement EXHIBIT P Form of Accession Agreement EXHIBIT Q Form of Contribution Agreement EXHIBIT R Form of Delivery and Acceptance Certificate v EXHIBIT S Form of Trademark Security Agreement EXHIBIT T Form of General Reaffirmation and Modification Agreement EXHIBIT U Form of Guaranty and Security Agreement vi SCHEDULES SCHEDULE 1.01(a) Applicable Margin SCHEDULE 3.02 Consents SCHEDULE 3.05 Litigation SCHEDULE 3.09(a) Governmental Authorizations and Approvals SCHEDULE 3.09(b) Material Agreements SCHEDULE 3.09(c) Intellectual Property SCHEDULE 3.10 Environmental Matters SCHEDULE 3.11 Plans SCHEDULE 3.14 Filing Offices SCHEDULE 3.16 Corporate and Fictitious Names SCHEDULE 3.17 Insurance SCHEDULE 3.19 Capitalization and Subsidiaries SCHEDULE 3.20 Real Property, Leased Real Property and Easements SCHEDULE 6.11 Transactions With Affiliates SCHEDULE 8.04 Collection Accounts ANNEXES ANNEX A.....- Commitment Amounts ANNEX B.....- Financial Covenant Information ANNEX C.....- Revolving Loan Commitment Reductions and Term Loan Amortizations vii AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("AGREEMENT") dated as of February 15, 2000 among KMC TELECOM INC., a Delaware corporation ("KMC"), KMC TELECOM II, INC., a Delaware corporation ("KMC II"), KMC TELECOM III, INC., a Delaware corporation ("KMC III"), KMC TELECOM OF VIRGINIA, INC., a Virginia public service company ("KMC VIRGINIA"), KMC TELECOM LEASING I LLC, a Delaware limited liability company ("LEASING I"), KMC TELECOM LEASING II LLC, a Delaware limited liability company ("LEASING II"), KMC TELECOM LEASING III LLC, a Delaware limited liability company ("LEASING III"), KMC TELECOM.COM, INC., a Delaware corporation ("TELECOM.COM"), KMC III Services LLC, a Delaware limited liability company ("SERVICES"), the Additional Borrowers from time to time parties hereto (KMC, KMC II, KMC Virginia, Leasing I, Leasing II, Leasing III, Telecom.com, Services and any Additional Borrowers being collectively referred to hereinafter as the "BORROWERS" and sometimes individually as a "BORROWER"), the financial institutions signatory hereto from time to time, as "Lenders", FIRST UNION NATIONAL BANK, as administrative agent for the Lenders (in such capacity, the "AGENT") and NEWCOURT COMMERCIAL FINANCE CORPORATION, formerly known as AT&T Commercial Finance Corporation and an affiliate of The CIT Group, Inc., as collateral agent for the Lenders (in such capacity, the "COLLATERAL AGENT"). RECITALS A. The Borrowers (other than KMC III, Leasing III, Telecom.com and Services), the Lenders, the Agent and the Collateral Agent, are parties to a certain Loan and Security Agreement dated as of December 22, 1998, as amended pursuant to that certain Amendment No. 1 thereto dated as of March 3, 1999, that certain Amendment No. 2 thereto dated as of August 13, 1999, that certain Waiver and Amendment No. 3 thereto dated as of October 29, 1999, and that certain Amendment No. 4 thereto dated as of December 31, 1999 (such Loan and Security Agreement, as so amended being hereinafter referred to as the "EXISTING AGREEMENT"), pursuant to which the Lenders have provided loans to the Borrowers other than KMC III, Leasing III, Telecom.com and Services (the "EXISTING LOANS") and issued letters of credit for the account of the Borrowers other than KMC III, Leasing III, Telecom.com and Services and for which the Borrowers other than KMC III, Leasing III, Telecom.com and Services have incurred Letter of Credit Obligations (the "EXISTING LETTER OF CREDIT OBLIGATIONS"). B. The Borrowers, the Lenders, the Agent and the Collateral Agent have agreed to amend the Existing Agreement in certain respects, to, among other things, increase the Commitment Amount to $700,000,000 and to add KMC III, Leasing III, Telecom.com and Services as Borrowers and to refinance the obligations of KMC III, Leasing III and Services under that certain Amended and Restated Loan and Security Agreement dated as of December 30, 1999 among KMC III, Leasing III, Services, the financial institutions from time to time parties thereto as lenders, Lucent Technologies Inc., as Agent for said lenders and State Street Bank and Trust Company as Collateral Agent for said Lenders (the "Lucent Loan Agreement") and have agreed to execute this Agreement as an amendment and restatement of the Existing Agreement, in order to incorporate such amendments and the Existing Agreement into a single document. 1 C. It is the intent of the parties hereto that the execution and delivery of this Agreement not effectuate a refinancing or novation of the Existing Loans and Existing Letter of Credit Obligations, but rather a modification to the terms governing the repayment of the Existing Loans and Existing Letter of Credit Obligations, which Existing Loans and Existing Letter of Credit Obligations remain outstanding as of the date hereof and remain secured by the Collateral. ARTICLE I AMENDMENT AND RESTATEMENT; DEFINITIONS SECTION 1.01. AMENDMENT AND RESTATEMENT. The Borrowers, the Agent, the Collateral Agent and the Lenders hereby agree that, effective upon the execution and delivery of this Agreement by each such party: (a) the terms and provisions of the Existing Agreement shall be and hereby are amended, superseded and restated in their entirety by the terms and provisions of this Agreement, except that any grant of security by any Borrower pursuant to SECTION 8.01 of the Existing Agreement shall remain effective as of the date any such grant first became effective, and (b) the Existing Loans shall constitute the initial outstanding Loans under this Agreement, the Existing Letter of Credit Obligations shall constitute the initial outstanding Letter of Credit Obligations under this Agreement, and the Existing Loans and Existing Letter of Credit Obligations shall be payable solely in accordance with the terms of this Agreement, the Notes and any Loan Documents delivered pursuant hereto or modified in accordance with the General Reaffirmation. No party hereto shall have any obligations under the Existing Agreement, except to the extent that any obligations thereunder may be restated in this Agreement or the other Loan Documents. The Borrowers, the Agent, the Collateral Agent and the Lenders agree that the execution and delivery of this Agreement shall not effectuate a novation or refinancing of the Existing Loans and Existing Letter of Credit Obligations, but rather a substitution of certain of the terms governing the payment and performance of the Existing Loans and Existing Letter of Credit Obligations. SECTION 1.02. DEFINITIONS. As used in this Agreement, the following words and terms shall have the meanings specified below: "ACCESS LINES" shall mean the total number of installed business lines that provide service to a business customer of a Borrower including "resale", "on-net" and "unbundled network element"; PROVIDED, that resale shall constitute no more than twenty-five percent (25%) of the total Access Lines. "ACCOUNTS" shall mean all present and future rights of any Borrower to payment for goods sold or leased or for services rendered which are not evidenced by instruments or chattel paper, and whether or not they have been earned by performance. "ADDITIONAL BORROWER" shall mean any Subsidiary of KMC Holdings, KMC, KMC II, KMC III, KMC Virginia, Leasing I, Leasing II, Leasing III, Telecom.com or Services that enters into an accession agreement substantially in the form of EXHIBIT P hereto, is acceptable to the Requisite Lenders, and the outstanding Equity Interests of which are pledged to the Agent pursuant to a pledge agreement substantially in the form of EXHIBIT L attached hereto. 2 "ADDITIONAL PURCHASE AGREEMENT" shall mean a purchase agreement between any Borrower and an Additional Vendor relating to the purchase of Telecommunications Equipment on terms and conditions reasonably satisfactory to the Agents, if such purchase agreement contemplates Telecommunications Equipment purchases in excess of $5,000,000 in any one year or $15,000,000 in the aggregate, otherwise on the terms and conditions reasonably satisfactory to the Collateral Agent. "ADDITIONAL VENDOR" shall mean a vendor of Telecommunications Equipment other than Lucent, which Additional Vendor shall be reasonably satisfactory to the Agents if the Additional Purchase Agreement the Additional Vendor is a party to contemplates Telecommunications Equipment purchases in excess of $5,000,000 in any one year or $15,000,000 in the aggregate, otherwise on the terms and conditions reasonably satisfactory to the Collateral Agent. "AFFILIATE" shall mean any Person other than any Lender directly or indirectly controlling, controlled by or under common control with any Borrower and any officer or shareholder of such Person or any Borrower, which shareholder beneficially owns at least ten percent (10%) of the Equity Interests of such Person or any Borrower. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by", and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; PROVIDED, HOWEVER, that beneficial ownership of at least 10% of the Equity Interests of a Person shall be deemed to constitute control; and provided, further, that in no event shall any of the Agents or the Lenders be deemed to be an Affiliate of any Borrower or of KMC Holdings. "AGED EQUIPMENT" shall mean Telecommunications Equipment, which has been in commercial operation for more than twelve months. "AGENTS" shall mean collectively, the Agent, the Collateral Agent, the Documentation Agent and the Syndication Agent. "APPLICABLE MARGIN" shall mean with respect to (i) each Loan bearing interest based upon the Base Rate, the margin determined in accordance with the criteria set forth on SCHEDULE 1.01(A) hereto, and (ii) each Loan bearing interest based upon the LIBO Rate, the margin determined in accordance with the criteria set forth on SCHEDULE 1.01(A) hereto, which margins shall be calculated based upon the financial statements provided pursuant to SECTION 5.06, with any readjustments being effective five Business Days following the Agent's receipt thereof; provided, however, that in the event that the Required Contribution is obtained on or prior to August 31, 2000, each such margin shall be reduced effective as of five (5) Business Days after receipt by Borrowers of the Required Contribution by twenty-five (25) basis points. "ASSIGNMENT AGREEMENT" shall mean an assignment agreement entered into in connection with an assignment pursuant to SECTION 11.08 hereof substantially in the form of EXHIBIT O hereof. 3 "BASE LIBO RATE" shall mean, during any Interest Period, the rate of interest per annum (rounded upward to the nearest whole multiple of 1/16 of 1.0%, if such rate is not such a multiple) equal to the rate of interest notified to the Agent by the Reference Bank at which Dollar deposits in the approximate amount of the Loans to be made or continued as, or converted into, LIBOR Loans for such Interest Period and having a maturity comparable to such Interest Period would be offered by the London lending office of the Reference Bank in the London interbank market at approximately 11:00 a.m. (London time) two (2) Business Days prior to the commencement of such Interest Period. "BASE RATE" shall mean the higher of (i) a rate per annum equal to the corporate base rate, prime rate or base rate of interest, as applicable, announced by the Reference Bank from time to time, changing when and as such rate changes, it being understood that such rate of interest is not necessarily the lowest or best rate charged by the Reference Bank to its customers, and (ii) the sum of the Federal Funds Effective Rate plus one-half percent (0.50%) per annum. "BASE RATE LOAN" shall mean a Loan, or portion thereof, during any period in which it bears interest at a rate based upon the Base Rate. "BASE RATE REVOLVING LOAN" shall mean a Revolving Loan during any period for which it is a Base Rate Loan. "BASE RATE TERM A LOAN" shall mean any portion of the Term A Loans during any period for which such portion is a Base Rate Loan. "BASE RATE TERM B LOAN" shall mean any portion of the Term B Loans during any period for which such portion is a Base Rate Loan. "BASE RATE TERM LOAN" shall mean a Base Rate Term A Loan or a Base Rate Term B Loan. "BENEFIT PLAN" shall mean a defined benefit plan as defined in Section 3(35) of ERISA (other than a Multiemployer Plan) in respect of which any Borrower or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "BORROWER" shall mean any of KMC, KMC II, KMC III, KMC Virginia, Leasing I, Leasing II, Leasing III, Telecom.com, Services and any Additional Borrower. "BORROWING BASE" shall mean at any time the sum of the following amounts: (i) the aggregate cost of Telecommunications Equipment financed under this Agreement, minus any reserves established by the Collateral Agent with respect to Aged Equipment, (ii) the cash portion of the purchase price of Permitted Acquisitions, plus fees and expenses in connection with the Permitted Acquisitions; provided, however, that such fees and expenses may only be included in the Borrowing Base with respect to any Permitted Acquisition if the appraisal required by clause (8) of SECTION 6.08 with respect to such Permitted Acquisition indicates that the fair market value of the assets being acquired in 4 such Permitted Acquisition equals or exceeds the sum of the purchase price for such assets and such fees and expenses, and (iii) transaction costs incurred in connection with the execution, delivery and performance of the Loan Documents. "BUSINESS" shall mean with respect to (i) each of KMC, KMC II, KMC III and KMC Virginia, the business of constructing, operating and maintaining the Systems owned by them and all operations related thereto or in support thereof, (ii) each of Leasing I, Leasing II and Leasing III the business of owning and leasing Switch Equipment, (iii) Services, the business of owning software, installation and other soft costs related to the Systems and providing services for the Systems, and (iv) Telecom.com, the business of developing and providing intranet services. "BUSINESS DAY" shall mean (a) any day not a Saturday, Sunday or legal holiday in the State of New York or New Jersey, on which banks are open for business in New York and New Jersey and (b) with respect to all notices, determinations, fundings and payments in connection with the LIBO Rate or LIBOR Loans, any day that is a Business Day pursuant to CLAUSE (A) above and that is also a day on which trading is carried on by and between banks in the London interbank market. "CAPITALIZATION" shall mean funded equity capitalization of KMC Holdings. "CAPITALIZED LEASE OBLIGATIONS" shall mean Debt represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP, and the amount of such Debt shall be the capitalized amount of such obligations determined in accordance with GAAP. "CASH ADVANCE" shall mean any Term B Loan which is not a Credit Advance. "CHANGE OF CONTROL" shall mean (A) Harold N. Kamine ceases to have senior management responsibilities with respect to the Borrowers or KMC Holdings, (B) KMC Holdings no longer beneficially owns, directly or indirectly, all of the outstanding Equity Interests of each Borrower, (C) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35% of the total voting power of the Voting Stock of KMC Holdings on a fully diluted basis and such ownership represents a greater percentage of the total voting power of the Voting Stock of KMC Holdings, on a fully diluted basis, than is held by the Existing Stockholders on such date, or (D) individuals who on the Closing Date constitute the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination by the Board of Directors for election by KMC Holdings' stockholders was approved by a vote of at least a majority of the members of the Board of Directors then in office who either were members of the Board of Directors on the Closing Date or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the members of the Board of Directors then in office. "CLEC" shall mean a competitive local exchange carrier. 5 "CLOSING DATE" shall mean the date on which this Agreement is executed and delivered by the parties hereto. "COLLATERAL" shall mean, all property and interests in property now owned or hereafter acquired by any Borrower in or upon which a security interest, lien or mortgage is granted to the Collateral Agent by any Borrower, whether under this Agreement or the other Loan Documents. "COLLATERAL ASSIGNMENT OF LEASES" shall mean the Collateral Assignment of Leases in the form of EXHIBIT B attached hereto, which was executed and delivered pursuant to the Existing Agreement, together with the addenda thereto to be executed and delivered by KMC III, Leasing III, Telecom.com and Services pursuant to SECTION 4.01 hereof. "COLLATERAL ASSIGNMENT OF LICENSES" shall mean the Collateral Assignment of Licenses in the form of EXHIBIT C attached hereto, which was executed and delivered pursuant to the Existing Agreement, together with the addenda thereto to be executed and delivered by KMC III, Leasing III, Telecom.com and Services pursuant to SECTION 4.01 hereof. "COLLECTION ACCOUNTS" AND "COLLECTION AGENT" shall have the meanings given to such terms in SECTION 8.04 hereof. "COMMITMENT" shall mean Lenders' commitment to lend as set forth in SECTION 2.01 hereof. "COMMITMENT AMOUNT" shall mean (a) as to any Lender, the aggregate of such Lender's Revolving Loan Commitment Amount, Term Loan A Commitment Amount and Term Loan B Commitment Amount as set forth opposite such Lender's name on ANNEX A to this Agreement or in the most recent Assignment Agreement executed by such Lender and (b) as to all Lenders, the aggregate of all Lenders' Revolving Loan Commitment Amounts, Term Loan A Commitment Amounts and Term Loan B Commitment Amounts, which aggregate commitment shall be Seven Hundred Million Dollars ($700,000,000) on the Closing Date, as such amount may be adjusted from time to time in accordance with this Agreement "COMMON STOCK" shall mean with respect to any Person, all Equity Interests of such Person that are generally entitled to (i) vote in the election of directors of such Person or (ii) if such Person is not a corporation, vote or otherwise participate in the selection of the governing body, partners, managers or others that will control the management and policies of such Person. "CONSOLIDATED" or "Consolidated" refers, with respect to any Person, to the consolidation of the accounts of such Person and its Subsidiaries, if any, in accordance with GAAP; PROVIDED, that with respect to KMC Holdings, unless otherwise indicated, its Subsidiaries shall not include any Excluded Subsidiaries. "CONSOLIDATED DEBT" shall mean, with respect to KMC Holdings on a consolidated basis, at any date, the sum of the following determined on a consolidated basis, without duplication, in accordance with GAAP: (a) all liabilities, obligations and indebtedness for borrowed money, including, but not limited to, obligations evidenced by bonds, debentures, notes or other similar 6 instruments of any Borrower or KMC Holdings, (b) all obligations to pay the deferred purchase price of property or services of any Borrower or KMC Holdings (exclusive of rent for real property under leases that would not be capitalized in accordance with GAAP), including, but not limited to, all obligations under noncompetition agreements, except trade payables arising in the ordinary course of business not more than ninety (90) days past due, (c) all obligations of any Borrower or KMC Holdings as lessee under capital leases (exclusive of the interest component thereof), (d) all Debt of any other Person secured by a Lien on any asset of any such Borrower or KMC Holdings, (e) all guaranty obligations of any Borrower or KMC Holdings, (f) all obligations, contingent or otherwise, of any Borrower or KMC Holdings relative to the face amount of letters of credit, whether or not drawn, and banker's acceptances issued for the account of any Borrower or KMC Holdings, (g) all obligations to redeem, repurchase, exchange, defease or otherwise make payments in respect of capital stock or other securities of any Borrower or KMC Holdings at any time prior to the third annual anniversary of the Term Loan Termination Date, and (h) all termination payments which would be due and payable by any Borrower or KMC Holdings pursuant to any hedging agreement. "Consolidated Debt" shall not include any intercompany Debt between the Borrowers or between any Borrower and KMC Holdings. "CONTAMINANT" shall mean any pollutant, hazardous substance, toxic substance, hazardous waste, special waste, petroleum or petroleum derived substance or waste, or any constituent of any such substance or waste. "CONTRIBUTED CAPITAL" shall mean, with respect to the Borrowers, at any date of determination, all contributed capital to such Borrowers including all funded equity and all Qualified Intercompany Loans. "CONTRIBUTION AGREEMENT" shall mean the Contribution Agreement among the Borrowers (other than KMC III, Leasing III, Telecom.com and Services) substantially in the form of EXHIBIT Q, which was executed and delivered in connection with the Existing Agreement, as amended to add KMC III, Leasing III, Telecom.com and Services as parties thereto pursuant to the General Reaffirmation. "COUNSEL" shall mean Sidley & Austin or such successor counsel selected by the Collateral Agent. "CREDIT ADVANCE" shall mean a Term B Loan made to refinance a trade payable owing by any of the Borrowers to Lucent under a Lucent Purchase Agreement. "CREDIT SUPPORT" shall have the meaning given to such term in SECTION 2.10. "DEBT" shall mean, with respect to any Person, (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instruments, (iii) obligations which have been incurred in connection with the acquisition of property or services (including, without limitation, obligations to pay the deferred purchase price of property or services), excluding trade payables and accrued expenses incurred in the ordinary course of business, (iv) obligations as lessee under leases which shall have been or 7 should be, in accordance with GAAP, recorded as capital or operating leases, (v) all Guarantees of such Person, including without limitation, all debt of any other Person secured by a Lien on property of such Person, (vi) all reimbursement obligations, contingent or otherwise, with respect to letters of credit or banker's acceptances issued for the account of any Borrower, and (vii) all indebtedness, obligations or other liabilities in respect of any Interest Rate Agreement, PROVIDED that Debt shall not include any liability for Federal, state, local or other taxes, and PROVIDED, FURTHER, that the amount outstanding at any time of any Debt issued with original issue discount is the principal amount of such Debt less the remaining unamortized portion of the original issue discount of such Debt at such time as determined in conformity with GAAP, and that with respect to any high-yield Debt, the amount thereof shall not include fees incurred in raising such Debt or overfunded amounts set aside solely to pay interest. Notwithstanding any other provision of the foregoing definition, any trade payable arising from the purchase of goods or materials or for services obtained in the ordinary course of business shall not be deemed to be "Debt" of any Borrower for purposes of this definition. Furthermore, guarantees of (or obligations with respect to letters of credit supporting) Debt otherwise included in the determination of such amount shall not be included. "DEFAULT" shall mean any event which but for the passage of time or giving of notice would constitute an Event of Default. "DOCUMENTATION AGENT" shall mean General Electric Capital Corporation. "DOLLARS" or "$" shall mean lawful money of the United States of America. "EASEMENTS" shall have the meaning given to such term in SECTION 3.20 hereof. "EBITDA" shall mean, with respect to any Person, for any period, an amount equal to (i) Net Income PLUS (ii) the sum of the following, to the extent deducted in determining Net Income: (A) income and franchise taxes, (B) interest expense, (C) amortization, depreciation and other non-cash charges, MINUS (iii) the sum of interest income plus extraordinary gains, as determined in accordance with GAAP as calculated at the end of such period. "ELIGIBLE FRONTING ASSIGNEE" shall mean (a) Lucent or any Affiliate of Lucent, (b) any commercial bank or financial institution (including any credit corporation) that either (i) has total assets in excess of $1,000,000,000 and either (x) has a combined capital and surplus and undivided profits in excess of $250,000,000 or (y) has long-term indebtedness rated "BBB+" or better by Standard & Poor's Ratings Service or "Baa1" or better by Moody's Investors Services, Inc., or (ii) has an Affiliate that satisfies the criteria described in the foregoing clause (i), or (c) any fund that is regularly engaged in the making, purchasing or investing in loans or securities that is controlled by an institution described in clause (b) above, and in each case, Lucent, as assignor, and such Person described in clause (a), (b) or (c) above, as assignee, complies with the provisions of SECTION 11.08(C) below. "ENVIRONMENTAL LAWS" shall mean all federal, state and local laws, rules, regulations, ordinances, programs, permits, guidance, orders and consent decrees or other binding determination of any Governmental Authority relating to 8 protection of the environment, the handling, disposal or Release of Contaminants and occupational safety and health. Such laws and regulations include but are not limited to the Resource Conservation and Recovery Act, 33 U.S.C. ss. 6901 ET SEQ., as amended; the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. ss. 9601 ET SEQ., as amended; the Toxic Substances Control Act, 15 U.S.C. ss. 2601 ET SEQ., as amended; the Clean Water Act, 33 U.S.C. ss. 1251 ET SEQ., as amended; the Clean Air Act, 42 U.S.C. ss. 7401 ET SEQ., as amended; state and federal environmental lien and environmental cleanup programs; the Occupational Safety and Health Act, 29 U.S.C. ss. 651 ET SEQ.; and U.S. Department of Transportation regulations related to the transportation of hazardous materials, each as from time to time hereafter in effect. "EQUITY AFFILIATE" shall mean, as applied to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "EQUITY INTEREST" shall mean, with respect to any Person, any and all shares or other equivalents (however designated) of capital stock, membership units, partnership interests or any other participation right or other interest in the nature of an equity interest in such Person or any option, warrant or other security convertible into any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" shall mean (i) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the IRC) as any Borrower, (ii) any partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the IRC) with any Borrower and (iii) any member of the same affiliated service group (within the meaning of Section 414(m) of the IRC) as any Borrower, any corporation described in CLAUSE (i) above or any partnership or trade or business described in CLAUSE (ii) above. "EUROCURRENCY LIABILITIES" shall have the meaning assigned to that term in Regulation D of the Federal Reserve Board, as in effect from time to time. "EVENT OF DEFAULT" shall have the meaning given to such term in ARTICLE IX hereof. "EVENT OF LOSS" shall mean, with respect to any item of Collateral, the actual or constructive loss of such item of Collateral or the use thereof, due to theft, destruction, damage beyond repair or damage from any reason whatsoever which is not reimbursable by insurance, to an extent which makes repair uneconomical, or rendition thereof unfit for normal use, or the condemnation, confiscation or seizure of, or requisition of title to or use of, 9 such item of Collateral by any Governmental Authority or any other Person, acting under or deemed to be acting under color of any Governmental Authority. "EXCESS OPERATING CASH FLOW" shall mean for any fiscal quarter, Net Income of the Borrowers plus non-cash interest expense, depreciation and amortization and any other non-cash items of the Borrowers, minus scheduled principal payments of the Borrowers to Lenders, lease payments and capital expenditures of the Borrowers, plus or minus changes in working capital of the Borrowers, as appropriate. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "EXCLUDED LETTERS OF CREDIT" shall have the meaning ascribed to such term in SECTION 6.13(viii). "EXCLUDED SUBSIDIARY" shall mean (a) any Subsidiary of KMC Holdings which is neither a Borrower under this Agreement nor a Person which directly or indirectly beneficially owns Equity Interests in any Borrower, PROVIDED that (i) at the time such other Subsidiary was created or acquired, no Default or Event of Default shall have occurred and be continuing before or after giving effect to the creation or acquisition of such Subsidiary, and (ii) no portion of the Required Contributions, the proceeds of KMC's 12 1/2 % Senior Discount Notes due 2008, the proceeds of KMC's 13 1/2 % Senior Notes due 2009, the proceeds of the Equity Interests of KMC Holdings issued on or prior to the Closing Date or the Revolving Loan Commitment Amount shall have been or shall be used to fund the acquisition or operations of such Subsidiary, and KMC Holdings has external sources of funding (other than the Required Contributions and the Revolving Loan Commitment Amount) to finance the acquisition and operations of such Subsidiary, (b) KMC Telecom Financing, Inc., a Delaware corporation, (c) KMC Financial Services LLC, a Delaware limited liability company, or (d) any other Subsidiary of KMC Holdings which KMC Holdings or any Borrower requests the Lenders to designate as such, and which designation is agreed to by the Required Lenders. "EXISTING STOCKHOLDERS" shall mean Harold N. Kamine, his Equity Affiliates, Nassau Capital Partners L.P., NAS Partners I L.L.C. or their respective successors, and their Equity Affiliates. "FCC" shall mean the Federal Communications Commission or any successor commission or agency of the United States of America having jurisdiction over any Borrower or any System. "FEDERAL FUNDS EFFECTIVE RATE" shall mean, for any period, a fluctuating interest rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or if such day is not a Business Day, for the preceding Business Day) by the Federal Reserve Bank of New York in the Composite Closing Quotations for U.S. Government Securities; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations at approximately 10:30 a.m. (New York time) for such day on such transactions 10 received by the Reference Bank from three federal funds brokers of recognized standing selected by it. "FEDERAL RESERVE BOARD" shall mean the Board of Governors of the Federal Reserve System or any successor thereto. "FEE LETTERS" shall mean (i) that certain letter agreement dated September 25, 1998 among the Borrowers, KMC Holdings, the Collateral Agent, Capital Syndications Corporation ("CSC"), General Electric Capital Corporation ("GECC"), GECC Capital Market Groups, Inc. ("GECG"), the Agent, First Union Capital Markets, a Division of Wheat First Securities, Inc. ("FUCM") and Canadian Imperial Bank of Commerce ("CIBC"), (ii) that certain letter agreement dated September 25, 1998 among the Borrowers, KMC Holdings, the Collateral Agent, CSC, GECC, GECG, the Agent and FUCM, (iii) that certain letter agreement dated December 22, 1998 among the Borrowers, KMC Holdings, the Collateral Agent, CSC, GECC, GECG, the Agent, FUCM and CIBC, and (iv) that certain letter agreement dated February 14, 2000 between the Borrowers and Lucent. "FINANCIALS" shall have the meaning given to such term in SECTION 3.03. "FIXED CHARGES" shall mean with respect to any period for the Borrowers on a combined basis, the sum of the following amounts calculated at the end of such period with respect to such period without duplication and in accordance with GAAP: (i) the product of two multiplied by scheduled principal and interest payments with respect to Debt for the six month period then ending, (ii) capital expenditures for the four quarter period then ending, (iii) the product of two multiplied by income tax payments for the six month period then ending, and (iv) the product of two multiplied by cash dividend payments for the six month period then ending. "FIXED CHARGE COVERAGE RATIO" shall have the meaning assigned to such term in SECTION 7.02(c). "FRONTING COMMITMENT" shall mean a portion of the Term B Loan Commitment Amount that is assigned by Lucent pursuant to an Assignment Agreement designating the assigned portion of the Term B Loan Commitment Amount as a "Fronting Commitment". "FUNB" shall mean First Union National Bank, a national banking association. "GENERAL REAFFIRMATION" shall mean the General Reaffirmation and Modification Agreement in the form of EXHIBIT T hereto. "GOVERNMENTAL APPROVAL" shall mean, with respect to any Borrower, any license, permit, franchise or certificate of public convenience and necessity issued to any Borrower by the FCC, any PUC or any other Governmental Authority in connection with any System. 11 "GOVERNMENTAL AUTHORITY" shall mean any federal, state or local governmental authority or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "GUARANTEE" shall mean any obligation, contingent or otherwise, of any Person guaranteeing any indebtedness of any other Person (the "Primary Obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such indebtedness; (ii) to purchase property, securities or services for the purpose of assuring the owner of such indebtedness of the payment of such indebtedness; or (iii) to maintain working capital, equity capital or other financial statement condition of the Primary Obligor so as to enable the Primary Obligor to pay such indebtedness. "HOLDINGS III" shall mean KMC Telecom III Holdings, Inc., a Delaware corporation. "INDENTURES" shall mean (i) that certain Indenture dated as of January 29, 1998 between KMC Holdings, as Issuer and The Chase Manhattan Bank, as Trustee, relating to KMC Holdings' 12 1/2 percent Senior Discount Notes due 2008, together with the First Supplemental Indenture relating thereto dated as of May 24, 1999 and (ii) that certain Indenture dated as of May 24, 1999 between KMC Holdings, as Issuer and The Chase Manhattan Bank, as Trustee, relating to KMC Holdings' 13 1/2 percent Senior Notes due 2009. "INTELLECTUAL PROPERTY DOCUMENTS" shall mean (i) the Trademark Security Agreement, in the form of EXHIBIT S attached hereto, executed by the Borrowers (other than KMC III, Leasing III, Telecom.com and Services) in favor of the Collateral Agent for the benefit of the Agents and the Lenders, as amended, restated or otherwise modified from time to time and (ii) any other trademark, patent or copyright security agreement executed pursuant to SECTION 5.16 by any Borrower. "INTEREST EXPENSE" shall mean for any period, the total interest expense (including, without limitation, interest expense attributable to capital leases) determined on a combined basis, without duplication, for the Borrowers in accordance with GAAP. "INTEREST PERIOD" shall mean, with respect to each LIBOR Loan, the interest period applicable to such LIBOR Loan as set forth in the applicable Notice of Borrowing or Notice of Conversion or Continuation. "INTEREST RATE AGREEMENT" shall mean for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect the party indicated therein against fluctuations in interest rates. "INVESTMENT" shall mean, as applied to any Person, any direct or indirect purchase or other acquisition by that Person of securities, or of a beneficial interest in securities, of any other Person, and any direct or indirect loan, advance (other than deposits with financial institutions 12 available for withdrawal on demand, prepaid expenses, advances to employees, officers and directors and similar items, each made or incurred in the ordinary course of business), or capital contribution by that Person to any other Person, including all Debt of such other Person to that Person, but excluding accounts owed by that other Person in the ordinary course of business. Investments shall exclude (i) extensions of trade credit on commercially reasonable terms in accordance with normal trade practices and (ii) the repurchase of securities of any Person by such Person. The amount of any Investment shall be determined in conformity with GAAP. "IRC" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder, and any successor statutes or rules and regulations. "IRS" shall mean the Internal Revenue Service or any successor agency. "KMC HOLDINGS" shall mean KMC Telecom Holdings, Inc., a Delaware corporation. "KMC HOLDINGS GUARANTY" shall mean that certain unlimited guaranty of KMC Holdings in the form of EXHIBIT G hereto and executed and delivered by KMC Holdings in connection with the Existing Agreement, as amended by the General Reaffirmation. "KMC TELECOM.COM" shall mean KMC Telecom.com, a Delaware corporation. "LENDING OFFICE" shall mean, with respect to a Lender or Agent, any office, branch, subsidiary or affiliate of such Lender or the Agent. "LETTER OF CREDIT" shall mean a letter of credit issued or caused to be issued for the account of a Borrower or with respect to which Credit Support is provided, in any case pursuant to SECTION 2.10. "LETTER OF CREDIT OBLIGATIONS" shall mean without duplication, the sum of the aggregate maximum undrawn face amount of all outstanding Letters of Credit and unpaid reimbursement obligations with respect to all Letters of Credit. "LIBO RATE" shall mean, for any Interest Period with respect to LIBOR Loans comprising part of the same borrowing, the rate of interest per annum equal to the per annum rate of interest displayed on the Dow Jones Market Screen Page 3750, as being the one-month, two-month, three-month or six-month, as applicable, reserve adjusted "London Interbank Offered Rate", provided, however, that if such rate is not displayed or published, then the rate of interest per annum (rounded upward to the nearest whole multiple of 1/16 of 1.0%, if such rate is not such a multiple) determined by the Agent as follows: LIBO Rate = BASE LIBO RATE ------------------------------- 1.00 - LIBOR Reserve Percentage 13 "LIBOR INTEREST PAYMENT DATE" shall mean, with respect to a LIBOR Loan, the last day of each Interest Period applicable to such Loan, and, if such Interest Period has a duration of more than three months, on each day which occurs during such Interest Period every three months from the first day of such Interest Period. "LIBOR INTEREST RATE DETERMINATION DATE" shall mean each date of calculating the LIBO Rate for purposes of determining the interest rate with respect to an Interest Period. The LIBOR Interest Rate Determination Date for any LIBOR Loan shall be the second Business Day prior to the first day of the related Interest Period for such LIBOR Loan. "LIBOR LOAN" shall mean a Loan, or portion thereof, during any period in which it bears interest at a rate based upon the LIBO Rate. "LIBOR RESERVE PERCENTAGE" shall mean for any day for any Interest Period the maximum reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1.0%) in effect on such day (whether or not applicable to any Lender) for United States domestic banks under regulations issued from time to time by the Federal Reserve Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency Liabilities having a term comparable to such Interest Period. "LIBOR REVOLVING LOAN" shall mean a Revolving Loan during any period for which it is a LIBOR Loan. "LIBOR TERM A LOAN" shall mean any portion of the Term A Loans during any period for which such portion is a LIBOR Loan. "LIBOR TERM B LOAN" shall mean any portion of the Term B Loans during any period for which such portion is a LIBOR Loan. "LIBOR TERM LOAN" shall mean a LIBOR Term A Loan or a LIBOR Term B Loan. "LIEN" shall mean any mortgage, pledge, deed of trust, assignment, lien, charge, encumbrance or security interest of any kind, or the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement, but excluding easements, rights of way or similar encumbrances on real property which are in the ordinary course and which do not materially affect the value, use and insurability of title of such real property. "LOAN" shall mean a Revolving Loan or a Term Loan. "LOAN DOCUMENTS" shall mean this Agreement, the Existing Agreement, each "Loan Document" under and as defined in the Existing Agreement, the Collateral Assignment of Leases, the Collateral Assignment of Licenses, the Mortgages, the Notes, the Pledge Agreements, the KMC Holdings Guaranty, the Intellectual Property Documents, the Fee Letters, all other agreements, instruments and documents, including, without limitation, security agreements, loan agreements, notes, guarantees, mortgages, deeds of trust, subordination agreements, pledges, powers of attorney, consents, assignments, contracts, notices, leases, financing statements, Interest Rate Agreements between any 14 Borrower and the Agent, the Collateral Agent, or the Lenders and all other written matter whether heretofore, now, or hereafter executed by or on behalf of any Borrower or any other Person in connection with the transactions contemplated hereby and delivered to the Agent, the Collateral Agent or the Lenders, together with all agreements and documents referred to therein or contemplated thereby; PROVIDED, HOWEVER, that the documents executed in connection with the purchase by Newcourt Communications Finance Corporation (formerly known as AT&T Credit Corporation) or any Lender of Equity Interests in KMC or KMC Holdings shall not constitute Loan Documents. "LUCENT" shall mean Lucent Technologies Inc. "LUCENT LOAN AGREEMENT" shall have the meaning given to such term in Recital B. "LUCENT PURCHASE AGREEMENT" shall mean an agreement between any Borrower and Lucent for the purchase of Telecommunications Equipment, on terms and conditions satisfactory to the Agents. "MANAGEMENT AGREEMENT" shall mean that certain Management Agreement dated as of December 18, 1998 among KMC Holdings, the Borrowers, KMC Telecom Financing, Inc., a Delaware corporation, and KMC Financial Services, LLC, a Delaware limited liability company, as amended by Amendment Nos. 1, 2 and 3 thereto. "MATERIAL ADVERSE EFFECT" shall mean, with respect to any Person, a material adverse effect upon the condition (financial or otherwise), operations or properties of such Person, or upon the ability of such Person to perform under the Loan Documents. "MAXIMUM RATE" shall have the meaning given to such term in SECTION 2.13 hereof. "MILESTONE PLAN" shall mean the 39-city Milestone Plan of the Borrowers attached as EXHIBIT A hereto, as such Milestone Plan may be amended from time to time with the prior written consent of the Requisite Lenders. "MORTGAGES" shall mean mortgages or deeds of trust in favor of the Collateral Agent, with respect to any Borrower's (i) owned Real Property and (ii) other interests in those items of real property and Easements, as specified by the Collateral Agent, which mortgages and deeds of trust shall be in form and substance satisfactory to the Collateral Agent. "MULTIEMPLOYER PLAN" shall mean a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA which is, or within the immediately preceding six (6) years was, contributed to by any Borrower or an ERISA Affiliate. "NET INCOME" shall mean, with respect to any Person for any period, the net income (loss) of such Person determined in accordance with GAAP. 15 "NOTE" shall mean any Revolving Loan Note, any Term A Loan Note or any Term B Loan Note. "NOTICE OF BORROWING" shall mean a notice substantially in the form of EXHIBIT H-1 attached hereto. "NOTICE OF CONVERSION/CONTINUATION" shall have the meaning given to such term in SECTION 2.06(b). "OBLIGATIONS" shall mean all the obligations of any Borrower now or hereafter existing under this Agreement or any other Loan Document to which any Borrower is a party, whether for principal, interest, fees, expenses, reimbursement, indemnification or otherwise. Obligations shall include, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements, and paralegals' fees which accrue after the commencement of any case or proceeding in bankruptcy after the insolvency of, or for the reorganization of any Borrower, whether or not allowed in such proceeding, and Obligations shall not include any reimbursement obligations with respect to Excluded Letters of Credit. "PAYMENT ACCOUNT" shall mean the Agent's account at First Union National Bank, ABA No. 053000219, Account # 5000000016905, KMC reference: Payment Account. "PAYMENT DATE" shall mean the first day of January, April, July and October in each calendar year, but if any such date is not a Business Day, the next succeeding Business Day, commencing April 3, 2000. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "PERIODIC REPORTING CERTIFICATE" shall mean a periodic reporting certificate in the form of EXHIBIT F attached hereto. "PERMITTED ACQUISITION" shall have the meaning set forth in SECTION 6.08 hereof. "PERMITTED LIENS" shall have the meaning set forth in SECTION 6.01 hereof. "PERSON" shall mean any natural person, corporation, division of a corporation, business trust, joint venture, association, company, partnership, unincorporated organization or other legal entity, or a government or any agency or political subdivision thereof. "PLAN" shall mean any employee benefit plan as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) in respect of which any Borrower or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA. "PLEDGE AGREEMENT" shall mean a pledge agreement substantially in the form of the pledge agreements executed and delivered pursuant to the Existing Agreement, copies of which are attached as EXHIBIT L hereto. 16 "PREPAYMENT PREMIUM" shall mean (A) for the Revolving Loans, (i) with respect to the period commencing on the Closing Date and ending on February 1, 2001, one and one-half percent (1.5%) of the amount prepaid, (ii) with respect to the period commencing thereafter and ending on February 1, 2002, one-half percent (0.5%) of the amount prepaid, and (iii) at all times thereafter, zero percent (0%), and (B) for the Term A Loans and the Term B Loans, (i) with respect to the period commencing on the Closing Date and ending on February 1, 2001, two percent (2.0%) of the amount prepaid, (ii) with respect to the period commencing thereafter and ending on February 1, 2002, one percent (1.0%) of the amount prepaid, and (iii) at all times thereafter, zero percent (0%). "PRINCIPAL PAYMENTS" shall mean, for any period, total required Debt amortization (including, without limitation, the principal payments attributable to capital leases) determined on a combined basis, without duplication, for the Borrowers in accordance with GAAP. "PRO RATA SHARE" shall mean with respect to all matters relating to any Lender (a) with respect to the Revolving Loans and the Letters of Credit, the percentage obtained by dividing (1) at any time on or prior to the Revolving Credit Commitment Termination Date, the Revolving Loan Commitment Amount of such Lender by the aggregate Revolving Loan Commitment Amount of all Lenders, and (2) at any time after the Revolving Credit Commitment Termination Date, the aggregate outstanding principal balance of the sum of the Revolving Loans held by that Lender plus the Letters of Credit Obligations incurred by such Lender by the sum of the aggregate outstanding principal balance of the Revolving Loans held by all Lenders plus the aggregate Letter of Credit Obligations incurred by all the Lenders, (b) with respect to the Term A Loans, the percentage obtained by dividing the aggregate outstanding principal balance of the Term A Loans held by that Lender, by the aggregate outstanding principal balance of the Term A Loans held by all Lenders, and (c) with respect to the Term B Loans, the percentage obtained by dividing (1) at any time on or prior to the Term B Loan Commitment Termination Date, the Term B Loan Commitment Amount of that Lender by the Term B Loan Commitment Amount of all Lenders, and (2) at any time after the Term B Loan Commitment Termination Date, the aggregate outstanding principal balance of the Term B Loans held by that Lender, by the aggregate outstanding principal balance of the Term B Loans held by all Lenders. "PUC" shall mean any state Governmental Authority having utility or telecommunications regulatory authority over any Borrower or any System. "PURCHASE DEBT" shall have the meaning given to such term in SECTION 6.13(iv). "QUALIFIED INTERCOMPANY LOAN" shall mean a loan to a Borrower from KMC Holdings, which loan is expressly subordinated to the Obligations on terms and conditions satisfactory to the Agents, has a maturity date occurring on or after the third annual anniversary of the Term Loan Termination Date, and requires no cash payment of principal or interest prior to the scheduled maturity date of such loan. "REAL PROPERTY" shall have the meaning given to such term in SECTION 3.20 hereof. "REFERENCE BANK" shall mean First Union National Bank. 17 "REGISTER" shall have the meaning given to such term in SECTION 11.08(C)(iii). "RELEASE" shall mean any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the environment or into or out of any property, including the movement of Contaminants through or in the air, soil, surface water, groundwater or property. "REMEDIAL ACTION" shall mean actions required to (1) clean up, remove, treat or in any other way address Contaminants in the environment; (2) prevent the Release or threat of Release or prevent or minimize the further Release of Contaminants so they do not migrate or endanger or threaten to endanger public health or welfare or the environment; or (3) perform preremedial studies and investigations and postremedial monitoring and care. "REPORTABLE EVENT" shall mean any reportable event as defined in Section 4043 of ERISA unless the reporting requirement with respect to such reportable event has been waived by the PBGC or other appropriate Governmental Authority. "REQUIRED CONTRIBUTION" shall mean cash capital contributions to the Borrowers from KMC Holdings in such amount as is necessary to fully fund the Milestone Plan, but in any event at least $185,000,000. "REQUISITE LENDERS" shall mean (1) as long as one Lender holds thirty-three and one-third percent (33 1/3%) or more of the Term B Loan Commitment Amounts, Lenders who collectively hold at least seventy five percent (75%) of the sum of the following amounts: (i) the Aggregate Revolving Loan Commitment Amounts until such commitments expire or terminate, and thereafter, the aggregate outstanding balance of the Revolving Loans; (ii) the aggregate outstanding balance of the Term A Loans; and (iii) the aggregate Term B Loan Commitment Amounts until such commitments expire, terminate or are fully drawn upon, and thereafter, the aggregate outstanding balance of the Term B Loans; and (2) thereafter, Lenders who hold at least sixty-six and two-thirds percent (66 2/3%) of the sum of the amounts listed above. "REQUISITE REVOLVING LENDERS" shall mean (a) Lenders having at least sixty-six and two-thirds percent (66 2/3%) of the aggregate Revolving Loan Commitment Amount of all Lenders, or (b) if the Revolving Loan Commitment has been terminated, at least sixty-six and two-thirds percent (66 2/3%) of the aggregate outstanding amount of the sum of all Revolving Loans plus Letter of Credit Obligations incurred by all the Lenders. "REVOLVING CREDIT COMMITMENT TERMINATION DATE" shall mean April 1, 2007. "REVOLVING LENDERS" shall mean, as of any date of determination on or prior to the Revolving Credit Commitment Termination Date, Lenders having a Revolving Loan Commitment Amount, and thereafter Lenders having outstanding Revolving Loans or Letter of Credit Obligations. "REVOLVING LOAN" shall mean any loan made to the Borrower pursuant to the provisions of SECTION 2.01(b) below. 18 "REVOLVING LOAN COMMITMENT AMOUNT" shall mean (a) as to any Revolving Lender, the aggregate commitment of such Revolving Lender to make Revolving Loans and/or incur Letter of Credit Obligations as set forth opposite such Revolving Lender's name on ANNEX A to this Agreement or in the most recent Assignment Agreement executed by such Revolving Lender and (b) as to all Revolving Lenders, the aggregate commitment of all Revolving Lenders to make Revolving Loans and/or incur Letter of Credit Obligations, which aggregate commitment shall be One Hundred Seventy-Five Million Dollars ($175,000,000) on the Closing Date, as such amount may be adjusted from time to time in accordance with this Agreement. "REVOLVING LOAN NOTE" shall mean a promissory note of the Borrower delivered under the Existing Agreement and substantially in the form of EXHIBIT E-1 attached hereto. "SOLVENT" shall mean, at any time of determination, with respect to any Person: (i) the assets of such Person, at a fair valuation, are in excess of the total amount of its debts (including, without limitation, contingent liabilities); and (ii) the present fair saleable value of its assets is greater than its probable liability on its existing debts as such debts become absolute and matured; and (iii) it is then able and expects to be able to pay its debts (including, without limitation, contingent debts and other commitments) as they mature; and (iv) it has capital sufficient to carry on its business as conducted. For purposes of determining whether a Person is Solvent, the amount of any contingent liability shall be computed as the amount that, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or mature liability. "SUBSIDIARY" shall mean, with respect to any Person, any corporation, partnership, joint venture, association or other business entity, whether now existing or hereafter organized or acquired, (i) in the case of a corporation, of which more than 50% of the total voting power of the Equity Interests entitled (without regard to the occurrence of any contingency) to vote in the election of directors, officers or trustees thereof is held by such Person or any of its Subsidiaries; or (ii) in the case of a partnership, joint venture, association or other business entity, with respect to which such Person or any of its Subsidiaries has the power to direct or cause the direction of the management and policies of such entity by contract or otherwise or if in accordance with GAAP such entity is consolidated with the such Person for financial statement purposes. "SUPPORTING LETTER OF CREDIT" shall have the meaning given to such in SECTION 2.10(j). "SWITCH EQUIPMENT" shall mean any Lucent 5-ESS telecommunications switch or other telecommunications/data switch for the provision of CLEC telephony service, data transport, internet access and other related services. 19 "SYNDICATION AGENT" shall mean Canadian Imperial Bank of Commerce. "SYSTEM" shall mean each telephone, telecommunications or information system (including, without limitation, any voice, video transmission, data or Internet services) and any related, ancillary or complementary services, as described in the Milestone Plan, and all replacements, enhancements or additions thereto. "TAX SHARING AGREEMENT" shall mean that certain Tax Allocation Agreement dated as of December 18, 1998 among KMC Holdings, the Borrowers, KMC Telecom Financing, Inc., a Delaware corporation, and KMC Financial Services, LLC, a Delaware limited liability company, as amended by Amendment Nos. 1, 2 and 3 thereto. "TAXES" shall mean any and all license, documentation, recording and registration fees, and all taxes, including, without limitation, income (other than net income taxes, franchise taxes and capital taxes imposed on the Lenders, the Agent or the Collateral Agent other than by withholding), gross receipts, sales, value-added, use, excise, personal property (tangible and intangible), real estate and stamp, documentary, transfer or recording taxes, levies, imposts, deductions, duties, assessments, fees, charges, and withholdings of any nature whatsoever, whether or not presently in existence, together with any penalties, fines, additions to tax, or interest thereon, imposed by any taxing authority or other Governmental Authority. "TELECOMMUNICATIONS EQUIPMENT" shall mean fiber optic cable, Switch Equipment, transmission equipment and other ancillary hardware necessary for the installation and operation of a switch room or central office and co-location with other telecommunications providers that will enable a Borrower to offer CLEC telephony, data transport, internet access and other related state-of-the-art telecommunications services, as well as all software associated with the network operating center and back office systems (including, without limitation, billing systems, operations systems and support, customer service and data services) and other related software and hardware products integral to developing and operating viable CLEC telephony, data transport, internet access and related state of the art telecommunications businesses, together with all related support, construction and installation costs associated with an operational system, provided that such costs are capitalized in accordance with GAAP. "TERM A LENDERS" shall mean those Lenders who have made Term A Loans. "TERM A LOAN" shall mean any loan made to the Borrowers pursuant to SECTION 2.01(a) of the Existing Agreement and which under the Existing Agreement was characterized as a "Term Loan". "TERM A LOAN COMMITMENT AMOUNT" shall mean (a) as to any Term A Lender, the commitment of such Term A Lender to make a Term A Loan under the Existing Agreement, which commitment has been fully drawn upon, as set forth opposite such Term A Lender's name on Annex A to this Agreement and (b) as to all Term A Lenders, the aggregate commitment of all Term A Lenders to make Term A Loans under the Existing Agreement, which commitment has been fully drawn upon. 20 "TERM A LOAN NOTE" shall mean a promissory note of a Borrower delivered under the Existing Agreement and substantially in the form of EXHIBIT E-2 attached hereto. "TERM A LOAN TERMINATION DATE" shall mean July 1, 2007. "TERM B LENDERS" shall mean those Lenders having Term B Loan Commitment Amounts or who have made Term B Loans. "TERM B LOAN" shall mean any loan made to the Borrowers pursuant to SECTION 2.01(a) below. "TERM B LOAN COMMITMENT AMOUNT" shall mean (a) as to any Term B Lender, the commitment of such Term B Lender to make Term B Loans as set forth opposite such Term B Lender's name on ANNEX A to this Agreement or in the most recent Assignment Agreement executed by such Term B Lender and (b) as to all Term B Lenders, the aggregate commitment of all Term B Lenders to make Term B Loans, which aggregate commitment shall be Four Hundred Fifty Million Dollars ($450,000,000) on the Closing Date; PROVIDED, HOWEVER, that until such time as both the Required Contribution has been made and the ratio of Total Debt to Contributed Capital becomes equal to or less than 1.0 to 1.0, the aggregate commitment of all Term B Lenders to make Term B Loans shall not exceed Three Hundred Fifty Million Dollars ($350,000,000) and the commitment of each Term B Lender shall be proportionately reduced from the amount set forth opposite such Term B Lender's name on ANNEX A to this Agreement or in the most recent Assignment Agreement executed by such Term B Lender. "TERM B LOAN COMMITMENT TERMINATION DATE" shall mean the second annual anniversary of the Closing Date. "TERM B LOAN NOTE" shall mean a promissory note of a Borrower substantially in the form of EXHIBIT E-3 attached hereto. "TERM B LOAN TERMINATION DATE" shall mean July 1, 2007. "TERM LOAN" shall mean a Term A Loan or a Term B Loan. "TERMINATION EVENT" shall mean (i) a Reportable Event with respect to a Benefit Plan; (ii) the withdrawal of any Borrower or any ERISA Affiliate from a Benefit Plan during a plan year in which any Borrower or such ERISA Affiliate was a "substantial employer" as defined in Section 4001(a)(2) of ERISA; (iii) the imposition of an obligation on any Borrower or any ERISA Affiliate under Section 4041 of ERISA to provide affected parties written notice of intent to terminate a Benefit Plan in a distress termination described in Section 4041(c) of ERISA; (iv) the institution by the PBGC of proceedings to terminate a Benefit Plan; (v) any event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Benefit Plan; or (vi) the partial or complete withdrawal of any Borrower or any ERISA Affiliate from a Multiemployer Plan. "THIRD PARTY INTERACTIVES" shall mean all Persons with whom any Borrower exchanges data electronically in the ordinary course of business, 21 including without limitation, customers, suppliers, third-party vendors, subcontractors, processors-converters, shippers and warehousemen. "TOTAL DEBT" shall mean, with respect to the Borrowers, at any date, the sum of the following determined on a combined basis, without duplication: (a) all liabilities, obligations and indebtedness for borrowed money, including, but not limited to, obligations evidenced by bonds, debentures, notes or other similar instruments, (b) all obligations to pay the deferred purchase price of property or services (exclusive of any rent for real property pursuant to a lease that would not be capitalized in accordance with GAAP), including, but not limited to, all obligations under non-competition agreements, except trade payables arising in the ordinary course of business not more than ninety (90) days past due, (c) all obligations as lessee under capital leases (exclusive of the interest component thereof), (d) all Debt of any other Person secured by a Lien on any asset of any Borrower, (e) all guaranty obligations, (f) all obligations, contingent or otherwise, relative to the face amount of letters of credit, whether or not drawn and banker's acceptances issued for the account of any Borrower, (g) all obligations to redeem, repurchase, exchange, defease or otherwise make payments in respect of capital stock or other securities at any time prior to the third annual anniversary of the Term A Loan Termination Date, and (h) all termination payments which would be due and payable by any Borrower thereof pursuant to any Interest Rate Agreement or hedging agreement. "Total Debt" shall not include any intercompany Debt between the Borrowers or between any Borrower and KMC Holdings. "TOTAL LEVERAGE RATIO" shall mean the ratio of (i) Total Debt as of the last day of the most recently ended fiscal quarter, to (ii) the product of (A) two multiplied by (B) EBITDA of the Borrowers on a combined basis, for the most recently ended two fiscal quarters. "UNUSED LETTER OF CREDIT SUBFACILITY" shall mean an amount equal to the lesser of (i) $10,000,000 minus the Letter of Credit Obligations, and (ii) the undrawn portion of the Revolving Loan Commitment Amount of all Lenders. "VOTING STOCK" shall mean securities of any class or classes of a corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors (or Persons performing similar functions). "YEAR 2000 CORRECTIVE ACTIONS" shall mean, as to each Borrower, all actions necessary to eliminate such Person's Year 2000 Problems, including, without limitation, computer code enhancements and revisions, upgrades and replacements of Year 2000 Date-Sensitive Systems/Components, and coordination of such enhancements, revisions, upgrades and replacements with Third Party Interactives. "YEAR 2000 CORRECTIVE PLAN" shall mean, with respect to each Borrower, a comprehensive plan to eliminate all of its Year 2000 Problems, including without limitations (i) computer code enhancements or revisions, (ii) upgrades or replacements of Year 2000 Date-Sensitive Systems/Components, (iii) test and validation procedures, (iv) an implementation time line and budget and (v) designation of specific employees who will be responsible for planning, coordinating and implementing each phase or subpart of the Year 2000 Corrective Plan. 22 "YEAR 2000 DATE-SENSITIVE SYSTEM/COMPONENT" shall mean, as to any Person, any system software, network software, applications software, database, computer file, embedded microchip, firmware or hardware that accepts, creates, manipulates, sorts, sequences, calculates, compares or outputs calendar-related data accurately; such systems and components shall include, without limitation, mainframe computers, file server/client system, computer workstations, routers, hubs, other network-related hardware, and other computer-related software, firmware or hardware and information processing and delivery systems of any kind and telecommunications systems and other communications processors, security systems, alarms, elevators and HVAC systems. "YEAR 2000 IMPLEMENTATION TESTING" shall mean, as to each Borrower, (i) the performance of test and validation procedures regarding Year 2000 Corrective Actions on a unit basis and a system wide basis, (ii) the performance of test and validation procedures regarding data exchanges among the Borrowers' Year 2000 Date-Sensitive Systems/Components and data exchanges with Third Party Interactives, and (iii) the design and implementation of additional Corrective Actions, the need for which has been demonstrated by test and validation procedures. "YEAR 2000 PROBLEMS" shall mean, with respect to each Borrower, limitations on the capacity or readiness of any such Borrower's Year 2000 Date-Sensitive Systems/Components to accurately accept, create, manipulate, sort, sequence, calculate, compare or output calendar date information with respect to calendar year 1999 or any subsequent calendar year beginning on or after January 1, 2000 (including leap year computations), including, without limitation, exchanges of information among Year 2000 Date-Sensitive Systems/Components of the Borrowers and exchanges of information among the Borrowers and Year 2000 Date-Sensitive Systems/Components of Third Party Interactives and functionality of peripheral interfaces, firmware and embedded microchips. SECTION 1.03. ACCOUNTING TERMS. Except as otherwise herein specifically provided, each accounting term used herein shall have the meaning given to it under generally accepted accounting principles ("GAAP") applied on a consistent basis. SECTION 1.04. OTHERS DEFINED IN NEW YORK UNIFORM COMMERCIAL CODE. All other terms contained in this Agreement (and which are not otherwise specifically defined herein) shall have the meanings provided by the Uniform Commercial Code of the State of New York (the "CODE") to the extent the same are used or defined therein. ARTICLE II LOANS AND LETTERS OF CREDIT SECTION 2.01. AGREEMENT TO LEND. (a) Each Term B Lender severally agrees, on the terms and conditions hereinafter set forth, to make on and after the Closing Date and until but not including the Term B Loan Commitment 23 Termination Date, one or more Term B Loans to the Borrowers in an amount not to exceed the Term B Loan Commitment Amount of such Term B Lender. (b) Each Revolving Lender severally agrees, on the terms and conditions hereinafter set forth, to make on and after the Closing Date and until but not including the Revolving Credit Commitment Termination Date, one or more Revolving Loans to the Borrowers in an amount not to exceed when combined with Revolving Loans that were made under the Existing Agreement and remain outstanding, the Revolving Loan Commitment Amount of such Revolving Lender less such Lender's Pro Rata Share of the Letter of Credit Obligations. (c) Term A Loans have been made to the Borrowers in the aggregate amount of $75,000,000 under the Existing Agreement and constitute the "Term Loans" as defined in the Existing Agreement. No additional Term A Loans shall be made to the Borrowers. (d) At any time that the Total Leverage Ratio is greater than 6:1 as determined by reference to the financial statements delivered pursuant to SECTION 5.06, the maximum amount of Revolving Loans that may be borrowed from all Revolving Lenders shall not exceed the Borrowing Base. (d) Term Loans which are repaid or prepaid may not be reborrowed. Revolving Loans which are repaid or prepaid may be reborrowed. SECTION 2.02. LOANS. (a) The proceeds of the Revolving Loans shall be used by the Borrowers to purchase Telecommunications Equipment, to pay transaction costs incurred in connection with the execution, delivery and performance of the Loan Documents, for financing Permitted Acquisitions and for working capital and other general corporate purposes, all as specified in the Notice of Borrowing and in accordance with the Milestone Plan; provided, however, that at any time that the Total Leverage Ratio is greater than 6:1 as determined by reference to the financial statements delivered pursuant to SECTION 5.06, proceeds of Revolving Loans may be used only to pay transaction costs incurred in connection with the execution and delivery of the Loan Documents, to purchase Telecommunications Equipment, and to finance Permitted Acquisitions. Subject to the provisions of SECTION 2.02(d), the proceeds of the Term B Loans shall be used by the Borrowers to (i) purchase Telecommunications Equipment pursuant to the Lucent Purchase Agreement, (ii) to purchase non-Lucent Telecommunications Equipment (such Term B Loans not to exceed an aggregate amount of $45,000,000), and (iii) to refinance the obligations of KMC III, Leasing III and Services under the Lucent Loan Agreement. Loans with respect to Telecommunications Equipment purchases may not be made to finance (i) soft costs (including installation, delivery and engineering costs) in excess of fifteen percent (15%) of the invoiced price for the related Switch Equipment or (ii) any support or installation costs associated with an operational system that would not be capitalized in accordance with GAAP. 24 (b) Each Base Rate Loan shall be in a minimum principal amount of $1,000,000 and increments of $250,000 in excess thereof. Each LIBOR Loan shall be in a minimum principal amount of $5,000,000 and increments of $1,000,000 in excess thereof. (c) In any calendar month not more than six (6) Revolving Loans may be requested, and no more than one Term B Loan may be requested. (d) The proceeds of any Term B Loan consisting of a Cash Advance shall be used exclusively to finance or reimburse invoices for Telecommunications Equipment purchased from Lucent by KMC, KMC II or KMC III during the period commencing on the date that is twelve months prior to the Closing Date and ending on the Term B Loan Termination Date; provided, that (i) the maximum principal amount of any Term B Loan consisting of a Cash Advance shall not exceed $100,000,000, (ii) the principal amount of all Term B Loans consisting of Cash Advances to reimburse invoices for Telecommunications Equipment purchased from Lucent during the twelve month period prior to the Closing Date ("Pre-Closing Invoices") shall not exceed $200,000,000 in the aggregate and (iii) the Borrowers may not use the proceeds of any Term B Loan consisting of a Cash Advance to reimburse Pre-Closing Invoices after the second anniversary of the Closing Date. SECTION 2.03. PROCEDURE FOR LOAN REQUEST AND BORROWING COMMITMENT. (a) A Borrower requesting a Loan shall deliver to each of the Agent and the Collateral Agent a Notice of Borrowing substantially in the form of EXHIBIT H-1 attached hereto on or before 11:00 a.m. (New York time) at least five (5) Business Days prior to the date on which such Loan is requested to be made if such Loan is requested to be a LIBOR Loan and at least two (2) Business Days prior to the date on which such Loan is requested to be made if such Loan is requested to be a Base Rate Loan, which notice, once given, shall be irrevocable; provided, however, that (i) only the Collateral Agent shall receive the attachments to the Notice of Borrowing, as outlined below, (ii) if the requested Loan is a Term B Loan consisting of a Cash Advance in excess of $50,000,000, the Notice of Borrowing shall be delivered as least seven (7) Business Days prior to the date on which such Loan is requested to be made, and (iii) the applicable Borrower(s) shall provide to Lucent simultaneously with the provision of the Notice of Borrowing to the Agent and the Collateral Agent a list of the invoices (including dollar amounts) to be financed or reimbursed with the proceeds of the requested Term B Loan. In the case of a Loan the proceeds of which will be used to purchase or reimburse any Borrower for Telecommunications Equipment (including any Telecommunications Equipment being purchased or reimbursed under the Lucent Purchase Agreement), the Notice of Borrowing delivered to the Collateral Agent will include a schedule supporting one hundred percent (100%) of Telecommunications Equipment requested to be funded. Such schedule will detail all invoices for equipment, third party labor, permits, other third party costs and all capitalized internal costs of the Borrowers with respect to such Telecommunications Equipment permitted under GAAP. All invoices over $25,000 will be attached to such schedule delivered to the Collateral Agent who shall review such invoices and verify that, when combined with the above described capitalized internal costs, such invoices will support at least seventy percent (70%) of the total requested funding. In addition, if the Telecommunications Equipment is being purchased or reimbursed under the Lucent Purchase Agreement, a certificate of delivery and acceptance in the form of EXHIBIT R shall be attached to the Notice of Borrowing delivered to the Collateral Agent. In the case of a Loan the proceeds of which will be used 25 to pay or reimburse any Borrower for transaction costs, the Notice of Borrowing delivered to the Collateral Agent will include a copy of the invoice from the provider of the service or other appropriate supporting documentation. In the case of a Loan, the proceeds of which will be used for working capital or other general corporate purposes, the Notice of Borrowing delivered to the Collateral Agent will contain a certification that the making of such Loan does not violate any provision of either Indenture or the terms of the preferred Equity Interests of KMC Holdings. The Notice of Borrowing shall, with respect to any Loans requested, specify whether such requested Loans are to be Base Rate Loans or LIBOR Loans, and if such requested Loans are to be LIBOR Loans, the requested Interest Period for such Loans. (b) The Agent agrees, promptly upon (i) receipt of a Notice of Borrowing and (ii) acknowledgment by the Collateral Agent that the Borrowers have delivered and the Collateral Agent has reviewed to its satisfaction (x) each of the invoices or certificates required to be provided to the Collateral Agent pursuant to SECTION 2.03(A) above and (y) each of the collateral documents, including, without limitation, all third party agreements and the related consents to collateral assignments required pursuant to SECTION 5.08 of the Loan Agreement, as requested by the Collateral Agent, to notify each Revolving or Term B Lender of the date and amount of the Loan proposed thereunder and the amount of such Lender's Pro Rata Share therein. So long as no Event of Default has occurred and is continuing and upon fulfillment of the applicable conditions set forth in ARTICLE IV, each such Lender severally agrees, on or before 12:00 P.M. (New York time) on the date of each proposed Loan, to pay into the Payment Account, an amount equal to such Lender's Pro Rata Share of such Loan in dollars and in same day funds; PROVIDED, that if a Fronting Commitment is assigned by Lucent to an Eligible Fronting Assignee, then, until Notice(s) of Borrowing are provided by the Borrowers to fully draw upon such Fronting Commitment, (i) Lucent shall not be required to make any additional Term B Loans and (ii) the amount of the Term B Loan to be made by the assignee of such Fronting Commitment pursuant to each Notice of Borrowing shall equal the amount of the Term B Loan that would have been made by such assignee pursuant to such Notice of Borrowing without giving effect to such assignment plus either (A) the amount of the Term B Loan that would have been made by Lucent pursuant to such Notice of Borrowing without giving effect to such assignment or, if less, (B) the remaining amount of such Fronting Commitment; PROVIDED FURTHER, however, that with respect to Lucent's Pro Rata Share of any Term B Loan consisting of a Credit Advance, Lucent, in lieu of making a payment into the Payment Account, shall credit the Borrowers on their applicable trade payables to Lucent in an amount equal to such Pro Rata Share. After the Agent's receipt of such Lender's Loan proceeds, the Agent shall make available such proceeds to the Borrower requesting the Loan or the Person entitled to payment thereof at the bank account(s) specified in the Notice of Borrowing on the date specified in such Notice of Borrowing in Dollars in immediately available funds. (c) Unless the Agent has received written notice from a Lender prior to the date of any proposed Loan that such Lender will not make available to the Agent such Lender's Pro Rata Share of such Loan, the Agent may, but is not obligated to, assume that such Lender has made its Pro Rata Share of such Loan available to the Agent on the date of such Loan in accordance with PARAGRAPH (b) above, and the Lenders may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If such Pro Rata Share is not, 26 in fact, paid to Agent by such Lender when due (other than in the case of Lucent with respect to its Pro Rata Share of a Term B Loan consisting of a Credit Advance), the Agent will be entitled to recover such amount on demand from such Lender or the Borrower which received the proceeds of such Loan without set-off, counterclaim or deduction of any kind, together with interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid to the Agent either by such Borrower or such Lender, at, (1) in the case of such Borrower, the interest rate applicable to such Loan, and (2) in the case of such Lender, the Federal Funds Effective Rate. Nothing in this SECTION 2.03(c) or elsewhere in this Agreement or the other Loan Documents shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its Commitment hereunder or to prejudice any rights that the Borrower may have against any Lender as a result of any default by such Lender hereunder. Without limiting the foregoing, with respect to any Lender which for any reason fails to make timely payment to the Agent of its Pro Rata Share of any Loan (other than in the case of Lucent with respect to its Pro Rata Share of a Term B Loan consisting of a Credit Advance), the Agent, in addition to other rights and remedies which it may have, shall be entitled to withhold or set off from any payments due to such Lender hereunder, an amount equal to the Pro Rata Share required to have been paid by such Lender plus interest as described above, and to withhold from such Lender any right of consent provided to such Lender by ARTICLE V or VI of this Agreement and to bring an action or suit against such Lender in a court of competent jurisdiction to recover such Pro Rata Share thereof and any related interest thereon. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's applicable Pro Rata Share of such Loan for purposes of this Agreement. If both such Lender and such Borrower shall have repaid the corresponding amount, the Agent shall promptly return to such Borrower its corresponding amount. (d) The Borrowers commit to the Lenders to request Revolving Loans to be made during calendar year 2001 in an aggregate amount equal to the undrawn portion of the Revolving Loan Commitment Amount. SECTION 2.04. THE NOTES. Each Borrower has executed and delivered to each Revolving Lender a Revolving Loan Note and to each Term A Lender (characterized as a "Term Lender" under the Existing Agreement) a Term A Loan Note (characterized as a "Term Loan Note" under the Existing Agreement) to evidence the Commitment of that Lender. Each Revolving Loan Note is in the principal amount of the Revolving Loan Commitment Amount of the applicable Lender, dated the "Initial Funding Date" (as defined in the Existing Agreement), shall mature on the Revolving Credit Commitment Termination Date and is substantially in the form of EXHIBIT E-1. Each Term A Loan Note is in the principal amount of the Term A Loan Commitment Amount (characterized as the "Term Loan Commitment Amount" under the Existing Agreement) of the applicable Term A Lender, dated the "Initial Funding Date" (as defined in the Existing Agreement), shall mature on the Term A Loan Termination Date (characterized as the "Term Loan Termination Date" under the Existing Agreement) and is substantially in the form of EXHIBIT E-2. Each Borrower shall execute and deliver to each Term B Lender a Term B Note to evidence the Term B Loan Commitment Amount of that Lender. Each Term B Note shall be in the principal amount of the Term B Loan Commitment Amount, dated the Closing Date, shall mature on the Term B Loan Commitment Termination Date and shall be substantially in the form of EXHIBIT E-3. The Notes payable to a Lender shall represent the 27 obligation of such Borrower to pay the amount of each Lender's Revolving Loan Commitment Amount, Term A Loan Commitment Amount or Term B Loan Commitment Amount or, if less, the applicable Lender's Pro Rata Share of the aggregate unpaid principal amount of all Loans to such Borrower and Letter of Credit Obligations incurred by such Lender together with interest thereon as prescribed in SECTION 2.05. The aggregate principal amount of all the Notes shall not exceed the aggregate Commitments of all the Lenders. The Agent is hereby authorized by such Borrower to record in the Register the date and amount of each Revolving Loan, Term A Loan or Term B Loan made to such Borrower, as applicable, and to record therein the date and amount of each payment on each Loan made to such Borrower, and such recordations shall be conclusive evidence against such Borrower of the amounts owing to the Lenders with respect to the Loans in the absence of manifest error; PROVIDED, HOWEVER, that the failure of the Agent to register any such information on such schedule shall not in any manner affect the obligation of such Borrower to repay the Loans made to such Borrower in accordance with the terms of this Agreement. SECTION 2.05. INTEREST ON LOANS. (a) GENERAL. Subject to the provisions of SECTIONS 2.05(b), 2.06 and 2.07, each Loan shall bear interest at the rate per annum equal to (i) the Base Rate plus the Applicable Margin, computed on the basis of a 365 or 366 day year, as applicable, and the actual number of days elapsed , or (ii) the LIBO Rate plus the Applicable Margin, computed on the basis of a 360 day year, and the actual number of days elapsed, as selected by the Borrowers in the Notices of Borrowing and the Notices of Continuation/Conversion. (b) DEFAULT INTEREST. Subject to the third sentence of this Section 2.05(b), if any Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder on its due date and such default shall continue uncured for three days, then the Borrowers shall, on demand, from the Agent, thereafter pay interest on all Loans at a rate that is four percent (4.00%) per annum above the rates of interest otherwise payable on all the Loans from the date such payment is due to the date such payment default is either cured or waived in writing by the Requisite Lenders. Subject to the next sentence, if any other Event of Default shall occur and be continuing and shall be declared by the Agent upon the direction of the Requisite Lenders, then the Borrowers shall, on demand, thereafter pay interest on all the Loans at a rate that is two percent (2.00%) per annum above the rates of interest otherwise payable on the Loans from the date of the occurrence of such Event of Default until the date such Event of Default has been cured or waived in writing by the Requisite Lenders; PROVIDED, that if an Event of Default described in the first sentence of this CLAUSE (b) shall occur at any time that an Event of Default described in this second sentence has occurred and is continuing, then the rate of interest described in the first sentence of this CLAUSE (b) shall apply. In the event that the Borrowers fail to obtain the Required Contribution on or prior to August 31, 2000, then beginning on September 1, 2000 and continuing until such time as the Required Contribution has been obtained, all of the margins set forth on SCHEDULE 1.01(a) shall be automatically increased by 100 basis points, and if any Event of Default occurs while such increased margins are in effect, and the interest rates on the Loans would be subject to increase by four percent (4.00%) per annum or two percent (2.00%) per annum, as described above, then the interest rates on the Loans 28 shall instead be increased by three percent (3.00%) per annum rather than four percent (4.00%) per annum or by one percent (1.00%) per annum rather than two percent (2.00%) per annum, as applicable. After the occurrence and during the continuance of any Event of Default, the Borrowers shall be subject to the limitations on borrowings of, conversions into and continuations as LIBOR Loans set forth in SECTION 2.07(g). SECTION 2.06. CONVERSION OR CONTINUATION. (a) Subject to the provisions of SECTION 2.07, each Borrower shall have the option (i) to convert (A) all or any part of its outstanding Term Loans or (B) all or any part of its outstanding Revolving Loans, in a minimum amount of $5,000,000 and integral multiples of $1,000,000 in excess of that amount, from a Term Loan or Revolving Loans that are Base Rate Loans to LIBOR Term Loans or LIBOR Revolving Loans, as the case may be; (ii) to convert (A) all or any part of its outstanding Term Loan or (B) all or any part of its outstanding Revolving Loans from LIBOR Loans to Base Rate Loans on the expiration of the Interest Period applicable thereto; and (iii) upon the expiration of any Interest Period applicable to its outstanding LIBOR Term Loan or any outstanding LIBOR Revolving Loan, to continue (A) all of such LIBOR Term Loan or (B) all or any portion of such LIBOR Revolving Loan equal to $5,000,000 and integral multiples of $1,000,000 in excess of that amount as a LIBOR Term Loan or LIBOR Revolving Loan, as applicable; PROVIDED, HOWEVER, that no outstanding Loans may be converted into, or continued as, LIBOR Loans when any Default or Event of Default has occurred and is continuing. Any conversion or continuation made with respect to less than the entire outstanding balance of a Borrower's Revolving Loans or Term Loans must be applied pro rata to such Borrower's Revolving Loans or Term Loans, as applicable, according to the outstanding principal balance of such Revolving Loans or Term Loans. (b) Whenever a Borrower elects to convert or continue Loans under this SECTION 2.06, such Borrower shall deliver to the Agent a written notice substantially in the form of that attached hereto as EXHIBIT H-2 (a "NOTICE OF CONVERSION/ CONTINUATION"), signed by an authorized officer of such Borrower (i) no later than 10:00 a.m. (New York time) two (2) Business Days in advance of the requested conversion date, in the case of a conversion into Base Rate Loans, and (ii) no later than 10:00 a.m (New York time) three (3) Business Days in advance of the requested conversion or continuation date, in the case of a conversion into, or continuation of, LIBOR Loans. The Notice of Conversion/Continuation shall specify (1) the conversion or continuation date (which shall be a Business Day), (2) the amount and type of the Loans to be converted or continued, (3) the nature of the requested conversion or continuation, and (4) in the case of a conversion into, or continuation of, LIBOR Loans, the requested Interest Period. Promptly after receipt of a Notice of Conversion/Continuation pursuant to this SECTION 2.06(b), the Agent shall notify the Revolving Lenders, the Term A Lenders or the Term B Lenders, as applicable, by telecopy, telephone or other similar form of transmission, of the requested conversion or continuation. In the event that a Borrower should fail to provide a Notice of Conversion/Continuation with respect to any LIBOR Loans as provided above, such Loans shall, on the last day of the Interest Period with respect to such Loans, convert to Base Rate Loans. (c) Any Notice of Conversion/Continuation for conversion to, or continuation of, Loans made pursuant to this SECTION 2.06 shall be irrevocable and the applicable Borrower shall be bound to convert or continue in accordance therewith. 29 SECTION 2.07. SPECIAL PROVISIONS GOVERNING LIBOR LOANS. Notwithstanding any other provisions to the contrary contained in this Agreement, the following provisions shall govern with respect to LIBOR Loans as to the matters covered: (a) AMOUNT OF LIBOR LOANS. Each continuation of or conversion to LIBOR Term Loans, and each election of, continuation of or conversion to LIBOR Revolving Loans, shall be in a minimum amount of $5,000,000 and in integral multiples of $1,000,000 in excess of that amount. (b) DETERMINATION OF INTEREST PERIOD. By giving notice as set forth in SECTION 2.06(b), a Borrower shall have the option, subject to the other provisions of this SECTION 2.07, to specify whether the Interest Period for such LIBOR Loan shall be a one, two, three or six month period. The determination of Interest Periods shall be subject to the following provisions: (i) In the case of immediately successive Interest Periods, each successive Interest Period shall commence on the day on which the preceding Interest Period expires. (ii) If any Interest Period would otherwise expire on a day which is not a Business Day, the Interest Period shall be extended to expire on the next succeeding Business Day; PROVIDED, HOWEVER, that if the next succeeding Business Day occurs in the following calendar month, then such Interest Period shall expire on the immediately preceding Business Day. (iii) A Borrower may not select an Interest Period for any LIBOR Loan, which Interest Period expires later than the maturity date of such Loan. (iv) A Borrower may not select an Interest Period with respect to any portion of such Borrower's Term Loans which extends beyond an installment payment date for such Term Loans unless, after giving effect to such selection, the portion of such Term Loans not subject to Interest Periods ending after such installment payment date is equal to or greater than the principal due on such installment payment date. (v) A Borrower may not select an Interest Period with respect to any portion of such Borrower's Revolving Loans which extends beyond any date on which the Revolving Loan Commitment Amounts are scheduled to be reduced unless, after giving effect to such selection, the portion of the Revolving Loans not subject to Interest Periods ending after any such date is equal to or greater than any amount of the Revolving Loans required to be prepaid as a result of any such reduction. (vi) There shall be no more than eight (8) Interest Periods in effect at any one time with respect to all the Loans and no more than four (4) Interest Periods in effect at any one time with respect to the Term B Loans. (c) DETERMINATION OF INTEREST RATE. As soon as practicable after 10:00 a.m. (New York time) on the LIBOR Interest Rate Determination Date, the 30 Agent shall determine (which determination shall, absent manifest error, be presumptively correct) the interest rate for the LIBOR Loans for which an interest rate is then being determined and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to the applicable Borrower. In the event that on any LIBOR Interest Rate Determination Date the Agent shall have determined (which determination shall, absent manifest error, be presumptively correct and binding upon all parties) that: (i) adequate and fair means do not exist for ascertaining the applicable interest rates by reference to which the LIBO Rate then being determined is to be fixed; or (ii) the LIBO Rate plus the Applicable Margin for any Interest Period for such Loans will not adequately reflect the cost to any Lender of making, funding or maintaining its LIBOR Loan for such Interest Period, the Agent shall forthwith so notify the applicable Borrower and the Lender, whereupon: (A) each LIBOR Loan will automatically, on the last day of the then existing Interest Period therefor, convert into a Base Rate Loan; and (B) the obligation of the Lenders to make, or to convert Loans into, LIBOR Loans shall be suspended until the Agent shall notify the applicable Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) ILLEGALITY. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other Governmental Authority asserts that it is unlawful, for any Lender to perform its obligations hereunder to make LIBOR Loans or to fund or maintain LIBOR Loans hereunder, (i) the obligation of the Lenders to make, or to convert Loans into or to continue Loans as, LIBOR Loans shall be suspended until the Agent shall notify the Borrowers and the Lenders that the circumstances causing such suspension no longer exist and (ii) the Borrowers shall on the termination of the Interest Period then applicable thereto, or on such earlier date required by law, prepay in full all LIBOR Loans then outstanding together with accrued interest thereon, or convert all such LIBOR Loans into Base Rate Loans in accordance with SECTION 2.06. (e) COMPENSATION. In addition to such amounts as are required to be paid by the Borrowers pursuant to the other Sections of this ARTICLE II, the Borrowers agree to compensate any Lender for all losses, expenses and liabilities, including, without limitation, any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund or maintain such Lender's LIBOR Loans (including the Applicable Margin component thereof) to the Borrowers, which such Lender may sustain (i) if for any reason a funding of any LIBOR Loans does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation, or a successive Interest Period does not commence after notice therefor is given pursuant to SECTION 2.06 as a result of any act or omission of any Borrower, (ii) if any voluntary or mandatory prepayment of any 31 LIBOR Loans occurs for any reason on a date which is not the last scheduled day of an Interest Period, (iii) as a consequence of any required conversion of LIBOR Loans to Base Rate Loans as a result of any of the events indicated in SECTION 2.07(d), or (iv) as a consequence of any other failure by a Borrower to repay LIBOR Loans when required by the terms of this Agreement. (f) BOOKING OF LIBOR LOANS. The Lenders may make, carry or transfer LIBOR Loans at, to, or for the account of, any of their respective branch offices or the office of any of their respective affiliates. (g) LIBOR LOANS AFTER EVENT OF DEFAULT. Unless the Requisite Lenders shall otherwise agree, after the occurrence of and during the continuance of any Event of Default, the Borrowers may not borrow Revolving Loans or Term B Loans as LIBOR Loans or elect to have any Loans continued as, or converted to, LIBOR Loans after the expiration of any Interest Period then in effect for such Loans. SECTION 2.08. PAYMENTS. (a) Interest on each LIBOR Loan shall be payable in arrears on each LIBOR Interest Payment Date and, if such LIBOR Loan is paid in full other than on such LIBOR Interest Payment date, on such other date. Interest on each Base Rate Loan will be payable in arrears on each Payment Date and, if such Base Rate Loan is paid in full other than on such Payment Date, on such other date. (b) Subject to the provisions of SECTIONS 2.09 and 9.02, the outstanding principal balance of the Term A Loans made to the Borrowers shall be payable in twenty-two consecutive quarterly installments beginning on the fourteenth Payment Date (i.e. the Payment Date occurring on April 1, 2002) and continuing on each Payment Date thereafter through and including the Term A Loan Termination Date in the amounts set forth on ANNEX C hereto. Subject to the provisions of SECTIONS 2.09 and 9.02, the outstanding principal balance of the Term B Loans made to the Borrowers shall be payable in seventeen consecutive quarterly installments beginning on the nineteenth Payment Date (i.e. the Payment Date occurring on July 1, 2003) and continuing on each Payment Date thereafter through and including the Term B Loan Termination Date in the amounts set forth on ANNEX C hereto. Subject to the provisions of SECTIONS 2.09 and 9.02, the outstanding principal balance of the Revolving Loans made to the Borrowers shall be payable on the Revolving Credit Commitment Termination Date. (c) Payments made with respect to the Loans by each Borrower shall be applied by the Agent first to unpaid and accrued fees and interest and then to the outstanding unpaid principal balance of the Loans of such Borrower; provided, however, that upon the occurrence and during the continuance of an Event of Default, all payments and prepayments with respect to the Obligations and all proceeds of Collateral shall be applied in the following order by the Agent; provided, further, that the order of priority set forth in the following clauses may be altered upon direction from the Requisite Lenders to the Agent: (1) first, to pay Obligations in respect of any expenses then due and payable by the Borrowers to the Agents, the Lenders or any Person which is not a Lender that has issued a Letter of Credit; 32 (2) second, to pay Obligations in respect of any reimbursement or indemnities then due and payable to the Agents, the Lenders or any Person which is not a Lender that has issued a Letter of Credit (excluding any reimbursement obligations with respect to any Letters of Credit); (3) third, to pay Obligations in respect of any fees due and owing to the Agent or the Collateral Agent; (4) fourth, to pay Obligations in respect of the commitment fee and any other fees and commissions then due and owing to the Agents, the Lenders or any Person which is not a Lender that has issued a Letter of Credit; (5) fifth, to pay Obligations in respect of any accrued and unpaid interest due in respect of Loans and Letter of Credit Obligations; (6) sixth, to pay termination payments due and payable pursuant to any Interest Rate Agreement or hedging agreement that constitutes a Loan Document; (7) to the ratable payment or prepayment of principal of any outstanding Loans and reimbursement obligations with respect to Letters of Credit; (8) to provide required cash collateral, if required pursuant to SECTION 2.10(j); and (9) to the ratable payment of all other Obligations. SECTION 2.09. OPTIONAL AND MANDATORY PREPAYMENT OF LOANS; OPTIONAL AND MANDATORY REDUCTION OF REVOLVING LOAN COMMITMENT AMOUNT. (a) Provided that no Event of Default has occurred and is continuing, the Borrowers shall have the right upon the provision of sixty (60) days' prior written notice to the Agent, which notice, once given, shall be irrevocable, on any Payment Date with respect to any Base Rate Term Loans and on the last day of the applicable Interest Period with respect to any LIBOR Term Loans, to prepay the outstanding principal of the Base Rate Term Loans in a minimum principal amount of $1,000,000 and increments of $250,000 in excess thereof, or the outstanding principal of the LIBOR Term Loans in a minimum principal amount of $5,000,000 and increments of $1,000,000 in excess thereof, together in each case with accrued interest thereon and the aggregate Prepayment Premium applicable thereto. The amount of principal so prepaid shall be applied to the remaining principal payments of the type of Loans prepaid (i.e. Base Rate Term Loans or LIBOR Term Loans) in the inverse order of maturity. (b) Upon the occurrence of any Event of Loss in excess of $1,000,000 with respect to any item of Collateral that is not repaired or replaced, or any Events of Loss which, in the aggregate, exceed $5,000,000 with respect to any item or items of Collateral that are not repaired or replaced (in each case, other than an item of Collateral no longer used or useful in the Business) such that after such repair or replacement it has a value at least equal to its value prior to the occurrence of such Event of Loss, the Borrower which suffered such 33 Event of Loss shall make a principal prepayment within thirty (30) days of such Event of Loss in an amount equal to the replacement value of the item of Collateral which suffered such Event of Loss, together with accrued interest thereon (but without the Prepayment Premium) with such principal payment to be applied, PRO RATA, to outstanding principal balance of the Revolving Loans and the Term Loans. (c) In the event that any Borrower finances any Telecommunications Equipment (exclusive of soft costs that exceed fifteen percent (15%) of the invoiced price of the related Telecommunications Equipment) with a financing source other than a Loan pursuant to this Agreement, then thirty (30) days following such financing the Revolving Loan Commitment Amounts of all the Revolving Lenders shall be reduced by the actual or imputed principal amount of any such financing, and any prepayments of the Revolving Loans required by the provisions of CLAUSE (h) below shall be accompanied by any applicable Prepayment Premium thereon. (d) The Borrowers shall prepay the Revolving Loans and the Term Loans on a pro rata basis in a principal amount equal to (i) all of the net proceeds of any sales of assets of any Borrower other than sales in the ordinary course of business, which proceeds are not reinvested within 270 days after receipt thereof in replacement assets, plus the applicable Prepayment Premium, and (ii) the proceeds of insurance policies paid to any Borrower and not applied within 270 days after any such payment to replacing, rebuilding or restoring the Collateral which was the subject of insurance loss, without any Prepayment Premium, in each case, within five (5) days after the expiration of the applicable 270 day period. (e) On the first Payment Date of each year, commencing in 2002, the Revolving Loan Commitment Amounts of all the Lenders shall be reduced by an amount equal to fifty percent (50%) of Excess Operating Cash Flow for the preceding fiscal year until the Borrowers have achieved and maintained for at least two consecutive fiscal quarters, a Total Leverage Ratio of less than 5:1, as determined by reference to the financial statements delivered pursuant to SECTION 5.06. (f) Provided that no Event of Default has occurred and is continuing, commencing January 1, 2002, the Borrowers shall have the right upon the provision of thirty days' prior written notice to the Agent, which notice, once given, shall be irrevocable, on any Payment Date, to reduce the Revolving Loan Commitment Amount of all the Lenders. Each such reduction shall be in a minimum principal amount of $1,000,000 and increments of $250,000 in excess thereof. Any Revolving Loans that must be prepaid in connection with such reduction in the Revolving Loan Commitment Amount pursuant to CLAUSE (h) below, shall be accompanied by any applicable Prepayment Premium thereon. (g) The Revolving Loan Commitment Amount of all the Lenders shall be reduced on each Payment Date beginning April 1, 2003 as set forth on ANNEX C hereto. In addition, in the event that at any time more than fifteen percent (15.0%) of the average outstanding principal balance of Revolving Loans during the immediately preceding 90-day period is repaid and is not reborrowed within 120 days after such repayment, then on such date, the Revolving Loan Commitment Amount of all the Lenders shall be reduced by an amount equal to such amount that was not reborrowed. Any Revolving Loans that must be prepaid in connection 34 with such reduction in the Revolving Loan Commitment Amount pursuant to SECTION 2.09(h) below, shall be accompanied by any applicable Prepayment Premium. (h) On each date that the Revolving Loan Commitment Amount is reduced, the Borrowers shall prepay first, the Revolving Loans, and second, provide to the Agent cash collateral with respect to the Letter of Credit Obligations in such amounts such that the sum of the outstanding principal balance of the Revolving Loans plus the Letter of Credit Obligations does not exceed the Revolving Loan Commitment Amount of all the Revolving Lenders after giving effect to the reduction thereof effective on such date, together with any applicable Prepayment Premium thereon. Any reduction in the Revolving Loan Commitment Amount of all the Lenders shall be allocated to each Revolving Lender based on its Pro Rata Share. All prepayments of principal shall be applied to the remaining principal payments of the type of Loans prepaid in the inverse order of maturity. The Letter of Credit Obligations shall be reduced on a dollar-for-dollar basis by the cash collateral. (i) All mandatory prepayments of the Term Loans shall be applied to the remaining principal installments of the Term Loans in the inverse order of maturity. SECTION 2.10. LETTERS OF CREDIT. (a) AGREEMENT TO CAUSE ISSUANCE. Subject to the terms and conditions of this Agreement, and in reliance upon the representations and warranties of the Borrowers herein set forth, the Agent agrees to (1) cause Letters of Credit to be issued by Lenders who are willing to do so or (2) provide credit support or enhancement or otherwise confirm payment (any such credit support, enhancement or payment confirmation being referred to as "CREDIT SUPPORT") to banks other than Lenders, which banks are acceptable to the Agent, which issue Letters of Credit for the respective accounts of the Borrowers in accordance with this SECTION 2.10 from time to time during the term of this Agreement. (b) AMOUNTS; OUTSIDE EXPIRATION DATE. The Agent shall not have any obligation to cause any Letter of Credit to be issued by a Lender or to provide Credit Support for any Letter of Credit at any time if: (1) the maximum undrawn face amount of the Letter of Credit is greater than the Unused Letter of Credit Subfacility; or (2) such Letter of Credit has an expiration date later than thirty (30) days prior to the Revolving Credit Commitment Termination Date, or more than one (1) year from the date of issuance. (c) OTHER CONDITIONS. In addition to being subject to the satisfaction of the applicable conditions precedent contained in ARTICLE IV, the obligation of the Agent to cause any Letter of Credit to be issued by a Lender or to provide Credit Support for any Letter of Credit is subject to the following conditions precedent having been satisfied in a manner satisfactory to the Agent: (1) the applicable Borrower shall have delivered to the proposed issuer of such Letter of Credit, at such times and in such manner as such proposed issuer may prescribe, an application in form and substance satisfactory to such proposed issuer for the issuance of the Letter of Credit and such other documents as may be required pursuant to the terms 35 thereof, and the form and terms of the proposed Letter of Credit shall be satisfactory to the Agent and such proposed issuer; and (2) as of the date of issuance, no order of any court, arbitrator or Governmental Authority shall purport by its terms to enjoin or restrain money center banks generally from issuing letters of credit of the type and in the amount of the proposed Letter of Credit, and no law, rule or regulation applicable to money center banks generally and no request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over money center banks generally shall prohibit, or request that the proposed issuer of such Letter of Credit refrain from, the issuance of letters of credit generally or the issuance of such Letters of Credit. (d) ISSUANCE OF LETTERS OF CREDIT. (1) REQUEST FOR LETTER OF CREDIT. The applicable Borrower shall give the Agent five (5) Business Days' prior written notice, containing the original signature of an authorized officer of such Borrower, of such Borrower's request for the issuance of a Letter of Credit or the provision of Credit Support for a Letter of Credit. Such notice shall be irrevocable and shall specify the original face amount of the Letter of Credit, the effective date (which date shall be a Business Day) of issuance of such proposed Letter of Credit, whether such Letter of Credit may be drawn in a single or in partial draws, the date on which such proposed Letter of Credit is to expire (which date shall be a Business Day), the purpose for which such Letter of Credit is to be issued, and the beneficiary of such Letter of Credit. The applicable Borrower shall attach to such notice the form of the proposed Letter of Credit. (2) RESPONSIBILITIES OF THE AGENT; ISSUANCE. The Agent shall determine, as of the Business Day immediately preceding the requested effective date of issuance of the Letter of Credit set forth in the notice from the applicable Borrower pursuant to SECTION 2.10(d)(1), the amount of the applicable Unused Letter of Credit Subfacility. If (A) the undrawn face amount of the proposed Letter of Credit is not greater than the applicable Unused Letter of Credit Subfacility, and (B) the Agent has received a certificate from such Borrower stating that the applicable conditions set forth in ARTICLE IV have been satisfied, the Agent shall cause such Letter of Credit to be issued on such proposed effective date of issuance. (3) NOTICE OF ISSUANCE. The Agent shall promptly give each Lender written notice of the issuance of each Letter of Credit. (4) NO EXTENSIONS OR AMENDMENT. No Letter of Credit shall be extended or amended unless the requirements of this SECTION 2.10(d) are met as though a new Letter of Credit were being requested and issued. (e) PAYMENTS PURSUANT TO LETTERS OF CREDIT. 36 (1) PAYMENT OF LETTER OF CREDIT OBLIGATIONS. The Borrowers agree to reimburse the issuer for any draw under any Letter of Credit, and the Agent, for the account of the Lenders, upon any payment pursuant to any Credit Support, immediately upon demand, and to pay the issuer of the Letter of Credit the amount of all other Obligations and other amounts payable to such issuer under or in connection with any Letter of Credit immediately when due, irrespective of any claim, set-off, defense or other right which a Borrower may have at any time against such issuer or any other Person. (2) REVOLVING LOANS TO SATISFY REIMBURSEMENT OBLIGATIONS. In the event that the issuer of any Letter of Credit honors a draw under such Letter of Credit, or the Agent shall have made any payment pursuant to any Credit Support, and the Borrowers shall not have repaid such amount to the issuer of such Letter of Credit or the Agent, as applicable, pursuant to SECTION 2.10(e)(1), the Agent shall, upon receiving notice of such failure, notify each Revolving Lender of such failure, and each Revolving Lender shall unconditionally pay to the Agent, for the account of such issuer or the Agent, as applicable, as and when provided hereinbelow, an amount equal to such Revolving Lender's Pro Rata Share of the amount of such payment in Dollars and in same day funds. If the Agent so notifies the Revolving Lenders prior to 12:00 p.m. (New York time) on any Business Day, each Revolving Lender shall make available to the Agent the amount of such payment, as provided in the immediately preceding sentence, on such Business Day. Such amounts paid by the Revolving Lenders to the Agent shall constitute Revolving Loans which shall be deemed to have been requested by the applicable Borrower pursuant to SECTION 2.03. (f) PARTICIPATIONS. (1) PURCHASE OF PARTICIPATIONS. Immediately upon issuance of any Letter of Credit in accordance with SECTION 2.10(d), each Revolving Lender shall be deemed to have irrevocably and unconditionally purchased and received without recourse or warranty, an undivided interest and participation in such Letter of Credit (if issued by a Revolving Lender) or the Credit Support provided through the Agent to such issuer in connection with the issuance of such Letter of Credit, as applicable, equal to such Revolving Lender's Pro Rata Share of the face amount of such Letter of Credit or the amount of such Credit Support (including, without limitation, all obligations of the Borrowers with respect thereto, and any security therefor or guaranty pertaining thereto). (2) SHARING OF REIMBURSEMENT OBLIGATION PAYMENTS. Whenever the Agent receives a payment from a Borrower on account of reimbursement obligations in respect of a Letter of Credit or Credit Support as to which the Agent has previously received for the account of the issuer thereof payment from a Revolving Lender pursuant to this SECTION 2.10(f)(2), the Agent shall promptly pay to such Lender such Revolving Lender's Pro Rata Share of such payment from such Borrower in Dollars. Each such payment shall be made by the Agent on the Business Day on which the Agent receives immediately available funds paid to such Person pursuant to the immediately preceding sentence, if received prior to 11:00 a.m. (New York time) on such Business Day and otherwise on the next succeeding Business Day. 37 (3) DOCUMENTATION. Upon the request of any Revolving Lender, the Agent shall furnish to such Revolving Lender copies of any Letter of Credit, reimbursement agreement executed in connection therewith, application for any Letter of Credit and Credit Support provided through the Agent in connection with the issuance of any Letter of Credit, and such other documentation as may reasonably be requested by such Revolving Lender. (4) OBLIGATIONS IRREVOCABLE. The obligations of each Revolving Lender to make payments to the Agent with respect to any Letter of Credit or with respect to any Credit Support provided through the Agent with respect to a Letter of Credit, and the obligations of the Borrowers to make payments to the Agent, for the account of the Revolving Lenders, shall be irrevocable, not subject to any qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement (assuming, in the case of the obligations of the Revolving Lenders to make such payments, that the Agent has provided Credit Support for such Letter of Credit in accordance with the terms of SECTION 2.10(d)), including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Loan Documents; (ii) the existence of any claim, set-off, defense or other right which a Borrower may have at any time against a beneficiary named in a Letter of Credit or any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), any Lender, the Agent, the Collateral Agent, the issuer of such Letter of Credit, or any other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transactions between a Borrower or any other Person and the beneficiary named in any Letter of Credit); (iii) any draft, certificate or any other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Loan Documents; or (v) the occurrence of any Default or Event of Default. (g) RECOVERY OR AVOIDANCE OF PAYMENTS. In the event any payment by or on behalf of a Borrower received by the Agent with respect to a Letter of Credit or Credit Support provided for any Letter of Credit (or any guaranty by a Borrower or reimbursement obligation of a Borrower relating thereto) and distributed by the Agent to the Revolving Lenders on account of their respective participations therein, is thereafter set aside, avoided or recovered from the Agent in connection with any receivership, liquidation or bankruptcy proceeding, 38 the Revolving Lenders shall, upon demand by the Agent, pay to the Agent their respective Pro Rata Shares of such amount set aside, avoided or recovered, together with interest at the rate required to be paid by the Agent upon the amount required to be repaid by it. (h) COMPENSATION FOR LETTERS OF CREDIT. The Borrowers agree to pay the fees set forth in SECTION 2.11 with respect to any Letters of Credit. (i) INDEMNIFICATION; EXONERATION. (1) INDEMNIFICATION. In addition to amounts payable as elsewhere provided in this SECTION 2.10, the Borrowers hereby agree to protect, indemnify, pay and save the Lenders and the Agent harmless from and against any and all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable attorneys' fees) which any Lender or the Agent may incur or be subject to as a consequence, direct or indirect, of the issuance of any Letter of Credit or the provision of any Credit Support in connection therewith. The agreements contained in this SECTION 2.10(i)(1) shall survive the payment in full of the Obligations. (2) ASSUMPTION OF RISK BY THE BORROWERS. As among the Borrowers, the Lenders and the Agent, each Borrower assumes all risks of the acts and omissions of, or misuse of any of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, the Lenders and the Agent shall not be responsible for: (A) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any Person in connection with the application for and issuance of and presentation of drafts with respect to any of the Letters of Credit, even if it should prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (B) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (C) the failure of the beneficiary of any Letter of Credit to comply duly with conditions required in order to draw upon such Letter of Credit; (D) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (E) errors in interpretation of technical terms; (F) any loss or delay in the transmission or otherwise of any document required in order make a drawing under any Letter of Credit or of the proceeds thereof; (G) the misapplication by the beneficiary of any Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (H) any consequences arising from causes beyond the control of the Lenders or the Agent, including, without limitation, any act or omission, whether rightful or wrongful, of any present or future de jure or de facto Governmental Authority. None of the foregoing shall affect, impair or prevent the vesting of any rights or powers of the Agent or any Lender under this SECTION 2.10(i). (3) EXONERATION. In furtherance and extension, and not in limitation, of the specific provisions set forth above, any action taken or omitted by the Agent or any Lender under or in connection with any of 39 the Letters of Credit or any related certificates, if taken or omitted in good faith, shall not put the Agent or any Lender under any resulting liability to any Borrower or relieve any Borrower of any of its obligations hereunder to any such Person. (j) SUPPORTING LETTER OF CREDIT; CASH COLLATERAL. If, notwithstanding the provisions of SECTION 2.10(b), any Letter of Credit is outstanding upon the termination of this Agreement, then upon such termination the Borrowers shall cause the termination of such Letter of Credit. If, at the Agent's election, any such Letter of Credit remains outstanding, then the Borrowers shall deposit with the Agent, for the ratable benefit of the Agent and the Revolving Lenders, with respect to each Letter of Credit then outstanding, as the Agent shall specify, either (A) a standby letter of credit (a "SUPPORTING LETTER OF CREDIT") in form and substance satisfactory to the Required Revolving Lenders, issued by an issuer satisfactory to the Agent in an amount equal to the greatest amount for which such Letter of Credit may be drawn, plus any fees and expenses associated with such Letter of Credit, under which Supporting Letter of Credit the Agent is entitled to draw amounts necessary to reimburse the Agent and the Revolving Lenders for payments made by the Agent and the Revolving Lenders under such Letter of Credit or under any Credit Support provided through the Agent with respect thereto and any fees and expenses associated with such Letter of Credit, or (B) cash in amounts necessary to reimburse the Agent and the Revolving Lenders for payments made by the Agent or the Revolving Lenders under such Letter of Credit or under any Credit Support provided through the Agent with respect thereto, and any fees and expenses associated with such Letter of Credit. Such Supporting Letter of Credit or deposit of cash shall be held by the Agent, for the ratable benefit of the Agent and the Revolving Lenders, as security for, and to provide for the payment of, the aggregate undrawn face amount of such Letters of Credit remaining outstanding. SECTION 2.11. FEES. (a) The Borrowers shall pay and the Borrowers shall be jointly and severally liable to the Agent for the account of the Revolving Lenders for payment of a nonutilization fee calculated on a per annum basis and equal to the percentage corresponding to the criteria set forth below of the average drawn portion of the Revolving Loan Commitment Amount for the quarterly period preceding a Payment Date, which fee shall be payable on each Payment Date following such last day of a quarter beginning on the Payment Date following the "Initial Funding Date" (as defined in the Existing Agreement) until and including the Payment Date following the Revolving Credit Commitment Termination Date: Average Drawn Portion of Revolving Loan Commitment Amount for the Quarterly Period Preceding a Payment Date Percentage ------------------------------- ----------- Less than or equal to $58,333,333 1.25% Greater than $58,333,333 and less than or equal to 1.00% $116,666,666 40 Greater than $116,66,666 and less than or equal to 0.75% $175,000,000 In the event that at any time the Borrowers fail to comply with the requirements of SECTION 2.03(d) for any calendar year, each of the above described nonutilization fees shall be increased by 100 basis points for the entire such calender year with payment of such increment in the nonutilization fee being due and payable not later than the last Business Day of such calendar year. (b) The Borrowers shall pay and the Borrowers shall be jointly and severally liable to the Agent for the account of the Term B Lenders for payment of a commitment fee calculated on a per annum basis and equal to one and one-half percent (1.50%) of the average of the unused Term B Loan Commitment Amount for the quarterly period preceding a Payment Date, which fee shall be payable on each Payment Date following such last day of a quarter beginning on the Payment Date following the Closing Date until and including the Payment Date following the Term B Loan Commitment Termination Date. (c) The Borrowers shall pay the Agent and the Collateral Agent and shall be jointly and severally liable to the Agent and the Collateral Agent, respectively, for payment of an annual administration fee and a collateral monitoring fee at the times and in the amounts set forth in the Fee Letters. (d) The Borrowers shall on the Closing Date pay the Agent for the ratable benefit of the Revolving Lenders and the Term A Lenders an amendment fee of $1,250,000 and any fee then due under the fee letter dated as of February 14, 2000 between the Borrowers and Lucent. (e) The Borrowers shall pay and the Borrowers shall be jointly and severally liable to the Agent (i) for the account of the Revolving Lenders for payment in arrears on each Payment Date of a fee equal to equal to the product of the Applicable Margin in effect with respect to LIBOR Loans for the preceding calendar quarter on an annualized basis, multiplied by the average Letter of Credit Obligations outstanding during such calendar quarter, and (ii) for the account of any Person which issues any Letter of Credit, for payment in arrears on each Payment Date of a fee equal to (A) the product of one-eighth percent (0.125%) per annum multiplied by the average face amount of Letters of Credit issued by such Person and outstanding during the preceding calendar quarter, and (B) if such Person is not a Lender, any additional fees as may be charged by such Person in connection with the issuance or maintenance of such Letter of Credit. (f) All fees once paid shall be nonrefundable. SECTION 2.12. MANNER OF PAYMENT; SPECIAL TAX CONSIDERATIONS. (a) All payments by the Borrowers hereunder and under the Notes shall be made to the Agent by wire transfer or other electronic payment method to the Payment Account or to such bank account as the Agent may designate, for the account of the Lenders in Dollars in immediately available funds by 11:00 a.m., New York time, on the date on which such payment shall be due. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or other fees ratably (other than amounts payable pursuant to SECTION 2.14) to each Lender in accordance with SECTION 10.07 hereof. 41 Interest in respect of any Loan hereunder shall accrue from the day such Loan is made up to and including the day prior to the date on which such Loan is paid in full. Payments received after 12:00 p.m. shall not be given credit until the next Business Day, and the Borrowers shall be liable for interest, if any, accruing on such payment until the next Business Day. (b) (1) Any and all payments by each Borrower hereunder shall be made free and clear of and without deduction for any and all Taxes. If any Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under the other Loan Documents to any Lender or Agent, (A) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this SECTION 2.12) such Lender or Agent receives an amount equal to the sum it would have received had no such deductions been made, (B) such Borrower shall make such deductions, and (C) such Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. If a withholding tax of the United States of America or any other Governmental Authority shall be or become applicable (y) after the date of this Agreement, to the payments by any Borrower made to the Lending Office or any other office that a Lender may claim as its Lending Office, or (z) after such Lender's selection and designation of any other Lending Office, to such payments made to such other Lending Office, such Lender shall use reasonable efforts to make, fund and maintain its Loans through another Lending Office of such Lender in another jurisdiction so as to reduce, but not increase, the applicable Borrower's liability hereunder, if the making, funding or maintenance of such Loans through such other Lending Office of such Lender does not, in the judgment of such Lender, otherwise materially adversely affect such Loans, such Lender's obligations under its Commitment or such Lender. Notwithstanding anything to the contrary hereunder, if a Person becomes a Lender under this Agreement pursuant to SECTION 11.08 hereof, the Borrowers shall in no event be required to increase any payment pursuant to paragraph (b) of this SECTION 2.12 by an amount that would exceed the amount of any increase that would be required to be made under paragraph (b) of this SECTION 2.12 to the assigning Lender. (2) The Borrowers will jointly and severally indemnify each Lender and the Agents and hold them harmless for the full amount of Taxes (including, without limitation, any Taxes imposed by any Governmental Authority on amounts payable under this SECTION 2.12 or any other documentary taxes, assessments or charges made by any Governmental Authority by reason of the execution and delivery of this Agreement or any other Loan Document) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest, and expenses) arising therefrom or with respect thereto. This indemnification shall be made within thirty (30) days after the date such Lender or the Agent (as the case may be) makes written demand therefor. A certificate as to any additional amount payable to any Lender or the Agent under this SECTION 2.12 submitted to the Borrowers and the Agent (if a Lender is so submitting) by such Lender or the Agent shall show in reasonable detail the amount payable and the calculations used to determine such amount. With respect to such deduction or withholding for or on account of any Taxes and to confirm that all such Taxes have been paid to the appropriate Governmental Authorities, the applicable Borrower shall promptly (and in any event not later than thirty (30) days after 42 receipt) furnish to each Lender and the Agent such certificates, receipts and other documents as may be required (in the judgment of such Lender or the Agent) to establish any tax credit to which such Lender or the Agent may be entitled. (3) Within thirty (30) days after the date of any payment of Taxes on amounts payable hereunder by any Borrower, such Borrower will furnish to the Agent, at its address referred to in SECTION 11.01, the original or a certified copy of a receipt evidencing payment thereof. (4) Without prejudice to the survival of any other agreement of any Borrower hereunder, the agreements and obligations of such Borrower contained in this SECTION 2.12 shall survive the payment in full of principal and interest hereunder and the termination of this Agreement. (5) Without limiting the obligations of the Borrowers under this SECTION 2.12, each Lender that is not created or organized under the laws of the United States of America or a political subdivision thereof shall deliver to the Borrowers and the Agent on or before the effective date hereof, or, if later, the date on which such Lender becomes a Lender pursuant to SECTION 11.08 hereof, a true and accurate certificate executed in duplicate by a duly authorized officer of such Lender, in a form satisfactory to the Borrowers and the Agent, to the effect that (A) such Lender is capable under the provisions of an applicable tax treaty concluded by the United States of America (in which case the certificate shall be accompanied by two original, executed copies of Form 1001 of the IRS or any successor form) or under Section 1442 of the IRC (in which case the certificate shall be accompanied by two original, executed copies of Form 4224 of the IRS or any successor form) of receiving payments of interest hereunder exempt from or at a reduced deduction or withholding of United States federal income tax or (B) if such Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the IRC and intends to claim exemption from U.S. federal withholding tax under Section 871(h) or Section 881(c) of the IRC with respect to payments of "portfolio interest", (i) that such Lender is not a "bank" within the meaning of Section 881(c) of the IRC, is not a ten percent (10%) shareholder (within the meaning of Section 871(h)(3)(B) of the IRC) of any Borrower and is not a controlled foreign corporation related to any Borrower (within the meaning of Section 864(d)(4) of the IRC), (ii) that such Lender claims complete exemption from U.S. federal withholding tax on payments of interest by the Borrowers under this Agreement and the other Loan Documents and (iii) that such Lender has received in replacement of any Note held by or assigned to it, a "QFL Note" (as defined below) in accordance with this SECTION 2.12(b). Each such Lender further agrees to deliver to the Borrowers and the Agent from time to time a true and accurate certificate executed in duplicate by a duly authorized officer of such Lender substantially in a form satisfactory to the Borrowers and the Agent, before or promptly upon the occurrence of any event requiring a change in the most recent certificate previously delivered by it to the Borrowers and the Agent pursuant to this SECTION 2.12(b)(5). Further, each Lender which delivers a certificate accompanied by Form 1001 of the IRS (or any successor form or forms required under the IRC or the applicable regulations promulgated thereunder) covenants and agrees to deliver to the Borrowers and the Agent within fifteen (15) days prior to January 1, 1999, and every third anniversary of such date thereafter, on which this Agreement is still in effect, another such certificate and two accurate and complete original signed copies of Form 1001 (or any successor form or forms required under the IRC or the applicable regulations promulgated thereunder), and each Lender that delivers a certificate accompanied by Form 4224 of the IRS (or any successor form or forms 43 required under the IRC or the applicable regulations promulgated thereunder) covenants and agrees to deliver to the Borrowers and the Agent within fifteen (15) days prior to the beginning of each subsequent taxable year of such Lender during which this Agreement is still in effect, another such certificate and two accurate and complete original signed copies of IRS Form 4224 (or any successor form or forms required under the IRC or the applicable regulations promulgated thereunder). Each such certificate shall certify as to one of the following: (a) that such Lender is capable of receiving payments of interest hereunder exempt from or at a reduced deduction or withholding of United States of America federal income tax; (b) that such Lender is not capable of receiving payments of interest hereunder exempt from or at a reduced deduction or withholding of United States of America federal income tax as specified therein but is capable of recovering the full amount of any such deduction or withholding from a source other than the Borrowers and will not seek any such recovery from the Borrowers; or (c) that, as a result of the adoption of or any change in any law, treaty, rule, regulation, guideline or determination of a Governmental Authority or any change in the interpretation or application thereof by a Governmental Authority after the date such Lender became a party hereto, such Lender is not capable of receiving payments of interest hereunder without deduction or withholding of United States of America federal income tax as specified therein and that it is not capable of recovering the full amount of the same from a source other than the Borrowers. Each Lender shall promptly furnish to the Borrowers and the Agent such additional documents as may be reasonably required by the Borrowers or the Agent to establish any exemption from or reduction of any Taxes required to be deducted or withheld and which may be obtained without undue expense to such Lender (6) For a period with respect to which a Lender has failed to provide the Agent and the Borrowers with the appropriate form described in this SECTION 2.12(b)(5) (other than if such failure is due to a change in law occurring subsequent to the date on which a form originally was required to be provided), such Lender shall not be entitled to indemnification under this SECTION 2.12 with respect to Taxes imposed by the United States by reason of such failure; PROVIDED, HOWEVER, that should a Lender become subject to Taxes because of its failure to deliver a form required hereunder, the Borrowers shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes. (7) Any Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the IRC and satisfies the applicable requirements of SECTION 2.12(b)(5) (a "Qualified Foreign Lender") shall upon receipt of the written request of the Agent or the Borrowers and may, upon its own written request to the Agent, exchange any Note held by or assigned to it for a qualified foreign lender Note (a "QFL Note"). A QFL Note shall be in the form of the applicable 44 Note attached as Exhibit E-1, E-2 or E-3 but shall contain the following legend: "This Note is a QFL Note, and as such, ownership of the obligation represented by such QFL Note may be transferred only in accordance with Section 2.12 of the Loan and Security Agreement." Any QFL Note issued in replacement of any existing Note pursuant to this Section shall be (i) dated the date of such existing Note, (ii) issued in the name of the Borrowers and (iii) issued in the same principal amount as such existing Note. Any Note replaced pursuant to this Section is sometimes referred to herein as a "Replaced Note". (8) The Borrowers agree that, upon the request of or delivery of a request to a Qualified Foreign Lender pursuant to paragraph (7) of this SECTION 2.12(b), they shall execute and deliver a QFL Note to the Agent in replacement of the Replaced Note surrendered in connection with such request conforming to the requirements of this paragraph. Each Qualified Foreign Lender shall surrender its Note in connection with any replacement, of a QFL Note and the existing Note to be replaced by such QFL Note in accordance with this paragraph, the Agent shall forward the QFL Note to the Lender which has surrendered its Note for replacement by such QFL Note and shall forward the surrendered Note to the Borrowers marked "canceled". Once issued, QFL Notes (i) shall be deemed to and shall be "Notes" for all purposes under the Loan Documents, (ii) may not be exchanged for Notes which are not QFL Notes, notwithstanding anything to the contrary in the Loan Documents and (iii) shall at all times thereafter be QFL Notes, including, without limitation, following any transfer or assignment thereof. (9) Notwithstanding anything to the contrary in the Loan Documents, the QFL Notes are registered obligations as to both principal and interest with the Borrowers and transfer of the obligations underlying such QFL Note may be effected only by surrender of the QFL Note to the Borrowers and either reissuance by the Borrowers of such QFL Note to the transferee or issuance by the Borrowers of a new QFL Note to the transferee. A QFL Note shall only evidence a Lender's or an assignee's right, title and interest in and to the related obligation, and in no event is a QFL Note to be considered a bearer instrument or obligation. This SECTION 2.12 shall be construed so that the obligations underlying the QFL Notes are at all times maintained in "registered form" within the meaning of Sections 871(h)(2) and 881(c)(3) of the IRC. (c)(1) If a Borrower pays any additional amount under this SECTION 2.12 and, as a result, any Lender, together with the Agent, subsequently, in their sole discretion and based on their own interpretation of any relevant laws (but acting in good faith) receive or are granted a final and non-appealable credit against or deduction from or in respect of any tax payable by such Lender, or obtain any other final and non-appealable relief in respect of any tax, which in the opinion of such Lender and the Agent, acting in good faith, is both reasonably identifiable and quantifiable by them without requiring any Lender, the Agent or their professional advisers to expend a material amount of time or incur a material cost in so identifying or quantifying (any of the foregoing, to the extent so reasonably identifiable and quantifiable, being referred to as a "SAVING"), such Lender shall, to the extent that it can do so without prejudice to the retention of the Saving, reimburse such Borrower promptly after such identification and quantification with the amount of such Saving; PROVIDED, HOWEVER, that any such Saving shall be reduced by any costs incurred by such Lender or the Agent in obtaining such Saving. 45 (2) Nothing in this SECTION 2.12(c) shall require any Lender to disclose to any Person any information regarding its tax affairs or to arrange its tax and other affairs in any particular manner. SECTION 2.13. MAXIMUM LAWFUL INTEREST RATE. Notwithstanding any provision contained herein, the total liability of the Borrowers for payment of interest pursuant hereto and the Notes, including any other charges or other amounts, to the extent such charges and other amounts are deemed to be interest, shall not exceed the maximum amount of such interest permitted by law to be charged, collected, or received from the Borrowers (the "MAXIMUM RATE"). If any payments by any Borrower for the account of any Lender include interest in excess of the Maximum Rate, such Lender shall apply such excess to the reduction of the unpaid principal amount owing by such Borrower, or if none is due, such excess shall be returned to such Borrower. SECTION 2.14. FUNDING ISSUES. (a) INCREASED COSTS. If, due to either (i) the introduction after the date hereof of, or any change after the date hereof in or in the interpretation of, any applicable law, rule or regulation by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof or (ii) compliance by any Lender after the date hereof with any final request or final directive issued after the date hereof (whether or not having the force of law) by any such Governmental Authority, central bank or comparable agency, and, as a result of any of the events set forth in the above clauses (i) and (ii), (x) there shall be any increase in the cost to such Lender in maintaining its Commitment under this Agreement or funding or maintaining its Pro Rata Share of the Loans under this Agreement, or (y) any Lender is subjected to any charge or withholding on its obligations hereunder, or changes in the basis of taxation of payments to any Lender in connection with any of the foregoing (except for changes in the rate of tax on overall net income of any Lender) (collectively, "INCREASED COSTS"), then the Borrowers shall, from time to time, pay, to the Agent for the benefit of such Lender within 15 days after such Lender shall have provided notice to the Agent (and the Agent shall have provided notice to the Borrowers) of such Increased Cost, an amount sufficient to compensate such Lender for such Increased Cost, as provided herein. A certificate setting forth in reasonable detail the computation of the amount of such Increased Cost (which increase in cost shall be determined by such Lender's reasonable allocation of the aggregate of such cost increases resulting from such event), submitted to the Borrowers by such Lender, shall be conclusive and binding for all purposes, absent manifest error. (b) INCREASED CAPITAL. If any Lender which is subject to minimum capital requirements determines that compliance by such Lender, with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender, or any corporation controlling such Lender, and such Lender reasonably determines that the amount of such capital is increased by or based upon any commitment to lend hereunder or making or maintaining Loans, its commitment to participate (as provided for in SECTION 2.10(f)) in any Letter of Credit or any Credit Support provided through the Agent in connection with the issuance of any Letter of Credit, or other commitments of this type, then, upon demand by such Person, the Borrowers agree to, within five (5) days of such demand, pay to such Person, from time to time as specified by such Person, additional amounts sufficient to compensate 46 such Person in the light of such circumstances, to the extent that such Person reasonably determines such increase in capital to be allocable to such Person's commitment or maintenance of Loans hereunder or such Person's commitment to participate in any Letter of Credit or Credit Support. A certificate as to the amount of such increased cost, submitted to the Borrowers by the applicable Person shall, absent manifest error, be conclusive and binding on the Borrowers for all purposes. (c) REPLACEMENT OF LENDER. If any Borrower, as a result of the requirements of either SECTION 2.14(a) or SECTION 2.14(b), shall be required to pay any particular Lender (an "AFFECTED LENDER") the additional amounts referred to in such Section, which costs are not imposed by the other Lenders, and such additional amounts are material, then such Borrower shall be entitled to either prepay such Affected Lender without any Prepayment Premium but with any payments required by SECTION 2.07(e), or find a replacement Lender, reasonably acceptable to the Agents (the Agents' consent to such replacement Lender not to be unreasonably withheld), to replace the Affected Lender. The Affected Lender and the replacement Lender shall execute an Assignment Agreement with respect to all of the Affected Lender's Commitments and all Loans owing to the Affected Lender and comply with the other provisions of SECTION 11.08(c). Upon the payment by the replacement Lender to the Affected Lender of the then outstanding principal amount of Loans owing to the Affected Lender, together with accrued interest thereon, and the payment by the Borrower to the Affected Lender of any compensation required with respect to LIBOR Loans pursuant to SECTION 2.07(e), the replacement Lender shall succeed to all of the Affected Lender's rights and obligations under this Agreement and the other Loan Documents. SECTION 2.15. JOINT AND SEVERAL LIABILITY; CONTRIBUTION. (a) Notwithstanding anything to the contrary in this Agreement or the other Loan Documents, all payment and performance Obligations arising under this Agreement and the other Loan Documents shall be joint and several obligations of each Borrower secured by all the Borrowers' Collateral. The Agent and the Collateral Agent may apply any portion of any Borrower's Collateral to satisfy any of the Obligations of any other Borrower. (b) CONTRIBUTION AND INDEMNIFICATION BETWEEN THE BORROWERS. To the extent that any Borrower shall, as a result of the operation of SECTION 2.15, pay any Obligation of any other Borrower under the Loan Documents (such payment being referred to as an "ACCOMMODATION PAYMENT"), then such Borrower shall be entitled to contribution and indemnification from, and be reimbursed by such other Borrower, as set forth in the Contribution Agreement. Each Borrower agrees that any extension, forbearance or amendment, or any acceptance, release or substitution of security, or any impairment or suspension of Lender's remedies or rights against any other Borrower or the cessation of the liability of any other Borrower for any reason other than full and indefeasible satisfaction of all Obligations shall not in any way affect the liability of such Borrower. Each Borrower has provided itself of the means of remaining informed of the financial condition of each other Borrower, and waives any right to require any Lender or any of the Agents to keep it informed of the financial condition of any other Borrower. The provisions of this section shall, to the extent expressly inconsistent with any provision in any Loan Document, supersede such inconsistent provision. 47 ARTICLE III REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to the Agent, the Collateral Agent and the Lenders that: SECTION 3.01. ORGANIZATION; POWERS. (a) Such Borrower (i) is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and (ii) is qualified to do business in the jurisdiction in which its principal place of business is located and in every other jurisdiction where such qualification is necessary; (b) such Borrower has the power and authority to own its properties, to carry on its business as now conducted; and (c) such Borrower has the power and authority to execute and deliver and perform this Agreement and the other Loan Documents to which it is a party, to borrow hereunder, and will have the power to execute and deliver any Mortgages and Collateral Assignments of Leases or other instruments to be delivered by it subsequent to the date hereof. SECTION 3.02. CORPORATE AUTHORIZATION. The execution, delivery and performance of this Agreement and the other Loan Documents to which such Borrower is a party, and the Loans hereunder: (a) have been duly authorized by such Borrower's Board of Directors or managers and, if necessary, such Borrower's stockholders or members; (b) (1) do not violate (i) any existing provision of law applicable to such Borrower and not immaterial to its business, (ii) such Borrower's Certificate or Articles of Incorporation or other organizational documents, as the case may be, or (iii) any applicable order of any court or other governmental agency, and (2) do not conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any indenture, agreement for borrowed money, bond, note or other similar instrument or any other material agreement to which such Borrower is a party or by which such Borrower or any of such Borrower's property is bound; (c) do not result in the creation or imposition of any Lien of any nature whatsoever upon any property or assets of such Borrower other than the Liens granted pursuant to this Loan Agreement or the other Loan Documents; (d) constitute legal, valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms; and (e) do not, as of the date of execution hereof, require any governmental consent, filing, registration or approval except as set forth on SCHEDULE 3.02. 48 SECTION 3.03. FINANCIAL STATEMENTS. The Borrowers have furnished to the Agent and the Lenders the audited consolidated financial statements of KMC Holdings dated as of December 31, 1998, and the unaudited consolidated financial statements for the fiscal quarter ended September 30, 1999 , which statements are attached hereto as EXHIBIT I (collectively, the "Financials"). The Financials have been prepared in accordance with GAAP applied on a basis consistent with that of preceding periods and are complete and correct in all material respects. As of the date of the Financials, (a) the Financials fairly represent KMC Holdings' financial position and results of operations; and (b) there are no omissions from the Financials or any other facts or circumstances not reflected in the Financials which are or may be material according to GAAP. SECTION 3.04. NO MATERIAL ADVERSE CHANGE. There has been no material adverse change in the condition (financial or otherwise), operations or properties of such Borrower since the date of the Financials. SECTION 3.05. LITIGATION. Except as set forth on SCHEDULE 3.05, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority now pending or, to the knowledge of such Borrower, threatened, against or affecting such Borrower or any property or rights of such Borrower as to which there is a reasonable possibility of an adverse determination and which, if adversely determined, would individually or in the aggregate materially impair the right of any Borrower to carry on business substantially as now being conducted or as presently contemplated or would result in any Material Adverse Effect. SECTION 3.06. TAX RETURNS. Such Borrower has filed or caused to be filed all Federal, state and local tax returns which are required to be filed and has paid or caused to be paid all taxes as shown on such returns or on any assessment received by it to the extent that such taxes have become due, except such taxes the amount, applicability or validity of which are being contested in good faith by appropriate proceedings and with respect to which such Borrower shall have set aside on its books adequate reserves with respect to such taxes as are required by GAAP. SECTION 3.07. NO DEFAULTS. Such Borrower is not in default (i) with respect to any judgment, writ, injunction, decree, rule or regulation of any Governmental Authority which is likely to have a Material Adverse Effect, or (ii) in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any material agreement or instrument to which such Borrower is a party or by which any of its assets are bound, which is likely to have a Material Adverse Effect. SECTION 3.08. PROPERTIES. Such Borrower has good and marketable title to all its material properties and assets and all Collateral of such Borrower is free and clear of all Liens of any nature whatsoever, except Permitted Liens. SECTION 3.09. LICENSES, MATERIAL AGREEMENTS, INTELLECTUAL PROPERTY. (a) Such Borrower has obtained all material Governmental Approvals, which Governmental Approvals are necessary or appropriate for the construction and operation of the Systems as are presently operating, as contemplated in the Milestone Plan, other than immaterial municipal business permits. Such Governmental Approvals are correctly listed on SCHEDULE 3.09(a) and constitute the only Governmental Approvals required in connection with the Systems as are presently operating. All Governmental Approvals of such Borrower are in full force and effect, are duly issued in the name of, or validly assigned to, such Borrower and such Borrower has the power and authority to operate thereunder. (b) SCHEDULE 3.09(b) accurately and completely lists all material agreements to which such Borrower is a party, including, without limitation, all purchase agreements, construction contracts, right of way or right of occupancy agreements, lease agreements, consulting, employment, management and related 49 agreements. All of the foregoing agreements are valid, subsisting and in full force and effect and none of such Borrower, or, to the best of such Borrower's knowledge and belief, any other parties, are in material default thereunder. Such Borrower has given true and complete copies of all such agreements to the Agent and the Lenders. (c) Such Borrower owns or possesses all the patents, trademarks, service marks, trade names, copyrights and licenses, and all rights with respect to the foregoing (the "INTELLECTUAL PROPERTY"), necessary for the conduct of its business as presently conducted without any known conflict with the rights of others. SCHEDULE 3.09(c) accurately and completely lists all Intellectual Property owned or possessed by or licensed to such Borrower. Such Borrower has entered into Intellectual Property Documents with respect to its Intellectual Property, as requested by the Collateral Agent. SECTION 3.10. COMPLIANCE WITH LAWS. Except as disclosed on SCHEDULE 3.10, the operations of such Borrower comply in all material respects with all applicable federal, state or local laws and regulations, including Environmental Laws. Except as disclosed on SCHEDULE 3.10, to such Borrower's knowledge, none of the operations of such Borrower is subject to any judicial or administrative proceeding alleging the violation of any Environmental Laws. Except as disclosed on SCHEDULE 3.10, such Borrower neither knows nor reasonably should know that any of the operations of such Borrower is the subject of federal or state investigation evaluating whether any Remedial Action is needed to respond to a Release. Except as disclosed on SCHEDULE 3.10, such Borrower has not filed any notice under any federal or state law indicating past or present treatment, storage or disposal of a hazardous waste or reporting a Release. Except as disclosed on SCHEDULE 3.10, such Borrower has no contingent liability of which such Borrower has knowledge or reasonably should have knowledge in connection with any Release. SECTION 3.11. ERISA. None of such Borrower or any ERISA Affiliate of such Borrower maintains or contributes to any Plan other than a Plan listed on SCHEDULE 3.11 hereto. Each Plan which is intended to be qualified under Section 401(a) of the IRC has been determined by the IRS to be so qualified, and each trust related to any such Plan has been determined to be exempt from federal income tax under Section 501(a) of the IRC. Except as disclosed on SCHEDULE 3.11, none of such Borrower or any ERISA Affiliate maintains or contributes to any employee welfare benefit plan within the meaning of Section 3(1) of ERISA which provides benefits to employees after termination of employment other than as required by Section 601 of ERISA. None of such Borrower or any ERISA Affiliate has breached any of the responsibilities, obligations or duties imposed on it by ERISA or regulations promulgated thereunder with respect to any 50 Plan which breach could result in a Material Adverse Effect. No Plan has incurred any accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA and Section 412(a) of the IRC), whether waived or not waived. None of such Borrower or any ERISA Affiliate nor any fiduciary of any Plan which is not a Multiemployer Plan (i) has engaged in a nonexempt "prohibited transaction" described in Section 406 of ERISA or Section 4975 of the IRC or (ii) has taken or failed to take any action which would constitute or result in a Termination Event. None of such Borrower or any ERISA Affiliate has incurred any liability to the PBGC which remains outstanding and which could result in a Material Adverse Effect, other than the payment of premiums, and there are no premium payments which have become due which are unpaid. Schedule B to the most recent annual report filed with the IRS with respect to each Plan is complete and accurate. Since the date of each such Schedule B, there has been no adverse change in the funding status or financial condition of the Plan relating to such Schedule B. None of such Borrower or any ERISA Affiliate has (i) failed to make a required contribution or payment to a Multiemployer Plan or (ii) made a complete or partial withdrawal under Sections 4203 or 4205 of ERISA from a Multiemployer Plan. None of such Borrower or any ERISA Affiliate has failed to make a required installment or any other required payment under Section 412 of the IRC on or before the due date for such installment or other payment. None of such Borrower or any ERISA Affiliate is required to provide security to a Plan under Section 401(a)(29) of the IRC due to a Plan amendment that results in an increase in current liability for the plan year. SECTION 3.12. INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY Act. Such Borrower is not an "investment company" as that term is defined in, and is not otherwise subject to regulation under, the Investment Company Act of 1940. Such Borrower is not a "holding company" as that term is defined in, and is not otherwise subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.13. FEDERAL RESERVE REGULATIONS. Such Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System of the United States), and no part of the proceeds of the Loans made to such Borrower will be used to purchase or carry any such margin stock or to extend credit to others for the purpose of purchasing or carrying any such margin stock or for any purpose that violates, or is inconsistent with, the provisions of Regulation T, U or X of said Board of Governors. SECTION 3.14. COLLATERAL. The security interests granted by ARTICLE VIII hereof, together with the security interests granted pursuant to the Existing Agreement and accompanying financing statements, when duly filed in the offices and jurisdictions set forth on SCHEDULE 3.14 hereof, create valid and perfected first priority Liens in and to the Collateral of such Borrower, enforceable against other Persons in all jurisdictions securing the payment, as applicable, of the Obligations hereunder. Upon filing such financing statements, to the extent that the filing of a financing statement is sufficient to perfect a security interest, no further action is required to perfect the Liens of the Collateral Agent in favor of the Lenders in the Collateral of such Borrower described in SECTION 8.01. 51 SECTION 3.15. CHIEF PLACE OF BUSINESS. As of the Closing Date, the chief executive office and principal place of business address of such Borrower is 1545 Route 206, Bedminster, New Jersey 07921. If any change in any such location occurs, such Borrower shall notify the Agent and the Collateral Agent thereof not later than ten days after the occurrence thereof. As of the date of execution hereof, the books and records of such Borrower and all chattel paper and all records of account are located at the principal place of business or chief executive office of such Borrower and if any change in such location occurs, such Borrower shall notify the Agent and the Collateral Agent thereof not later than ten days after the occurrence thereof. SECTION 3.16. OTHER CORPORATE NAMES. Except as set forth on SCHEDULE 3.16, such Borrower has not used and does not now use and will not use any corporate or fictitious name. SECTION 3.17. INSURANCE. SCHEDULE 3.17 contains a description of all insurance which such Borrower maintains or has maintained on its behalf. All of such insurance is in full force and effect. SECTION 3.18. MILESTONE PLAN. The Milestone Plan represents good faith projections of future financial performance of the Borrowers for the periods set forth therein. Such document has been prepared on the basis of the assumptions set forth therein, which the Borrowers believe are reasonable in light of current and reasonably foreseeable business conditions. SECTION 3.19. CAPITALIZATION AND SUBSIDIARIES. The classes of Equity Interests, number of authorized shares, number of outstanding shares and par values or other designations of the Equity Interests or other equity securities or beneficial interests of such Borrower are correctly set forth on SCHEDULE 3.19. All the outstanding shares of Equity Interests or other equity securities or beneficial interests of such Borrower are duly and validly issued, fully paid and nonassessable, and none of such issued and outstanding shares, equity securities or beneficial interests has been issued in violation of, or is subject to, any preemptive or subscription rights. Except as set forth on SCHEDULE 3.19, there are no: (A) outstanding shares of Equity Interests or other equity securities or beneficial interests or other securities convertible into or exchangeable for shares of Equity Interests or other equity securities or other beneficial interests of such Borrower, (B) outstanding rights of subscription, warrants, calls, options, contracts or other agreements of any kind, issued, made or granted to or with any Person under which such Borrower may be obligated to issue, sell, purchase, retire or redeem or otherwise acquire or dispose of any shares of Equity Interests or other equity securities or beneficial interests of such Borrower, or (C) Subsidiaries of such Borrower. KMC Holdings beneficially owns, directly or indirectly, all of the Equity Interests of such Borrower. SECTION 3.20. REAL PROPERTY, LEASES AND EASEMENTS. Such Borrower leases or owns the real property described on SCHEDULE 3.20. Set forth on SCHEDULE 3.20 is a list of (i) all real property leased or owned by such Borrower (the "REAL PROPERTY") and (ii) all easements, rights of way, rights of occupancy, licenses and similar rights with respect to real property granted to 52 such Borrower not otherwise disclosed to the Collateral Agent and the Lenders on a title report delivered to the Collateral Agent and the Lenders pursuant to the terms hereof (together with all easements, rights of way, rights of occupancy, licenses and similar rights with respect to real property granted to such Borrower which are so disclosed, collectively, the "EASEMENTS"). Also set forth on SCHEDULE 3.20 is a street address of the Real Property locations described above, including a description of such properties' current use. Except as set forth in SCHEDULE 3.20, such Borrower's interests in the Real Property and the Easements are sufficient in order for such Borrower to conduct its business and operations as presently conducted. SECTION 3.21. SOLVENCY. After giving effect to any Loans made to such Borrower hereunder, the disbursement of the proceeds of such Loans pursuant to such Borrower's instructions and the execution, delivery and performance of each of the Loan Documents and transactions contemplated thereby, such Borrower is Solvent and is not contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of all or a substantial portion of its property, and has no knowledge of any Person contemplating the filing of any such petition against such Borrower. SECTION 3.22. BROKERS, ETC. Such Borrower has not dealt with any broker, finder, commission agent or other similar Person in connection with the Loans or the transactions being effected contemporaneously with this Agreement, and such Borrower covenants and agrees to indemnify and hold harmless the Agent, the Collateral Agent and the Lenders from and against, any broker's fee, finder's fee or commission in connection with such transactions. SECTION 3.23. NO MATERIAL MISSTATEMENTS. Neither any report, financial statement, exhibit or schedule furnished by or on behalf of such Borrower to the Agent, the Collateral Agent or any Lender in connection with the negotiation of this Agreement and the other Loan Documents or included herein or therein, nor any other information required to be furnished pursuant to the provisions of ARTICLE V hereof, contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein not materially misleading. SECTION 3.24. YEAR 2000 PROBLEMS. Each Borrower has completed and implemented a Year 2000 Corrective Plan and Year 2000 Corrective Actions, has completed Year 2000 Implementation Testing and has eliminated all Year 2000 Problems, except where the failure to correct the same could not reasonably be expected to have a Material Adverse Effect. ARTICLE IV CONDITIONS FOR LOANS The obligations of each Lender to make Loans hereunder are subject to the accuracy, as of the Closing Date and as of the date of making of each of the Loans after the Closing Date, of the representations and warranties contained in ARTICLE III (except that any representations or warranties that relate to a specified date shall only be reaffirmed as of such date) and the 53 other Loan Documents, to the performance by each Borrower of its obligations to be performed hereunder on or before the date of such Loan and to the satisfaction of the following further conditions: SECTION 4.01. CONDITIONS PRECEDENT TO INITIAL LOAN ON OR AFTER THE CLOSING DATE. In the case of the Loans to be made on the Closing Date and Letters of Credit to be issued or Credit Support for any Letters of Credit to be incurred on the Closing Date: (a) All then applicable legal matters incident to this Agreement and the other Loan Documents shall be reasonably satisfactory to Counsel. (b) The Agent and the Collateral Agent , as applicable, shall have received payment in full of the fees set forth in the Fee Letters, and all the other documented out-of-pocket costs and expenses of the Agent and the Collateral Agent incurred on or prior to the Closing Date, including, without limitation, reasonable attorneys' and paralegals' fees and expenses and the fees and expenses incurred in connection with preparation of any environmental audits; (c) (1) The Agent and the Collateral Agent shall have received the following items, in each case in form and substance satisfactory to the Agent and the Collateral Agent: (i) the Financials; (ii) the Milestone Plan showing in reasonable detail and specifying any material underlying assumptions, for the subsequent nine (9) year period, the Borrower's anticipated revenues and expenses and projected statements of cash flow and information with respect to projected capital expenditures and changes in working capital over such period, and a detailed Systems construction and buildout schedule; (iii)certificates substantially in the form of EXHIBITS J-1, and J-2 hereto, dated the Closing Date, of the secretary or assistant secretary of each of the Borrowers or the sole members of the Borrowers, as applicable, and KMC Holdings, certifying (A) (1) the names and true signatures of the officers authorized to sign each Loan Document to which any Borrower or KMC Holdings is a party, (2) the resolutions of the Board of Directors of each Borrower or KMC Holdings, as applicable, approving the transactions contemplated by the Loan Documents to which each is a party, (3) each Borrower's, or KMC Holdings' , as applicable, bylaws, and (B) only with respect to the certificate of KMC Holdings, (1) true and correct copies of the Indentures, (2) true and correct copies of the Management Agreement and the Tax Sharing Agreement and (3) evidence satisfactory to the Agent and the Collateral Agent that Holdings III has either been dissolved or merged into KMC Holdings; 54 (iv) the written opinions of special, regulatory and local counsel for the Borrowers and KMC Holdings, dated the Closing Date, addressed to the Agent, the Collateral Agent and the Lenders satisfactory to (and containing only such qualifications and limitations as are satisfactory to) Counsel, which opinions shall be substantially in the forms set forth in EXHIBITS K-1, K-2 and K-3, respectively, attached hereto; (v) certificates of appropriate public officials dated not more than 30 days prior to the Closing Date, as to the legal existence or qualification, and good standing of each Borrower and KMC Holdings from such Person's jurisdiction of organization and from the jurisdiction in which such Person has its principal place of business; (vi) each Borrower's and KMC Holdings' Certificate or Articles of Incorporation (or other constituent or organizational documents, as the case may be), in each case, as amended, modified or supplemented on or prior to the Closing Date, each certified to be true, correct and complete by the Secretary of State of the state in which such Person is organized; (vii)the General Reaffirmation and Modification Agreement in the form of EXHIBIT T hereto duly executed and delivered by the Borrowers and KMC Holdings; (viii) the Term B Loan Notes duly executed and delivered by the Borrowers; (ix) this Agreement duly executed and delivered by the Borrowers; and (x) Addenda to that certain Trademark Security Agreement dated as of December 22, 1998 between the Borrowers other than KMC III, Leasing III, Telecom.com and Services, and the Collateral Agent, duly executed and delivered by KMC III, Leasing III, Telecom.com and Services. (2) The Collateral Agent shall have received the following items in each case in form and substance satisfactory to the Collateral Agent: (i) Pledge Supplement duly executed by KMC Holdings with respect to the Equity Interests of KMC III and Telecom.com, together with, in each case, for all such Equity Interests which are certificated, stock certificates and undated stock powers executed in blank in form and substance satisfactory to the Collateral Agent and for all such Equity Interests which are limited liability company interests, pledge instructions and 55 initial transaction statements in form and substance satisfactory to the Collateral Agent; (ii) a Pledge Agreement duly executed by KMC III with respect to the Equity Interests of Leasing III and Services, together with for all such Equity Interests which are certificated, stock certificates and undated stock powers executed in blank in form and substance satisfactory to the Collateral Agent and for all such Equity Interests which are limited liability company interests, pledge instructions and initial transaction statements in form and substance satisfactory to the Collateral Agent; (iii)loss payable endorsements substantially in the form of EXHIBIT M attached hereto with respect to each Borrower's insurance policies relating to the Collateral, and insurance certificates required by SECTION 5.04(g) from nationally recognized insurance brokers with respect to each Borrower's insurance policies; (iv) with respect to each Borrower's then existing Collection Accounts, Restricted Account Agreements substantially in the form of such agreements executed and delivered pursuant to the Existing Agreement, copies of which are attached as EXHIBIT N hereto, duly executed by the applicable Borrower and the financial institutions maintaining the Collection Accounts (except to the extent previously delivered pursuant to the Existing Agreement); (v) Addenda to the Collateral Assignment of Licenses duly executed by KMC III, Leasing III, Telecom.com and Services, and an updated Schedule I thereto certified as being complete and correct by all the Borrowers, together with consents to assignment of licenses and rights from Persons designated by the Collateral Agent duly executed by such Persons, including agreements as to default notices, cure rights, waiver of lien rights, conveyance of nondisturbance rights and other terms satisfactory to the Collateral Agent; (vi) Addenda to the Collateral Assignment of Leases duly executed by KMC III, Leasing III, Telecom.com and Services, and an updated Schedule I thereto certified as being complete and correct by all the Borrowers, together with consents to assignment, duly executed by the appropriate Persons, including agreements as to default notices, cure rights, waiver of lien rights, conveyance of nondisturbance rights and other terms satisfactory to the Collateral Agent with respect to those leased properties specified by the Collateral Agent, together with landlord waivers in the form 56 of EXHIBIT D hereto executed by the appropriate landlord with respect to those leased properties specified by the Collateral Agent; (vii)Completed environmental questionnaires and indemnity agreement executed by KMC III, Leasing III, Telecom.com and Services and Phase I Environmental Reports with respect to premises described on Schedule 3.10 (if any); and (viii) Access Agreements executed and delivered by Kamine Development Corp. with respect to KMC III's, Leasing III's , Telecom.com's and Services' premises located at 1545 Route 206, Suite 300, Bedminster, New Jersey in form and substance satisfactory to the Collateral Agent. (d) The Agents or the Collateral Agent, as applicable, shall have satisfactorily completed their review of any Lucent Purchase Agreement, any Additional Purchase Agreements, construction and maintenance contracts, right of way agreements and interconnection agreements related to the Systems being financed with the Loans made on the Closing Date. (e) The Collateral Agent shall have received evidence satisfactory to the Collateral Agent that the Collateral Agent's security interests in the Collateral have been properly perfected and constitute first and prior security interests subject only to Permitted Liens, including by (i) filing Mortgages, the Collateral Assignment of Licenses, the Collateral Assignment of Leases, leasehold mortgages and UCC-1 financing statements (including, without limitation, fixture filings) in certain filing and recording offices, (ii) filing the Trademark Security Agreement in the United States Patent and Trademark Office, (iii) obtaining consents to the Collateral Assignments of Licenses and the Collateral Assignments of Leases and (iv) taking possession of stock certificates and other instruments, in each case, as requested by the Collateral Agent. (f) The Collateral Agent shall have received evidence satisfactory to the Collateral Agent, including the results of searches conducted in the mortgage recording, UCC, tax Lien and judgment filing records in each appropriate filing office or jurisdiction, that there are no Liens against the Collateral except Permitted Liens. (g) The Agent shall have received evidence satisfactory to the Agent that no Borrower has any Debt other than as described in SECTION 6.13 and that the holders of any such Debt described in CLAUSES (v) and (vii) of SECTION 6.13 have executed subordination and standstill agreements satisfactory to the Agent. (h) The Collateral Agent, as it may require, shall have obtained or waived in writing with respect to each real estate and material equipment lease and each mortgage of any Borrower relating to the Systems being financed with the initial Loan made after the Closing Date (i) the right from the applicable lessors and mortgagees to cure all payment defaults under such leases and 57 mortgages by making payment directly to the applicable lessors and mortgagees and (ii) landlord waivers and consents, as the Collateral Agent may require, with respect to each leased facility. (i) The Agents shall have satisfactorily completed their due diligence investigation of the Borrowers and the Systems and the Borrowers' other assets, and their respective officers and directors including, without limitation, environmental reviews, engineering reviews, review of material agreements of the Borrowers and review of easement matters. (j) All right of way agreements with respect to each System under construction shall be sufficient to allow full operation of such System and shall, upon request of the Collateral Agent, be assignable to the Collateral Agent or its designee. (k) Lucent shall have executed and delivered to the Collateral Agent, in form and substance satisfactory to the Agents, a reaffirmation of the Consent and Subordination Agreement dated December 22, 1998 among Lucent, the Borrowers other than KMC III, Leasing III, Telecom.com and Services, and the Collateral Agent. (l) The obligations of KMC III and Leasing III under the Lucent Loan Agreement shall be discharged in full with the proceeds of the Loans to be made on the Closing Date. SECTION 4.02. CONDITIONS PRECEDENT TO ALL LOANS. In the case of each Loan hereunder and the obligation to issue Letters of Credit or provide Credit Support therefor: (a) The representations and warranties of each Borrower set forth in ARTICLE III or in any other Loan Document shall be true and correct in all material respects on and as of the date of such Loan with the same effect as though such representations and warranties had been made on and as of such date, except that any representations or warranties that relate to a specified date shall only be reaffirmed as of such date. (b) At the time of each such Loan, and after giving effect to such Loan, each Borrower shall be in compliance with all the terms and provisions set forth herein on its part to be observed or performed, and no Event of Default or Default shall have occurred and be continuing. (c) At the time of each such Loan and after giving effect to each such Loan, there shall have been no material adverse change in the condition (financial or otherwise), operations, properties or prospects of any Borrower since the date of the Financials. (d) Such Loan, when combined with Loans previously made to the Borrowers, shall not exceed the Commitment Amount. (e) All legal matters incident to such Loan and the Loan Documents shall be satisfactory to Counsel. 58 (f) The Agent shall have received a Notice of Borrowing for the Loan and acceptance certificate and invoices required by SECTION 2.03. (g) The Collateral Agent shall have first priority Liens on all personal and real property assets that comprise or relate to each System to be funded by such Loan, shall have received collateral assignments of all material third party agreements relating to such Systems, consented to by the applicable third parties, as requested by the Collateral Agent, and shall have received evidence that all necessary Governmental Approvals for such System have been obtained. (h) The Collateral Agent shall have received copies of such lien waivers and other acknowledgments from Persons constructing the Systems, any subcontractors or vendors (including Lucent or each Additional Vendor) with respect to the construction of the Systems as the Collateral Agent may reasonably request. (i) All fees and expenses which are due and payable to the Agent and the Collateral Agent on or prior to the date of the advance of such Loan shall have been paid. (j) The Agents or the Collateral Agent, as applicable, shall have satisfactorily completed their review of any Additional Purchase Agreements, construction and maintenance contracts related to the Systems being financed with such Loan and the interconnection agreements for each System being financed with such Loan. (k) The Collateral Agent shall have obtained or waived in writing with respect to each real estate and material equipment lease, each mortgage, and each material third party agreement relating to the Systems being financed with such Loan (i) the right from the applicable lessors and mortgagees to cure all payment defaults under such leases and mortgages by making payments directly to the applicable lessors and mortgagees, as the Collateral Agent may request, (ii) landlord waivers and consents, as the Collateral Agent may require, with respect to each leased facility, and (iii) consents to collateral assignment, as the Collateral Agent may require, with respect to each such material third party agreement. (l) There shall not have occurred in the opinion of the Agents, any material adverse change in any two of the three members of Borrower's or KMC Holdings' senior management team, which shall comprise its Chief Executive Officer, Chief Financial Officer and Chief Operating Officer. (m) If a Loan is requested to finance Aged Equipment, the Collateral Agent, if it so elects, shall have obtained an appraisal of such Aged Equipment from an appraiser selected by the Collateral Agent, which appraisal shall be satisfactory to the Collateral Agent and the cost of which shall be borne by such Borrower. 59 ARTICLE V AFFIRMATIVE COVENANTS Each Borrower covenants and agrees that so long as this Agreement shall remain in effect, any Commitment hereunder shall be outstanding or any Obligations hereunder or under any of the other Loan Documents are unpaid, unless the Requisite Lenders shall have otherwise given prior written consent: SECTION 5.01. CORPORATE AND FRANCHISE EXISTENCE. Such Borrower shall preserve and maintain its corporate existence, rights, franchises, licenses and privileges in the jurisdiction of its organization, and in all other jurisdictions in which such qualification is necessary in view of its business and operations and property and preserve, protect and keep in full force and effect its material rights and its Governmental Approvals. SECTION 5.02. COMPLIANCE WITH LAWS, ETC. Such Borrower shall comply in all material respects with all laws and regulations applicable to it, including, without limitation, Environmental Laws, regulations promulgated by the FCC and any PUC, and other telecommunications laws and regulations, and all material contractual obligations applicable to it. SECTION 5.03. MAINTENANCE OF PROPERTIES. Such Borrower shall at all times maintain in good repair, working order and condition, excepting ordinary wear and tear, all of its properties material to its operations and make all appropriate repairs, replacements and renewals thereof, in each case consistent with prudent industry practices and sound business judgment and with respect to the maintenance of machinery and equipment, in compliance with applicable government regulations, manufacturers' warranty requests and any licensing requirements. SECTION 5.04. INSURANCE. (a) COVERAGE. Without limiting any of the other obligations or liabilities of such Borrower under this Agreement, such Borrower shall carry and maintain, and require each contractor retained in connection with the construction of any System to carry and maintain, each at its own expense, at least the minimum insurance coverage set forth in this SECTION 5.04. Such Borrower shall also carry and maintain any other insurance that the Collateral Agent may reasonably require from time to time. All insurance carried pursuant to this SECTION 5.04 shall be placed with such insurers that have an A.M. Best rating of A:X or better, or as may be acceptable to the Collateral Agent. Such coverage shall be in such form, with terms, conditions, limits and deductibles as shall be acceptable to the Collateral Agent. (b) CONSTRUCTION PERIOD. During the period from, and including the commencement of construction of any System, to and including the completion of construction of any System, such Borrower shall maintain in full force and effect, pay all premiums when due in respect of, and comply with all terms and conditions of the following coverages: (i) ALL RISK BUILDER'S RISK. Such Borrower shall maintain all risk builder's risk insurance covering physical loss or damage to such System 60 including, but not limited to, fire and extended coverage, collapse, flood, earth movement and windstorm, and comprehensive boiler and machinery coverage (including electrical malfunction and mechanical breakdown). Such insurance shall cover all property during construction and testing, as well as any and all materials, equipment and machinery intended for such System during off-site storage and inland transit and, if necessary, during ocean and air transit. All transit coverage shall be on a "warehouse to warehouse" basis. The all risk builder's risk policy shall be written on a replacement cost basis for the full construction cost of such System or in an amount acceptable to the Collateral Agent and shall contain an agreed amount endorsement waiving any coinsurance penalty. Coverage shall not exclude resultant damage caused by faulty workmanship, design or materials nor shall it exclude machinery and equipment under guarantee or warranty; and (ii) DELAY IN START-UP. As an extension of the coverage required under SUBSECTION (B)(i) or as a separate policy, such Borrower shall maintain delay in start-up insurance covering net profits (if any), continuing expenses and debt service payments resulting from delays in achieving the completion date for the construction of any System caused by (i) physical loss or damage to such System during construction or testing, (ii) loss or damage to equipment while in ocean, air or inland transit or (iii) loss or damage to equipment while in storage away from the site. Contingent delay in start-up coverage shall also be included to cover delay caused by damage to critical path items while under manufacture or at the supplier's premise. Such extension or separate policy shall have a period of indemnity of not less than twelve (12) months with an agreed amount limit not less than $20,000,000 combined property, delay in start-up and extra expense per System and shall contain an agreed amount endorsement waiving any coinsurance penalty. Such extension or separate policy shall also cover expediting expenses in an amount not less than $1,000,000. Deductibles may not exceed seven (7) days; and (iii) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY. Such Borrower shall maintain comprehensive general liability insurance written on an occurrence basis with a limit of liability not less than $1,000,000 per occurrence and $2,000,000 in the aggregate. Coverage shall include, but not be limited to, premises/operations, explosion, collapse, and underground hazards, broad form contractual, independent contractors products/completed operations, broad form property damage, and personal injury liability. Such insurance shall not exclude coverage for punitive or exemplary damages where insurable by law; and (iv) WORKERS' COMPENSATION/EMPLOYER'S LIABILITY. Such Borrower shall maintain workers' compensation insurance in accordance with statutory provisions covering accidental injury, illness or death of an employee of such Borrower while at work or in the scope of his or her employment with such Borrower and employer's liability insurance in an amount not less than $500,000. Such coverage shall not contain any occupational disease exclusions; and (v) AUTOMOBILE LIABILITY. Such Borrower shall maintain automobile liability insurance covering owned, non-owned, leased, hired or borrowed 61 vehicles against bodily injury or property damage. Such coverage shall have a limit of not less than $1,000,000; and (vi) EXCESS/UMBRELLA LIABILITY. Such Borrower shall maintain excess or umbrella liability insurance in an amount not less than $30,000,000 written on an occurrence basis providing coverage limits in excess of the insurance limits required under SECTION 5.04(B)(iii), (B)(iv) (employer's liability only), and (b)(v). Such insurance shall follow from the primary insurances and drop down in case of exhaustion of underlying limits and/or aggregates. Such insurance shall not exclude coverage for punitive or exemplary damages where insurable by law. (c) CONTRACTOR INSURANCE COVERAGE. Such Borrower shall cause each contractor retained in connection with the construction of any System to carry and maintain, in full force and effect, such insurance and such bonds as such contractor is required to maintain pursuant to the following: (i) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY. Such contractor shall maintain comprehensive general liability insurance covering the construction of such System written on an occurrence basis with a limit of liability not less than $5,000,000. Coverage shall include, but not be limited to, premises/operations, explosion, collapse, and underground hazards, sudden and accidental pollution, broad form contractual, independent contractors, products/completed operations, broad form property damage, and personal injury liability. Such insurance may be written in any combination of primary and excess/umbrella forms. The products/completed operations coverage shall be extended to cover such System for two years after completion of such System. Such insurance shall not exclude coverage for punitive or exemplary damages where insurable by law; and (ii) WORKERS' COMPENSATION/EMPLOYER'S LIABILITY. Such contractor shall maintain workers' compensation insurance in accordance with statutory provisions covering accidental injury, illness or death of an employee of such contractor while at work or in the scope of his or her employment with such contractor and employer's liability insurance in an amount not less than $5,000,000 written in any combination of primary and excess/umbrella policies, and (iii) AUTOMOBILE LIABILITY. Such contractor shall maintain automobile liability insurance covering owned, non-owned, leased, hired or borrowed vehicles against bodily injury or property damage. Such coverage shall have a limit of not less than $5,000,000 written in any combination of primary and excess/umbrella policies. (d) OPERATIONS PERIOD. Beginning on the completion date of each System, such Borrower shall maintain in full force and effect, pay all premiums when due in respect of, and comply with all terms and conditions of the following insurance coverages for each System. (i) ALL RISK PROPERTY INSURANCE. Such Borrower shall maintain all risk property insurance covering such System against physical loss or 62 damage, including but not limited to fire and extended coverage, collapse, flood, earth movement and windstorm, and comprehensive boiler and machinery coverage (including electrical malfunction and mechanical breakdown). Such insurance shall cover each and every component of such System and shall not contain any exclusion for resultant damage caused by faulty workmanship, design or materials. Coverage shall be written on a replacement cost basis with property, business interruption and extra expense insurance in a combined amount of $30,000,000 per System. Such insurance policy shall contain an agreed amount endorsement waiving any coinsurance penalty; and (ii) BUSINESS INTERRUPTION. As an extension of the coverage required under SECTION 5.04(d)(i), such Borrower shall maintain business interruption insurance in an agreed amount equal to twelve (12) months projected loss of net profits, continuing expenses and debt service payments of such System and shall contain an agreed amount endorsement waiving any coinsurance penalty. Contingent business interruption insurance shall also be included to cover the major suppliers and customers of the Borrowers. Coverage shall be included for expediting expenses in an amount not less than $1,000,000. Such insurance shall also cover service interruption. Deductibles shall not exceed seven (7) days; and (iii) COMPREHENSIVE OR COMMERCIAL GENERAL LIABILITY INSURANCE. Such Borrower shall maintain comprehensive general liability insurance written on an occurrence basis with a limit of not less than $1,000,000 per occurrence and $2,000,000 in the aggregate. Such coverage shall include, but not be limited to, premises/operations, explosion, collapse, underground hazards, contractual liability, independent contractors, products/completed operations, property damage and personal injury liability. Such insurance shall not exclude coverage for punitive or exemplary damages where insurable by law; and (iv) WORKERS' COMPENSATION/EMPLOYER'S LIABILITY. Such Borrower shall maintain workers' compensation insurance in accordance with statutory provisions covering accidental injury, illness or death of an employee of such Borrower while at work or in the scope of his or her employment with such Borrower and employer's liability insurance in an amount not less than $500,000. Such coverage shall not contain any occupational disease exclusions; and (v) AUTOMOBILE LIABILITY. Such Borrower shall maintain automobile liability insurance covering owned, non-owned, leased, hired or borrowed vehicles against bodily injury or property damage. Such coverage shall have a limit of not less than $1,000,000; and (vi) EXCESS/UMBRELLA LIABILITY. Such Borrower shall maintain excess or umbrella liability insurance in an amount not less than $30,000,000 written on an occurrence basis providing coverage limits in excess of the insurance limits required under SECTIONS 5.04(d)(iii), (d)(iv) (employer's liability only), and (d)(v). Such insurance shall follow from the primary insurances and drop down in case of exhaustion of underlying limits and/or 63 aggregates. Such insurance shall not exclude coverage for punitive or exemplary damages where insurable by law. (e) ENDORSEMENTS. Such Borrower shall cause all insurance carried and maintained in accordance with this SECTION 5.04 to be endorsed as follows: (i) Such Borrower shall be the named insured and the Collateral Agent shall be an additional insured and loss payee with respect to policies described in SECTION 5.04(b)(i), (b)(ii), (d)(i) and (d)(ii). Such Borrower shall be the named insured and the Collateral Agent shall be an additional insured with respect to policies described in SECTION 5.04(b)(iii), (b)(v), (b)(vi), (d)(iii), (d)(v) and (d)(vi). Such Borrower and the Collateral Agent shall be additional insureds under all insurances carried by contractors under SECTION 5.04(c) to the extent allowed by law. All policies shall provide that any obligation imposed upon such Borrower and/or any contractor, including but not limited to the obligation to pay premiums, shall be the sole obligation of such Borrower and/or the contractor and not that of the Agent, the Collateral Agent or any Lender; and (ii) with respect to policies described in SECTION 5.04(b)(i) and (b)(ii), and (d)(i) and (d)(ii), the interests of the Collateral Agent shall not be invalidated by any action or inaction of such Borrower, or any other Person, and shall insure the Collateral Agent regardless of any breach or violation by such Borrower, any contractor or any other Person, of any warranties, declarations or conditions of such policies, and (iii) inasmuch as the liability policies are written to cover more than one insured, all terms, conditions, insuring agreements and endorsements, with the exception of the limits of liability, shall operate in the same manner as if there were a separate policy covering such insured; and (iv) the insurers thereunder shall waive all rights of subrogation against the Agent, the Collateral Agent or the Lenders, any right of setoff or counterclaim and any other right to deduction, whether by attachment or otherwise; and (v) such insurance shall be primary without right of contribution of any other insurance carried by or on behalf of the Agent, the Collateral Agent or the Lenders with respect to their interests as such in such System; and (vi) if such insurance is canceled for any reason whatsoever, including nonpayment of premium, or any changes are initiated by such Borrower or carrier which affect the interests of the Collateral Agent, such cancellation or change shall not be effective as to the Collateral Agent until thirty (30) days, except in the case of non-payment of premium which shall be ten (10) days, after receipt by the Collateral Agent of written notice sent by registered mail from such insurer. (f) CERTIFICATIONS. On the Closing Date, and at each policy renewal, but not less than annually, such Borrower shall provide to the Collateral Agent approved certification from each insurer or by an authorized representative of each insurer. Such certification shall identify the underwriters, the type of 64 insurance, the limits, deductibles, and term thereof and shall specifically list the special provisions delineated for such insurance required for this SECTION 5.04. (g) INSURANCE REPORT. Concurrently with the furnishing of all certificates referred to in this SECTION 5.04, such Borrower shall furnish the Collateral Agent with an opinion from an independent insurance broker, acceptable to the Collateral Agent, stating that all premiums then due have been paid and that, in the opinion of such broker, the insurance then maintained by such Borrower is in accordance with this section. Furthermore, upon its first knowledge, such broker shall advise the Collateral Agent promptly in writing of any default in the payment of any premiums or any other act or omission, on the part of any Person, which might invalidate or render unenforceable, in whole or in part, any insurance provided by such Borrower hereunder. (h) APPLICATION OF PAYMENTS. All payments received by such Borrower from any insurance referred in SECTION 5.04(b)(i), (b)(ii), (d)(i) and (d)(ii) shall be promptly delivered directly to the Collateral Agent, which amounts shall be applied by the Collateral Agent, upon request by such Borrower and provision to the Collateral Agent of detailed information, including a construction schedule and cost estimates, which establish to the reasonable satisfaction of the Collateral Agent that the amounts available and the proposed schedule are adequate to restore, replace or rebuild the property subject to insurance payments in a timely manner, to such restoration, replacement or rebuilding unless an Event of Default or Default shall have occurred and be continuing or such Borrower shall have failed to make such request within thirty (30) days after receipt of such amounts by Collateral Agent, in which case such amounts shall be applied in the Requisite Lenders' sole discretion to the repayment of the Obligations or such restoration, replacement or rebuilding. (i) GENERAL. The Collateral Agent shall be entitled, upon reasonable advance notice, to review and/or receive copies of such Borrower's (or other appropriate party's) books and records regarding all insurance policies carried and maintained with respect to each System and such Borrower's obligations under this SECTION 5.04. Notwithstanding anything to the contrary herein, no provision of this Agreement or any other Loan Document shall impose on the Collateral Agent, the Agent or any Lender any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by such Borrower, nor shall the Collateral Agent, the Agent or any Lender be responsible for any representations or warranties made by or on behalf of such Borrower to any insurance broker, company or underwriter. The Collateral Agent or the Agent, at its sole option, may obtain such insurance if not provided by such Borrower; in such event, such Borrower shall reimburse the Collateral Agent or the Agent upon demand for the cost thereof together with interest, and such costs shall constitute Obligations secured by the Collateral. SECTION 5.05. OBLIGATIONS AND TAXES. Such Borrower shall pay all of its indebtedness and obligations promptly and in accordance with their terms and pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become in default, as well as all lawful claims 65 for labor, materials and supplies or otherwise which, if unpaid, might become a Lien upon such properties or any part thereof; PROVIDED, HOWEVER, that such Borrower shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings diligently pursued, and such Borrower shall set aside on its books such reserves as are required by GAAP with respect to any such tax, assessment, charge, levy or claim so contested. SECTION 5.06. FINANCIAL STATEMENTS, REPORTS, ETC. Such Borrower shall furnish to the Agent and the Lenders (except as otherwise provided herein): (a) within one hundred twenty (120) days after the end of each fiscal year, annual consolidated and consolidating financial statements for KMC Holdings, and combined financial statements for the Borrowers, including the balance sheets and statements of operations, stockholders' equity (consolidated only) and cash flows, for such fiscal year, prepared in accordance with GAAP, which consolidated financial statements and other above described financial information shall have been audited by a nationally recognized independent certified public accounting firm satisfactory to the Agent, and accompanied by such independent certified public accounting firm's unqualified opinion; (b) within forty-five (45) days after the end of the first three fiscal quarters during each fiscal year and within one hundred twenty (120) days after the end of the fourth fiscal quarter (i) consolidated and consolidating unaudited balance sheets and statements of operations, and consolidated statements of stockholders' equity and cash flows for KMC Holdings, and combined unaudited balance sheets, statements of operations, stockholders' equity and cash flows of the Borrowers as of the end of each such fiscal quarter, as applicable, and for the then elapsed portion of the fiscal year and (ii) a statement of revenues and EBITDA for the Borrowers as of the end of each such fiscal quarter, as applicable, and for the then elapsed portion of the fiscal year, calculated for each city where a System has been constructed in accordance with the Milestone Plan; (c) within forty-five (45) days after the end of each month during each fiscal year (or within one hundred twenty (120) days after the end of each December), a detailed statement of operations for the Borrowers on a combined basis for such month and year-to-date period with comparisons to the corresponding projections for such month and year-to-date period set forth in the Milestone Plan; PROVIDED, that such Borrowers shall only be required to deliver the statement described in this SECTION 5.06(c) on a quarterly basis at any time that, and only for so long as, the Borrowers on a combined basis have achieved positive EBITDA; (d) concurrently with provision of the financial statements referred to in CLAUSES (a), (b) and (c) above, a certificate of KMC Holdings' independent certified public accountant or KMC Holdings' chief financial officer, as applicable, to the effect that the financial statements referred to in CLAUSE (a), (b) and (c) above, present fairly the financial position and results of operations of KMC Holdings, and the Borrowers and as having been prepared in accordance with GAAP consistently applied, in each case subject to normal year end audit adjustments except for the statements referred to in CLAUSE (a) above; 66 (e) concurrently with the provision of (i) the financial statements referred to in CLAUSE (a) above and (ii) any statements delivered pursuant to CLAUSE (b) above in respect of the periods ending March 31, June 30 or September 30, a Periodic Reporting Certificate of the chief financial officer of KMC Holdings setting forth the calculations contemplated in ARTICLE VII hereof and certifying as to the fact that such Person has examined the provisions of this Agreement and that no Event of Default or any Default, shall have occurred and be continuing or if such an event has occurred, a statement explaining its nature and extent and setting forth the steps the Borrowers propose to take to cure such Event of Default or Default; (f) (i) not later than December 1 of each calendar year, consolidating and consolidated projected annual statements of operations, balance sheets and cash flow statements for KMC Holdings for the succeeding fiscal year, such statements to be reasonably acceptable to the Agents, and (ii) not later than January 15 of each calendar year, an annual operating budget on a quarterly basis for such calendar year, with each such budget to be in compliance with the Milestone Plan; (g) to the Collateral Agent, all material agreements or licenses affecting the Governmental Approvals of any Borrower or any System promptly after any execution, or material amendment thereto; (h) to the Collateral Agent, promptly upon their becoming available, copies of any material periodic or special documents, statements or other information filed by any Borrower with the FCC, PUC or other Governmental Authority in connection with the construction and/or operation of any System or with respect to the transactions contemplated by any of the Loan Documents, and copies of any material notices and other material communications from the FCC, PUC or from any other Governmental Authority; (i) immediately upon any officer of any Borrower obtaining knowledge of any condition or event (i) which either constitutes an Event of Default or a Default, (ii) which renders any representation or warranty contained herein materially false or misleading, or when made, renders any document materially false or misleading, or (iii) which would result in any financial results for any fiscal year to materially deviate from the financial results projected for such fiscal year in the Milestone Plan or the financial projections described in CLAUSE (f) above, a certificate signed by an authorized officer of such Borrower specifying in reasonable detail the nature and period of existence thereof and what corrective action such Borrower has taken or proposes to take with respect thereto; (j) within thirty (30) days after the end of each fiscal year of such Borrower, a certificate signed by an authorized officer of such Borrower (x) setting forth all the Real Property, Easements, licenses, rights of way and other similar interests in real property acquired by such Borrower in the preceding year and (y) confirming that no Default or Event of Default has occurred and is continuing; (k) evidence in the manner set forth in SECTION 5.04(e) of insurance complying with SECTION 5.04; 67 (l) following the written request of the Agent, not later than forty-five (45) days after the end of each fiscal month, reports on accounts receivable and accounts payable of such Borrower in such detail and format as may be reasonably requested by the Agent; (m) promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which such Borrower or KMC Holdings files with the Securities and Exchange Commission; and (n) promptly from time to time such other information regarding the operations (including, without limitation, construction budgeting and System completion), business affairs and condition (financial or otherwise) of such Borrower or KMC Holdings as the Agent may reasonably request. SECTION 5.07. LITIGATION AND OTHER NOTICES. Such Borrower shall give the Agent prompt written notice upon obtaining knowledge of the following: (a) all Events of Default or Defaults and all events of default or any event that would become an event of default upon notice or lapse of time or both under any of the terms or provisions of any note, or of any other evidence of indebtedness or agreement or contract governing the borrowing of money in excess of $250,000 in the aggregate, of such Borrower; (b) any levy, attachment, execution or other process against any of the property or assets, real or personal, of such Borrower in an amount in excess of $250,000; (c) the filing or commencement of any action, suit or proceeding by or before any court or any Governmental Authority which, if adversely determined against such Borrower, would result in a Material Adverse Effect; (d) any material adverse notice, letter or other correspondence of any kind from the FCC or the PUC relating to the Governmental Approvals or any System; (e) any default under any other material license, agreement or contract to which such Borrower is a party; and (f) any matter which has resulted in, or which such Borrower reasonably believes will result in, a Material Adverse Effect on such Borrower. SECTION 5.08. MORTGAGES; LANDLORD CONSENTS; LICENSES AND OTHER Agreements. As security for the Obligations, such Borrower shall with respect to each System (a) promptly execute and deliver to the Collateral Agent (1) Mortgages in favor of and satisfactory to the Collateral Agent with respect to any real property purchased by such Borrower on which a switch or network operating center is located, and at the request of the Collateral Agent, with respect to any other real property purchased by such Borrower, together with lender's title policies for any such real property satisfactory to the Collateral Agent, if requested by the Collateral Agent, (2) leasehold mortgages or collateral assignments of leases, landlord waivers or consents, and appropriate Uniform Commercial Code fixture financing statements, in each case satisfactory to the Collateral Agent with respect to any real property leased by such Borrower and on which Switch Equipment or a network operating center is located, and at the request of the Collateral Agent, with respect to any other leased real property of such Borrower, (3) Mortgages or collateral assignments and consents satisfactory to the Collateral Agent with respect to such Borrower's Easements and rights of way, as requested by the Collateral Agent, (4) collateral assignments of leases and lessor consents, satisfactory to and as requested by the Collateral Agent, with respect to any long-haul fiber leased by such Borrower and (5) with respect to each System, collateral assignments and consents to such assignments from the applicable third Persons, for each other material lease, license, contract or other agreement or instrument entered into 68 by such Borrower after the date hereof, as required by the Collateral Agent and (b) (1) update Schedule 1 to the Collateral Assignment of Licenses to cover all Governmental Approvals obtained by such Borrower after the Closing Date and agreements entered into by such Borrower after the Closing Date with third Persons, (2) obtain consents to collateral assignments from the licensors granting the Governmental Approvals referred to in CLAUSE (b)(1) above and from those third Persons referred to in CLAUSE (b)(1) above that are specified by the Collateral Agent, such consents to collateral assignment to be in form and substance satisfactory to the Collateral Agent and (3) update Schedule 1 to the Collateral Assignment of Leases to cover all leases referred to in CLAUSE (a)(2) above. SECTION 5.09. ERISA. Such Borrower shall comply in all material respects with the applicable provisions of ERISA and furnish to the Agent, (i) as soon as possible, and in any event within thirty (30) days after such Borrower or any officer of such Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred or any Termination Event has occurred, a statement of an officer of such Borrower setting forth details as to such Reportable Event or Termination Event and the corrective action that such Borrower proposes to take with respect thereto, together with a copy of the notice of any such Reportable Event given to the PBGC, and (ii) promptly after receipt thereof, a copy of any notice such Borrower may receive from the PBGC relating to the intention of the PBGC to terminate any Plan or to appoint a trustee to administer any such Plan. SECTION 5.10. ACCESS TO PREMISES AND RECORDS. Such Borrower shall permit representatives of the Agents to have access to such Borrower's books and records and to the Collateral and the premises of such Borrower at reasonable times upon reasonable notice and to make such excerpts from such records as such representatives deem necessary and to inspect the Collateral. SECTION 5.11. DESIGN AND CONSTRUCTION. Such Borrower shall design, construct, equip and operate its Systems substantially as previously disclosed to Lenders in the Milestone Plan and in accordance with prudent industry standards. SECTION 5.12. ENVIRONMENTAL NOTICES. If such Borrower shall (a) receive written notice that any violation of any Environmental Law may have been committed or is about to be committed by such Borrower, (b) receive written notice that any administrative or judicial complaint or order has been filed or is about to be filed against such Borrower alleging violations of any Environmental Law or requiring such Borrower to take any action in connection with any Release of any Contaminant into the environment, or (c) receive any written notice from a Governmental Authority or private party alleging that such Borrower may be liable or responsible for costs associated with a response to or cleanup of a Release or any damages caused thereby, such Borrower shall provide the Agent with a copy of such notice within twenty (20) Business Days of such Borrower's receipt thereof. SECTION 5.13. AMENDMENT OF ORGANIZATIONAL DOCUMENTS. Such Borrower shall notify the Agent and the Collateral Agent of any amendment to its Certificate or Articles of Incorporation or other organizational documents within ten (10) days of the occurrence of any such event, and provide the Agent with copies of any amendments certified by the secretary of such Borrower and of 69 all other relevant documentation. Such Borrower shall promptly deliver to the Collateral Agent such financing statements executed by such Borrower which the Collateral Agent may request as a result of any such event. SECTION 5.14. THIRD PARTY AGREEMENTS AND DELIVERY AND ACCEPTANCE CERTIFICATES. Such Borrower shall provide the Collateral Agent with (i) copies of all interconnection agreements, right of way agreements, easement agreements, real property leases, construction agreements, equipment purchase agreements, fiber leases, telephone line leases, state and local franchise agreements and other agreements with municipalities, that in each case relate to each System of such Borrower, promptly after execution of each such agreement; PROVIDED, HOWEVER, that with respect to certain of the foregoing categories of agreements specified by the Collateral Agent, such Borrower shall be permitted to provide the Collateral Agent with inventories of the particular types of agreements in lieu of delivering copies of the agreements, which inventories shall be (x) in form and substance satisfactory to the Collateral Agent and (y) updated by the applicable Borrower promptly following the execution of any additional agreement of the type inventoried; PROVIDED, FURTHER, HOWEVER, that nothing in the foregoing proviso shall limit the Collateral Agent's ability to, at any time, request and receive a copy of any third party agreement from the applicable Borrower, and (ii) with respect to each System, copies of delivery and acceptance certificates substantially in the form of EXHIBIT R hereto with respect to each item of Telecommunications Equipment with an invoiced purchase price in excess of $250,000, in each case, where such certificates are not required to be delivered to the Collateral Agent pursuant to SECTION 2.03(a), promptly after completion of such System or acceptance of such item of Equipment, as applicable. SECTION 5.15. ACCOUNTS PAYABLE. Such Borrower shall pay each of its accounts payable in accordance with its practices as of the Closing Date but in any event no later than sixty (60) days after the due date, PROVIDED, HOWEVER, that such Borrower shall not be required to pay any account payable as long as the validity thereof shall be contested in good faith by appropriate protest or proceedings and such Borrower shall have set aside adequate reserves on its books with respect thereto in accordance with GAAP. SECTION 5.16. INTELLECTUAL PROPERTY. Such Borrower shall enter into Intellectual Property Documents, in form and substance satisfactory to the Collateral Agent, with respect to all of the Intellectual Property owned by such Borrower. SECTION 5.17. FISCAL YEAR. Such Borrower shall maintain a fiscal year ending on December 31. SECTION 5.18. REQUIRED CONTRIBUTION. The Borrowers shall obtain the Required Contribution on or prior to August 31, 2000. SECTION 5.19. SUBSIDIARY GUARANTEES AND PLEDGES. Such Borrower shall (i) cause each Person which becomes a Subsidiary of such Borrower and does not become a Borrower under this Agreement to execute a Guaranty and Security Agreement in the form of EXHIBIT U hereto, and (ii) execute a Pledge Agreement pursuant to which all of the Equity Interests in such Person will be pledged to the Collateral Agent, PROVIDED, that in the event such Person is an indirect 70 Subsidiary of such Borrower, such Borrower shall cause each applicable Subsidiary of such Borrower to pledge all of the Equity Interests in such Person to the Collateral Agent. SECTION 5.20. ACCOUNTING; MAINTENANCE OF RECORDS. Such Borrower shall maintain a system of accounting established and administered in accordance with GAAP. Such Borrower shall keep and maintain, and cause each of its Subsidiaries to keep and maintain, in all material respects, proper books of record and account in which entries in conformity with GAAP shall be made of all dealings and transactions in relation to their respective businesses and activities. SECTION 5.21. FURTHER ASSURANCES. Such Borrower agrees to do such further acts and things and to execute and deliver to the Agent or the Collateral Agent such additional assignments, agreements, powers and instruments, at such Borrower's expense, as the Agent or the Collateral Agent may reasonably require or deem advisable to carry into effect the purposes of this Agreement and the other Loan Documents or to better assure and confirm unto the Agent or the Collateral Agent its rights, powers and remedies hereunder and thereunder. ARTICLE VI NEGATIVE COVENANTS Each Borrower covenants and agrees with the Agent, the Collateral Agent and the Lenders that as long as this Agreement shall remain in effect, any Commitment hereunder shall be outstanding or any Obligations hereunder or under any of the Loan Documents shall be unpaid, unless the Requisite Lenders shall have otherwise given prior written consent: SECTION 6.01. LIENS, ETC. Such Borrower shall not create, incur, assume or suffer to exist, directly or indirectly, any Lien upon or with respect to any of its properties or the Collateral, now owned or hereafter acquired, or upon any proceeds, products, issues, income or profits therefrom except for the following ("PERMITTED LIENS"): (i) Liens granted pursuant to the Loan Documents; (ii) Liens securing any Purchase Debt to the extent that the Liens cover only the subject assets purchased with such Purchase Debt; (iii) Liens for taxes, assessments or governmental charges or levies on such Borrower's property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being diligently contested in good faith and by appropriate proceedings and for which such Borrower shall have set aside reserves on its books as required by GAAP; (iv) Liens imposed by law, such as landlord's, carrier's, warehousemen's and mechanic's liens, which liens shall be waived in writing to the extent waivable, and with respect to obligations not yet due or being contested in good faith by appropriate proceedings and in either case 71 for which such Borrower shall have set aside adequate reserves on its books as required by GAAP; (v) Liens arising out of pledges or deposits under workmen's compensation laws, unemployment insurance, old age pensions, or other social security benefits other than any Lien imposed by ERISA; (vi) Liens incurred or deposits made in the ordinary course of business to secure surety bonds provided that such Liens shall extend only to cash collateral for such surety bonds; or (vii) Liens on cash securing the reimbursement obligations under the Excluded Letters of Credit. SECTION 6.02. USE OF PROCEEDS. Such Borrower shall not use the proceeds of any Loan for any purpose other than as provided in SECTION 2.02 hereof. SECTION 6.03. SALE OF ASSETS, CONSOLIDATION, MERGER, ETC. Such Borrower shall not consolidate with or merge into any other Person, or without the prior written consent of the Requisite Lenders, sell, lease, transfer or otherwise dispose of any Collateral, except for (a) sales of inventory in the ordinary course of business, and (b) any sale, lease, transfer or other disposition of assets no longer used or useful in the conduct of the Business for the fair market value thereof not to exceed $250,000 in the aggregate; PROVIDED, HOWEVER, that if no Event of Default has then occurred or is continuing or would result therefrom, any Borrower, upon provision of thirty days prior written notice to the Agent and upon compliance with SECTION 8.02, may merge with another Borrower. SECTION 6.04. DIVIDENDS AND DISTRIBUTIONS; SALE OF EQUITY INTERESTS. (a) Such Borrower shall not purchase, redeem or otherwise acquire any interest of such Borrower, declare or make or pay any dividends in any fiscal year of such Borrower on any class or classes of stock, return capital of such Borrower to its shareholders, make any other distribution on or in respect of any shares of any class of capital stock of such Borrower or make other payments to any shareholder of such Borrower (including in the form of compensation, loan, expense reimbursement or management fee); PROVIDED, HOWEVER, that provided no Event of Default or Default has occurred and is continuing or would result therefrom, (i) such Borrower may make payments of fees or compensation for services which are in the nature of management, corporate overhead or administrative services to the extent permitted by SECTION 6.05 hereof, (ii) provided further, that (A) during the previous four fiscal quarters of the Borrowers, EBITDA equaled at least eighty-five percent (85%) of "Estimated EBITDA" (as defined below) and such Estimated EBITDA is a positive number, (B) during the previous four fiscal quarters of the Borrowers, the Borrowers 72 maintained a Fixed Charge Coverage Ratio of at least 1.10 to 1.00, (C) with respect to the next four fiscal quarters of the Borrowers, EBITDA for the Borrowers, as projected in the most recent financial information furnished pursuant to SECTION 5.06(e), is projected to equal at least eighty-five percent (85%) of Estimated EBITDA for such fiscal quarters and such Estimated EBITDA is a positive number, and (D) with respect to the next four fiscal quarters of the Borrowers, the Fixed Charge Coverage Ratio as projected in the most recent financial information submitted to the Agent and the Lenders pursuant to SECTION 5.06(e), is projected to equal at least 1.10 to 1.00, the Borrowers may pay to KMC Holdings dividends in the amount necessary to make (i) scheduled principal and interest payments under the Indentures, and any other amounts due under the Indentures (including Sections 4.14 and 7.07 thereunder), and (ii) required payments of cash dividends due to the holders of KMC Holdings' Series E and F Senior Redeemable, Exchangeable PIK Preferred Stock. Estimated EBITDA shall mean "EBITDA" as calculated in the Milestone Plan. (b) Such Borrower shall not sell or issue any additional Equity Interests. SECTION 6.05. MANAGEMENT FEES AND PERMITTED CORPORATE OVERHEAD. Such Borrower shall not pay or enter into any arrangement to pay any fee or compensation, or reimburse expenses of, an Affiliate or any other Person for services which are in the nature of management, corporate overhead or administrative services except to the extent provided for in the Milestone Plan, the Management Agreement or as described on SCHEDULE 6.11 attached hereto. SECTION 6.06. GUARANTEES; THIRD PARTY SALES AND LEASES. Such Borrower shall not directly or indirectly, (i) assume any obligation or indebtedness of another Person, (ii) make or assume any Guarantee, or (iii) finance any third party sales or leases, other than its obligations under SECTION 2.15. SECTION 6.07. INVESTMENTS. Such Borrower shall not, directly or indirectly, make any Investments except: (i) Investments in marketable, direct obligations issued or guaranteed by the United States of America, or of any governmental agency or political subdivision thereof, maturing within 365 days of the date of purchase; (ii) Investments in certificates of deposit issued by a bank organized under the laws of the United States of America or any state thereof or the District of Columbia, in each case having capital, surplus and undivided profits totaling more than $500,000,000 and rated at least A by Standard & Poor's Ratings Service and A-2 by Moody's Investors Service, Inc. maturing within 365 days of purchase; (iii) Investments in certificates of deposit, repurchase agreements, money market or other cash management accounts, bankers acceptances and short term Eurodollar time deposits with financial institutions having a long term deposit rating of at least A+ from Moody's Investors Service, Inc. or Standard & Poor's Ratings Group, respectively; (iv) Investments in commercial paper rated P1 or A1 by Moody's Investors Service, Inc. or Standard & Poor's Ratings Group respectively; and (v) Investments not exceeding 365 days in duration in money market funds that invest substantially all of such funds' assets in the Investments described in the preceding clauses (i), (ii), (iii) or (iv). 73 SECTION 6.08. SUBSIDIARIES; PERMITTED ACQUISITIONS. Such Borrower shall not create or acquire any Subsidiary or acquire all or any significant portion of the assets or Equity Interests of another Person; provided, however, that each Borrower may acquire all the Equity Interests of, or all or any significant portion of the assets of, another Person, if such acquisition meets the following requirements (each such acquisition constituting a "Permitted Acquisition"): (1) no Default or Event of Default shall have occurred and be continuing or would result from such transaction or transactions or the incurrence of any Debt by any Borrower or KMC Holdings in connection therewith; (2) If such acquisition is being effectuated by means of the acquisition of Equity Interests of any Person (or the formation of a new Subsidiary in order to acquire assets of another Person), such acquired Person (unless merged with and into a Borrower) shall become a Borrower hereunder pursuant to an Accession Agreement and shall deliver such documentation as is reasonably required by the Agent to evidence the enforceability of such Accession Agreement; (3) The Collateral Agent shall, immediately upon the consummation of such acquisition, obtain a first priority Lien, for the benefit of the Lenders and as collateral for the payment of the Obligations, in the assets being purchased or acquired by virtue of an acquisition of Equity Interests and the Borrowers shall have complied in all respects with the provisions of SECTION 8.02 with respect to such assets; (4) The assets being acquired shall be substantially similar, related or incidental to the Businesses; (5) After giving effect to such acquisition, the representations and warranties set forth in ARTICLE III hereof shall be true and correct in all material respects on and as of the date of such acquisition with the same effect as though made on and as of such date and including with respect to any Person that becomes a new Borrower pursuant to paragraph (2) above; (6) The purchase is consummated pursuant to a negotiated acquisition agreement on a non-hostile basis; (7) The Borrowers shall have submitted a revised Milestone Plan demonstrating (i) PRO FORMA compliance with the applicable Financial Covenants set forth in Article VII after giving effect to such Acquisition, and (ii) that if such acquisition is made after the Required Contribution has been obtained or after August 31, 2000, that the Milestone Plan remains fully funded and that if such acquisition is made before the Required Contribution has been obtained, that the acquisition does not result in the Milestone Plan becoming less fully funded than it was prior to giving effect to such acquisition; 74 (8) The Borrowers shall have delivered an appraisal to the Agent and the Collateral Agent reasonably satisfactory to the Collateral Agent, which appraisal establishes that in the aggregate the purchase price of the assets being acquired in such acquisition (measured by appropriate market multiples) does not exceed the fair market value of such assets; and (9) The aggregate cash consideration paid by the Borrowers for all such acquisitions shall not exceed $60,000,000. SECTION 6.09. PERMITTED ACTIVITIES. Such Borrower shall not engage in any business or activity other than the operation of its Business in accordance with the Milestone Plan without the prior written consent of the Requisite Lenders. SECTION 6.10. DISPOSITION OF LICENSES, ETC. Such Borrower shall not sell, assign, transfer or otherwise dispose or attempt to dispose of in any way any Governmental Approval or any other licenses, permits or approvals, the assignment, transfer or disposal of which would result in a Material Adverse Effect, without the prior written consent of the Requisite Lenders. SECTION 6.11. TRANSACTIONS WITH AFFILIATES. Except for the Management Agreement, the Tax Sharing Agreement, or as set forth on SCHEDULE 6.11, such Borrower shall not directly or indirectly, enter into any transaction, including, without limitation, leases or other agreements for the purchase or use of any goods or services, with any Affiliate, except in the ordinary course of and pursuant to reasonable requirements of such Borrower's business upon fair and reasonable terms no less favorable to such Borrower than it would obtain in a comparable arm's length transaction with an unaffiliated Person. SECTION 6.12. ERISA. Such Borrower shall not: (A) engage, or permit any ERISA Affiliate to engage, in any prohibited transaction described in Section 406 of ERISA or 4975 of the IRC for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the United States Department of Labor; (B) permit to exist any accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived; (C) fail, or permit any ERISA Affiliate to fail, to pay timely required contributions or annual installments due with respect to any waived funding deficiency to any Benefit Plan; (D) terminate, or permit any ERISA Affiliate to terminate, any Benefit Plan which would result in any material liability of such Borrower under Title IV of ERISA; (E) fail to make any contribution or payment to any Multiemployer Plan which such Borrower or any ERISA Affiliate may be required to make under any agreement relating to such Multiemployer Plan, or any law pertaining thereto; 75 (F) amend, or permit any ERISA Affiliate to amend, a Plan resulting in an increase in current liability for the plan year such that such Borrower is required to provide security to such Plan under Section 401(a)(29) of the IRC; or (G) fail, or permit any ERISA Affiliate to fail, to pay any required installment under Section 412 of the IRC on or before the due date for such installment or other payment. SECTION 6.13. INDEBTEDNESS. Such Borrower shall not create or suffer to exist any Debt or any other obligations for the deferred purchase price of property or services except: (i) the Obligations; (ii) the obligations arising under any Loan Document; (iii) obligations under leases contemplated in the Milestone Plan and the Schedules to this Agreement; (iv) obligations under Capitalized Leases, financing leases or loan agreements or similar debt documents with respect to the financing and contemplated purchase of office equipment, vehicles and non-essential telecommunications equipment, not to exceed an aggregate amount for the Borrowers of $5,000,000 at any time ("PURCHASE DEBT"); (v) additional unsecured Debt subordinate to the payment of the Obligations on terms and conditions approved by the Agents but in no event to exceed an aggregate amount for the Borrowers of $1,000,000 in principal amount outstanding at any time; (vi) performance bonds and bid bonds executed solely in connection with the construction of Systems in the ordinary course of business; (vii) Qualified Intercompany Loans; (viii)Debt to the Agent consisting of reimbursement obligations for letters of credit in an aggregate outstanding amount not to exceed $250,000 at any one time for the account of the Borrower and not issued pursuant to SECTION 2.10 (the "EXCLUDED LETTERS OF CREDIT"); and (ix) Debt consisting of indebtedness, obligations or other liabilities in respect of any Interest Rate Agreement with the Agent, the Collateral Agent, any Lender or any other party acceptable to, and pursuant to documentation in form and substance acceptable to, the Agent. SECTION 6.14. PREPAYMENT AND DEBT DOCUMENTS. (a) Such Borrower shall not voluntarily prepay any Debt, except the Obligations in accordance with the terms hereof. 76 (b) Such Borrower shall not amend any agreement relating to Debt other than the Obligations in any manner which would increase the amount of principal, interest or fees on such debt, or accelerate any payments of such Debt. SECTION 6.15. SALE AND LEASEBACK TRANSACTIONS. Such Borrower shall not, directly or indirectly, enter into any arrangement with any Person providing for such Borrower to lease or rent property that any Borrower or KMC Holdings has sold or will sell or otherwise transfer to such Person. SECTION 6.16. MARGIN REGULATION. Such Borrower shall not use or permit any other Person to use any portion of the proceeds of any credit extended under this Agreement in any manner which might cause the extension of credit made by any Lender or the application of such proceeds to violate the Securities Act of 1933 or Securities Exchange Act of 1934 (each as amended from time to time, and any successor statute) or to violate Regulation T, Regulation U, or Regulation X, or any other regulation of the Federal Reserve Board, in each case as in effect on the date or dates of such extension of credit and such use of proceeds. SECTION 6.17. MANAGEMENT AND TAX SHARING AGREEMENTS. Such Borrower shall not amend the Management Agreement or the Tax Sharing Agreement in any manner that would have a material adverse effect on the Lenders, the Borrowers or the transactions contemplated hereby. ARTICLE VII FINANCIAL COVENANTS Each Borrower covenants and agrees with the Agent and the Lenders that as long as this Agreement shall remain in effect, any Commitment hereunder shall be outstanding or the Obligations hereunder or under any of the Loan Documents shall be unpaid, unless the Requisite Lenders shall have otherwise given prior written consent: SECTION 7.01. FINANCIAL COVENANTS PRIOR TO ACHIEVING POSITIVE EBITDA. Until the earlier to occur of (i) March 31, 2002 and (ii) the date on which the Borrowers shall have achieved positive EBITDA for all the Borrowers on a combined basis for two consecutive fiscal quarters and a Total Leverage Ratio equal to or less than 9:1 as determined by reference to the financial statements submitted pursuant to SECTION 5.06: (a) TOTAL DEBT TO CONTRIBUTED CAPITAL. The Borrowers shall not at any time permit the ratio of the Total Debt to Contributed Capital to exceed 1.00 to 1.00. (b) MINIMUM REVENUES. As of the last day of each fiscal quarter, the Borrowers shall on a combined basis have revenues at least equal to 85% of the amount projected for such date in the Milestone Plan, which amount is set forth in ITEM 1 on ANNEX B attached hereto. (c) EBITDA. 77 (i) As of the last day of each fiscal quarter occurring on or after the Closing Date and on or prior to June 30, 2001, the Borrowers shall not permit the EBITDA losses for all the Borrowers on a combined basis for the two fiscal quarters then ending to exceed the greater of (A) 115% of such losses projected for each such date in the Milestone Plan, which amount is set forth in ITEM 2 on ANNEX B attached hereto and (B)an amount equal to $7,500,000 more than the aggregate amount of EBITDA losses projected for each such date in the Milestone Plan, which latter amount is set forth in ITEM 2 on ANNEX B attached hereto. (ii) As of the last day of each fiscal quarter thereafter, the Borrowers shall not permit EBITDA for all the Borrowers on a combined basis for the two fiscal quarters then ending to be less than the greater of (A) 85% of the amount of EBITDA projected for each such date in the Milestone Plan, which amount is set forth in ITEM 3 on ANNEX B attached hereto and (B) an amount equal to $7,500,000 less than the aggregate amount of EBITDA projected for each such date in the Milestone Plan, which latter amount is set forth as ITEM 3 on ANNEX B attached hereto. (d) CAPITAL EXPENDITURES. As of the last day of each fiscal quarter, the Borrowers shall not permit capital expenditures on a combined, cumulative basis beginning on the Closing Date to exceed the amount projected for each such date in the Milestone Plan by more than $25,000,000, which amount is set forth in ITEM 4 on ANNEX B attached hereto, unless any such excess is funded with cash capital contributions or Qualified Intercompany Loans from KMC Holdings that are not part of the Required Contribution. (e) MINIMUM ACCESS LINES. As of the last day of each fiscal quarter beginning March 31, 2000, the Borrowers shall have in place at least seventy-five percent (75%) of the Access Lines projected for each such date in the Milestone Plan, which amounts are set forth in ITEM 5 on Annex B attached hereto. SECTION 7.02. FINANCIAL COVENANTS AFTER ACHIEVING POSITIVE EBITDA. On and after the earlier of (i) March 31, 2002, and (ii) the date on which the Borrowers have achieved positive EBITDA on a combined basis for two consecutive fiscal quarters and a Total Leverage Ratio equal to or less than 9:1 as determined by reference to the financial statements submitted pursuant to SECTION 5.06: (a) MAXIMUM TOTAL LEVERAGE RATIO. As of the last day of each fiscal quarter, the Borrowers shall not permit the Total Leverage Ratio to be greater than the following:
MAXIMUM TOTAL FISCAL QUARTER ENDING LEVERAGE RATIO On or prior to December 31, 2001 9.00 to 1.00 March 31, 2002 8.00 to 1.00 June 30, 2002 6.00 to 1.00 September 30, 2002 4.00 to 1.00 December 31, 2002 4.00 to 1.00 78 March 31, 2003 3.00 to 1.00 June 30, 2003 3.00 to 1.00 September 30, 2003 3.00 to 1.00 December 31, 2003 3.00 to 1.00 Last Day of each 2.00 to 1.00 Fiscal Quarter Thereafter
(b) MINIMUM DEBT SERVICE COVERAGE RATIO. As of the last day of each fiscal quarter, the Borrowers shall not permit the ratio of (1) EBITDA for the Borrowers on a combined basis for the most recently ended six month period, to (2) Interest Expense for the most recently ended six month period plus Principal Payments required during the most recently ended six month period to be less than the following:
MINIMUM DEBT SERVICE FISCAL QUARTER ENDING COVERAGE RATIO On or prior to December 31, 2001 1.15 to 1.00 March 31, 2002 - December 31, 2003 1.50 to 1.00 Last Day of each Fiscal 2.00 to 1.00 Quarter Thereafter
(c) MINIMUM FIXED CHARGE COVERAGE RATIO. As of the last day of any fiscal quarter, the Borrowers shall not permit the ratio of (1) the product of two times the EBITDA for the Borrowers on a combined basis for the most recently ended six month period to (2) Fixed Charges for the Borrowers (such ratio being referred to as the "FIXED CHARGE COVERAGE RATIO") to be less than the following:
MINIMUM FIXED CHARGE FISCAL QUARTER ENDING COVERAGE RATIO January 1, 2002 - December 31, 2002 0.50 to 1.00 March 31, 2003 - June 30, 2004 0.75 to 1.00 September 30, 2004 - December 31, 2004 1.00 to 1.00 Last Day of each Fiscal 1.10 to 1.00 Quarter Thereafter
(d) MAXIMUM CONSOLIDATED LEVERAGE RATIO. As of the last day of any fiscal quarter, the Borrowers shall not permit the ratio of (1) Consolidated Debt to (2) the product of two times the sum of EBITDA for KMC Holdings and its Subsidiaries (excluding its Excluded Subsidiaries) on a consolidated basis for the most recently ended six month period to be greater than the following:
MAXIMUM TOTAL FISCAL QUARTER ENDING LEVERAGE RATIO On or Prior to March 31, 2002 20.00 to 1.00 June 30, 2002 15.00 to 1.00 September 30, 2002 10.00 to 1.00 December 31, 2002 10.00 to 1.00 March 31, 2003 8.00 to 1.00 June 30, 2003 8.00 to 1.00 September 30, 2003 8.00 to 1.00 December 31, 2003 8.00 to 1.00 Last Day of Each Fiscal 6.00 to 1.00 Quarter Thereafter
79 ARTICLE VIII COLLATERAL SECURITY SECTION 8.01. COLLATERAL SECURITY. (a) To secure payment and performance of all of the Obligations, each of KMC III, Leasing III, Telecom.com and Services hereby grants, and each of the other Borrowers hereby reaffirms, grants and hereby regrants, to the Collateral Agent for the benefit of the Collateral Agent, the Agent and the Lenders, to the extent permitted by law, a right of setoff against and a continuing security interest in and to all of such Borrower's tangible and intangible personal property, fixtures and real property leasehold and easement interests, whether now owned or existing, or hereafter acquired or arising, wheresoever located, including, without limitation, all of the following property, or interests in property: (a) all machinery, equipment, Telecommunications Equipment and fixtures, including without limitation, fiber optic and other cables, transmission and switching equipment, transmission facilities, connection equipment, conduit, carrier pipes, junctions, regenerators, power sources, alarm systems, electronics, structures and shelters and cable laying equipment; (b) all Accounts, accounts receivable, other receivables, contract rights, leases, chattel paper, investment property, and general intangibles of such Borrower (including, without limitation, goodwill, going concern value, patents, trademarks, trade names, service marks, blueprints, designs, product lines and research and development), including, without limitation, all of such Borrower's rights under all present and future Governmental Approvals, permits, licenses and franchises heretofore or hereafter granted to such Borrower for the operation and ownership of its Systems (excluding licenses and permits issued by the FCC, any PUC or any other Governmental Authority to the extent, and only to the extent, it is unlawful to grant a security interest in such licenses and permits, but including, to the maximum extent permitted by law, all rights incident or appurtenant to such licenses and permits, including, without limitation, the right to receive all proceeds derived from or in connection with the sale, assignment or transfer of such licenses and permits), whether now owned or hereafter acquired by such Borrower, or in which such Borrower may now have or hereafter acquire an interest; (c) all instruments, letters of credit, documents of title, policies and certificates of insurance, securities, bank deposits, deposit accounts (including such Borrower's Collection Accounts), checking accounts and cash now or hereafter owned by such Borrower, or in which such Borrower may now have or hereafter acquire an interest; (d) all inventory, including all merchandise, raw materials, work in process, finished goods and supplies, now or hereafter owned by such Borrower or in which such Borrower may now have or hereafter acquire an interest; (e) all of such Borrower's leasehold interest in any real property, all of such Borrower's licenses, easements and rights of way with respect to real property; (f) all accessions, additions or improvements to, substitutions 80 for and all proceeds and products of, all of the foregoing, including proceeds of insurance; and (g) all books, records, documents, computer tapes and discs relating to all of the foregoing. SECTION 8.02. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN. Such Borrower shall execute and deliver to the Collateral Agent for the benefit of the Collateral Agent, the Agent and the Lenders, prior to the Closing Date, and at any time or times thereafter at the request of the Collateral Agent, all financing statements or other documents (and pay the cost of filing or recording the same in all public offices deemed necessary by the Collateral Agent), as the Collateral Agent may request, in a form satisfactory to the Collateral Agent, to perfect and keep perfected the security interest in the Collateral granted by such Borrower to the Collateral Agent or to otherwise protect and preserve the Collateral and the Collateral Agent's security interest therein or to enforce the Collateral Agent's security interest in the Collateral. Should such Borrower fail to do so, the Collateral Agent is authorized to sign any such financing statements as such Borrower's agent. Such Borrower further agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement. SECTION 8.03. APPOINTMENT OF THE COLLATERAL AGENT AS THE BORROWERS' ATTORNEY-IN-FACT. Such Borrower hereby irrevocably designates, makes, constitutes and appoints the Collateral Agent (and all persons designated by the Collateral Agent) as such Borrower's true and lawful attorney-in-fact, and authorizes the Collateral Agent, in such Borrower's or the Collateral Agent's name, to, following the occurrence and during the continuance of an Event of Default: (i) demand payment of such Borrower's Accounts; (ii) enforce payment of such Borrower's Accounts by legal proceedings or otherwise; (iii) exercise all of such Borrower's rights and remedies with respect to proceedings brought to collect an Account; (iv) sell or assign any Account upon such terms, for such amount and at such time or times as the Collateral Agent deems advisable; (v) settle, adjust, compromise, extend or renew an Account; (vi) discharge and release any Account; (vii) prepare, file and sign such Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor of such Borrower; (viii) notify the post office authorities to change the address for delivery of such Borrower's mail to an address designated by the Collateral Agent, and open and deal with all mail addressed to such Borrower; (ix) do all acts and things which are necessary, in the Collateral Agent's sole discretion, to fulfill such Borrower's obligations under this Agreement; (x) take control in any manner of any item of payment or proceeds thereof; (xi) have access to any lockbox or postal box into which such Borrower's mail is deposited; (xii) endorse such Borrower's name upon any items of payment or proceeds thereof and deposit the same in the Collateral Agent's account on account of the Obligations; (xiii) endorse such Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account or any goods pertaining thereto; and (xiv) sign such Borrower's name on any verification of Accounts and notices thereof to account debtors. SECTION 8.04. COLLECTION OF ACCOUNTS AND RESTRICTED ACCOUNT Arrangements. Such Borrower hereby represents and warrants that each depository account ("COLLECTION ACCOUNT") now maintained by such Borrower at any bank ("COLLECTION AGENT") for the collection of checks and cash constituting proceeds 81 of Accounts and sales of other personal property which are part of the Collateral is identified on SCHEDULE 8.04 attached hereto and made a part hereof. With respect to each Collection Account, such Borrower shall, no later than the Closing Date, deliver (to the extent not previously delivered pursuant to the Existing Agreement) to the Collateral Agent, a "RESTRICTED ACCOUNT AGREEMENT" substantially in the form of EXHIBIT N attached hereto and made a part hereof, duly executed and delivered by such Borrower and the applicable Collection Agent, authorizing and directing such Collection Agent, upon receipt of written notice from the Collateral Agent that an Event of Default has occurred and is continuing, to deposit all checks and cash received into a restricted account (a "RESTRICTED ACCOUNT") and remit all amounts deposited in such Restricted Account to the Collateral Agent's account specified in such Restricted Account Agreement until such time as the Collection Agent receives written notice from the Collateral Agent rescinding such instruction. Such Borrower shall, following the occurrence and during the continuance of an Event of Default and any subsequent request by the Collateral Agent therefor, take such further action as the Collateral Agent may reasonably deem desirable to effect the transfer of exclusive ownership and control of the Restricted Accounts and all Collection Accounts to the Collateral Agent. Until all of the Obligations have been indefeasibly paid in full, such Borrower agrees not to enter into any agreement or execute and deliver any direction which would modify, impair or adversely affect the rights and benefits of the Collateral Agent under any Restricted Account Agreement. Such Borrower shall not open, establish or maintain any Collection Account (other than those identified on SCHEDULE 8.04 hereto) without first having delivered to the Collateral Agent a duly executed and delivered Restricted Account Agreement with respect to such Collection Account. Such Borrower shall notify the Collateral Agent in writing not less than five (5) days prior to the date it shall open or establish any Collection Account other than an account described on SCHEDULE 8.04 hereto. SECTION 8.05. CURE RIGHTS. Such Borrower expressly authorizes the Collateral Agent, and the Collateral Agent may, but shall not be required to, at any time and from time to time, to take any and all action that it reasonably determines to be necessary or desirable to cure any default or violation (including a payment default) of such Borrower in connection with any real estate lease, license agreement, Governmental Approval or any other material lease, agreement or contract entered into with respect to the Systems. ARTICLE IX EVENTS OF DEFAULT; REMEDIES SECTION 9.01. EVENTS OF DEFAULT. The following events shall each constitute an "EVENT OF DEFAULT": (a) Any Borrower shall fail to pay the principal of or interest on its Notes or any other amounts payable hereunder or under any of the other Loan Documents when due, whether as scheduled, at a date fixed for prepayment, by acceleration or otherwise, and five (5) Business Days shall have elapsed; or 82 (b) Any Borrower shall fail to observe or perform any other covenant, condition or agreement to be observed or performed by such Borrower in any of the Loan Documents, and such Borrower fails to cure such breach within ten (10) Business Days after written notice thereof unless the breach relates to a covenant contained in SECTIONS 5.04, or ARTICLE VI (other than SECTION 6.05 or SECTION 6.07) or VII, in which case no notice or grace period shall apply, or unless the breach relates to SECTION 5.06, in which case an Event of Default shall occur on the thirtieth day following the breach without any notice requirement, unless the breach shall have been cured before such date; or (c) Any representation or warranty made by any Borrower or KMC Holdings in connection with this Agreement or any other Loan Document, or the Loans or any statement or representation made in any report, certificate, financial statement or other instrument furnished by or on behalf of such Borrower or KMC Holdings pursuant to this Agreement or any other Loan Document, shall prove to have been false or misleading in any material respect when made or delivered or when deemed made in accordance with the terms hereof or thereof; or (d) Any Borrower or KMC Holdings shall fail to make any payment due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) on any other obligation for borrowed money in excess of $250,000 with respect to any Borrower or in excess of $1,000,000 with respect to KMC Holdings, and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such indebtedness; or any other default or event under any agreement or instrument relating to any indebtedness for borrowed money in excess of $250,000 with respect to any Borrower or in excess of $1,000,000 with respect to KMC Holdings, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such indebtedness in excess of $250,000 with respect to any Borrower or in excess of $1,000,000 with respect to KMC Holdings; or any such indebtedness in excess of $250,000 with respect to any Borrower or in excess of $1,000,000 with respect to KMC Holdings shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof; or (e) Any Borrower or KMC Holdings shall (i) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official for such Borrower or KMC Holdings or for a substantial part of its property, (ii) make a general assignment for the benefit of creditors, (iii) become unable, or admit in writing its inability, to pay its debts as they become due, (iv) voluntarily or involuntarily dissolve, liquidate or wind up its affairs, or (v) take action for the purpose of effecting any of the foregoing; or (f) a proceeding under any bankruptcy, reorganization, arrangement of debts, insolvency or receivership law is filed by or against any Borrower or KMC Holdings, or any Borrower or KMC Holdings takes any action to authorize any of the foregoing matters, and in the case of any such proceeding instituted against any Borrower or KMC Holdings (but not instituted by any Borrower or KMC Holdings), either such proceeding shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee or other similar official for any Borrower or KMC 83 Holdings or any substantial part of its property) shall be granted or shall occur; or (g) a Termination Event occurs which the Requisite Lenders in good faith believe would subject any Borrower to a material liability; or (h) the plan administrator of any Plan applies under Section 412(d) of the IRC for a waiver of the minimum funding standards of Section 412(a) of the IRC and the Requisite Lenders in good faith believe that the approval of such waiver could subject any Borrower or any ERISA Affiliate to material liability; or (i) any of the Governmental Approvals or any other license, Governmental Approval or other governmental consent or approval necessary for the continuing operation of any Borrower or any System or any other material Governmental Approval or approval of or material filing with the FCC, any PUC or any other Governmental Authority with respect to the conduct by any Borrower of its business and operations, including its Business, shall not be obtained or shall cease to be in full force and effect, which in respect of any of the Governmental Approvals shall, in the case of an order of the FCC, any PUC or other Governmental Authority having jurisdiction with respect thereto, revoking, or deciding not to renew, any such Governmental Approval, occur upon the issuance of such order, and, in the case of any other order revoking or terminating any of the Governmental Approvals or deciding not to renew such Governmental Approvals prior to the termination thereof, occur when such order becomes final, and in each case, such event is also reasonably likely to result in a Material Adverse Effect; or (j) the FCC, any PUC or any other Governmental Authority, by final order, determines that the existence or performance of this Agreement or any other Loan Document will result in a revocation, suspension or material adverse modification of any of the Governmental Approvals for any System, and such determination is reasonably likely to result in a Material Adverse Effect; or (k) for any reason any Loan Document shall not be in full force and effect or shall not be enforceable in accordance with its terms, or any security interest or lien granted pursuant thereto with respect to Collateral having an aggregate value of $500,000 or greater shall fail to be perfected or to have its intended priority, or any Borrower or any Affiliate thereof shall contest the validity of any Lien granted under, or shall disaffirm its obligations under any Loan Document; or (l) any Borrower shall default under any Lucent Purchase Agreement or Additional Purchase Agreement, which default shall not have been cured or waived within the applicable grace period thereunder unless such Borrower is contesting such default in good faith by appropriate protest or proceedings and shall have set aside adequate reserves in accordance with GAAP; or (m) for any reason, any Borrower ceases to operate any System or ceases to own any of its Governmental Approvals necessary for the continuing operation of any System, and such cessation is reasonably likely to result in a Material Adverse Effect; or 84 (n) a judgment or judgments for the payment of money in excess of $250,000 individually or $500,000 in the aggregate at any one time shall have been rendered against any Borrower and the same shall have remained unsatisfied and in effect for any period of sixty (60) days during which no stay of execution shall have been obtained; or (o) any Borrower is enjoined, restrained or in any way prevented by the order of any court or administrative or regulatory agency from conducting its business in any material respect with respect to any one or more of its Systems and such event is reasonably likely to result in a Material Adverse Effect; or (p) any Borrower becomes subject to any liabilities, costs, expenses, damages, fines or penalties which could reasonably be expected to have a Material Adverse Effect arising out of or related to (i) any Remedial Action in response to a Release or threatened Release at any location of any Contaminant into the indoor or outdoor environment or (ii) any material violation of any Environmental Law; or (q) a Change of Control shall occur; or (r) KMC Holdings shall fail to observe or perform any covenant, condition or agreement to be observed or performed by KMC Holdings in the KMC Holdings Guaranty or in the Pledge Agreement executed and delivered by it in favor of the Collateral Agent; or (s) any Borrower shall fail to observe or perform any covenant, condition or agreement to be observed or performed by such Borrower in any material agreement (other than a Loan Document or an agreement referred to in SECTION 9.01(d)), such Borrower fails to cure such breach within ten (10) Business Days after written notice thereof, and such failure is reasonably likely to result in a Material Adverse Effect, unless such Borrower is contesting such covenant, condition or agreement by appropriate protest or proceedings and shall have set aside adequate reserves in accordance with GAAP. SECTION 9.02. TERMINATION OF COMMITMENT; ACCELERATION. Upon the occurrence and at any time during the continuance of any Event of Default, the Agent shall upon direction from the Requisite Lenders: (a) by notice to the Borrowers, terminate Lenders' Commitment to make Loans hereunder; or (b) by notice to the Borrowers, declare the Obligations to be immediately due and payable, whereupon all the Obligations shall be immediately due and payable without further notice of any kind, PROVIDED, HOWEVER, that if an Event of Default described in SECTION 9.01(f) shall exist or occur, all of the Obligations shall automatically, without declaration or notice of any kind, be immediately due and payable and the Commitment shall be automatically terminated. SECTION 9.03. WAIVERS. Demand, presentment, protest and notices of nonpayment, protest, dishonor and acceptance are hereby waived by each Borrower. Each Borrower also waives the benefit of all valuation, appraisal and exemption 85 laws and the posting of any bond required of the Collateral Agent, the Agent or any Lender in connection with any judicial process to realize on the Collateral, to enforce any judgment or other court order entered in favor of the Collateral Agent, the Agent or any Lender or to enforce by specific performance, temporary restraining order, or preliminary or permanent injunction, this Agreement or any other Loan Documents. Each Borrower waives the right, if any, to the benefit of, or to direct the application of, any Collateral. Each Borrower hereby acknowledges that none of the Collateral Agent, the Agent or any Lender has any obligation to resort to any Collateral or make claim against any other Person before seeking payment or performance from any Borrower. SECTION 9.04. RIGHTS AND REMEDIES GENERALLY. If an Event of Default occurs and is continuing, the Agent and the Collateral Agent shall have, in addition to any other rights and remedies contained in this Agreement or in any of the other Loan Documents, all of the rights and remedies of a secured party under the Code or other applicable laws, all of which rights and remedies shall be cumulative, and none exclusive, to the extent permitted by law. In addition to all such rights and remedies, the sale, lease or other disposition of the Collateral, or any part thereof, by the Collateral Agent or the Agent after the occurrence of an Event of Default may be for cash, credit or any combination thereof, and the Collateral Agent or the Agent may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set off the amount of such purchase price against the Obligations then owing. Any sales of the Collateral may be adjourned from time to time with or without notice. The Agent or the Collateral Agent, may, in its sole discretion, cause the Collateral to remain on the premises of any Borrower, at the expense of the Borrowers, pending sale or other disposition of the Collateral. The Agent or the Collateral Agent shall have the right to conduct such sales on the premises of any Borrower, at the expense of the Borrowers, or elsewhere, on such occasion or occasions as it may see fit. SECTION 9.05. ENTRY UPON PREMISES AND ACCESS TO INFORMATION. If an Event of Default occurs and is continuing, the Agent and the Collateral Agent shall have the right to enter upon the premises of any Borrower where any Collateral is located (or is believed to be located) without any obligation to pay rent to such Borrower, or any other place or places where the Collateral is believed to be located and kept, and render the Collateral unusable or remove the Collateral therefrom to the premises of the Agent or the Collateral Agent or any agent of the Agent or the Collateral Agent, for such time as the Agent or the Collateral Agent may desire, in order effectively to collect or liquidate the Collateral, and/or the Agent or the Collateral Agent may require any Borrower to assemble the Collateral and make it available to the Agent or the Collateral Agent at a place or places to be designated by the Agent or the Collateral Agent. If an Event of Default occurs and is continuing, the Agent or the Collateral Agent shall have the right to obtain access to any Borrower's data processing equipment, computer hardware and software relating to the Collateral and to use all of the foregoing and the information contained therein in any manner the Agent or the Collateral Agent deems appropriate. SECTION 9.06. SALE OR OTHER DISPOSITION OF COLLATERAL BY THE AGENT. Any notice required to be given by the Agent or the Collateral Agent of a sale, lease or other disposition or other intended action by the Agent or the Collateral Agent with respect to any of the Collateral which is deposited in the United States mails, registered or certified, postage prepaid and duly addressed to the Borrowers at the address specified in SECTION 11.01 below, at least ten 86 days prior to such proposed action shall constitute fair and reasonable notice to the Borrowers of any such action. The net proceeds realized by the Agent or the Collateral Agent upon any such sale or other disposition, after deduction for the expense of retaking, holding, preparing for sale, selling or the like and the reasonable attorneys' fees and legal expenses incurred by the Agent or the Collateral Agent in connection therewith, shall be applied as provided herein toward satisfaction of the Obligations. The Agent or the Collateral Agent, as applicable, shall account to the Borrowers for any surplus realized upon such sale or other disposition, and the Borrowers shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect the Collateral Agent's security interest in the Collateral. The Borrowers agree that the Collateral Agent has no obligation to preserve rights to the Collateral against any other parties. The Agent and the Collateral Agent are hereby granted a license or other right to use, without charge, the Borrowers' labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks and advertising matter, or any property of a similar nature, as it pertains to the Collateral, and the Borrowers' rights under all licenses and all franchise agreements shall inure to the Agent's and the Collateral Agent's benefit until the Obligations are paid in full. SECTION 9.07. GOVERNMENTAL APPROVALS. In connection with the enforcement by the Agent or the Collateral Agent of any remedies available to it as a result of any Event of Default, each Borrower agrees that it shall join and cooperate fully with, at the request of the Agent or the Collateral Agent, any receiver referred to below and/or the successful bidder or bidders at any foreclosure sale in a filing of an application (and furnishing any additional information that may be required in connection with such application or which the Agent or the Collateral Agent may believe relevant to such application) with the FCC, any PUC and all other applicable Governmental Authorities, requesting their prior approval of (i) the operation or abandonment of all or the portion of any System and/or (ii) the transfer of control of such Borrower or assignment of all licenses, certificates, Governmental Approvals, approvals and permits, issued to such Borrower by the FCC, any PUC or any such Governmental Authorities with respect to any System and the operation thereof, to the Agent or the Collateral Agent, the receiver or to the successful bidder or bidders. In connection with the foregoing, each Borrower shall take such further actions, and execute all such instruments, as the Agent or the Collateral Agent reasonably deems necessary or desirable. Each Borrower agrees that the Agent or the Collateral Agent may enforce any obligation of such Borrower as set forth in this section by an action for specific performance. In addition, each Borrower hereby irrevocably constitutes and appoints the Agent and the Collateral Agent and any agent or officer thereof (which appointment is coupled with an interest) as its true and lawful attorney-in-fact with full irrevocable power and authority and in the place and stead of such Borrower and in the name of such Borrower or in its own name, from time to time in its discretion after the occurrence and during the continuance of an Event of Default and in connection with the foregoing, for the purpose of executing on behalf and in the name of such Borrower any and all of the above-referenced instruments and to take any and all appropriate action in furtherance of the foregoing. THE EXERCISE OF ANY RIGHTS OR REMEDIES HEREUNDER OR UNDER ANY OTHER LOAN DOCUMENT BY ANY LENDER, THE AGENT OR THE COLLATERAL AGENT THAT MAY REQUIRE FCC, ANY PUC OR ANY OTHER 87 GOVERNMENTAL AUTHORITY APPROVAL SHALL BE SUBJECT TO OBTAINING SUCH APPROVAL. PENDING THE RECEIPT OF ANY FCC, ANY PUC OR ANY OTHER GOVERNMENTAL AUTHORITY APPROVAL, NO BORROWER SHALL DO ANYTHING TO DELAY, HINDER, INTERFERE OR OBSTRUCT THE EXERCISE OF THE AGENT'S OR THE COLLATERAL AGENT'S RIGHTS OR REMEDIES HEREUNDER IN OBTAINING SUCH APPROVALS. SECTION 9.08. APPOINTMENT OF RECEIVER OR TRUSTEE. In connection with the exercise of its remedies under this Agreement, the Agent or the Collateral Agent may, upon the occurrence of an Event of Default, obtain the appointment of a receiver or trustee to assume, upon receipt of all necessary judicial, FCC, any PUC or other Governmental Authority consents or approvals, control of or ownership of any of the Governmental Approvals. Such receiver or trustee shall have all rights and powers provided to it by law or by court order or provided to the Agent or the Collateral Agent under this Agreement. Upon the appointment of such trustee or receiver, the Borrowers agree to cooperate, to the extent necessary or appropriate, in the expeditious preparation, execution and filing of an application to the FCC, any PUC or any other Governmental Authority or for consent to the transfer of control or assignment of any Borrower's Governmental Approvals to the receiver or trustee. SECTION 9.09. RIGHT OF SETOFF. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and during the continuance of any Event of Default, each Lender and each holder of any Note is hereby authorized at any time or from time to time, without notice to any Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all balances held by it at any of its offices for the account of any Borrower (regardless of whether such balances are then due to such Borrower) and any other properties or assets any time held or owing by that Lender or that holder to or for the credit or for the account of any Borrower against and on account of any of the Obligations which are not paid when due. Any Lender or holder of any Note exercising a right to set off or otherwise receiving any payment on account of the Obligations in excess of its Pro Rata Share thereof shall purchase for cash (and the other Lenders or holders shall sell) such participation in each such other Lender's or holder's Pro Rata Share of the Obligations as would be necessary to cause such Lender to share the amount so set off or otherwise received with each other Lender or holder in accordance with their respective Pro Rata Shares. Each Borrower agrees, to the fullest extent permitted by law, that (a) any Lender or holder may exercise its right to set off with respect to amounts in excess of its Pro Rata Share of the Obligations and may sell participations in such amount so set off to other Lenders and holders and (b) any Lender or holder so purchasing a participation in the Loans made or other Obligations held by other Lenders or holders may exercise all rights of set-off, bankers' lien, counterclaim or similar rights with respect to such participation as fully as if such Lender or holder were a direct holder of the Loans and the other Obligations in the amount of such participation. Notwithstanding the foregoing, if all or any portion of the set-off amount or payment otherwise received is thereafter recovered from the Lender that has exercised the right of set-off, the purchase of participations by that Lender shall be rescinded and the purchase price restored without interest. Each Borrower hereby agrees that the foregoing provisions are intended to be construed so as to satisfy the requirements of Section 553 of the Federal Bankruptcy Code or amendments thereto (including any requirement of mutuality of obligations therein). 88 ARTICLE X THE AGENT AND THE COLLATERAL AGENT SECTION 10.01. APPOINTMENT OF AGENT. (a) First Union National Bank is hereby appointed to act as contractual representative on behalf of all Lenders under this Agreement and the other Loan Documents. The Agent agrees to act as such contractual representative upon the express conditions contained in this ARTICLE X. The provisions of this SECTION 10.01 are solely for the benefit of the Agent and the Lenders and no Borrower or any other Person shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement and the other Loan Documents, the Agent shall act solely as an agent of the Lenders and does not assume and shall not be deemed to have assumed any obligation toward or relationship of agency or trust with or for any Borrower or any other Person. The Agent shall have no duties or responsibilities except for those expressly set forth in this Agreement and the other Loan Documents. Notwithstanding the use of the defined term "Agent", it is expressly understood and agreed that the Agent shall not have any fiduciary responsibilities to any Lender by reason of this Agreement and that the Agent is merely acting as the representative of the Lenders with only those duties as are expressly set forth in this Agreement and the other Loan Documents. In its capacity as the Lenders' contractual representative, the Agent (i) does not assume any fiduciary duties to any of the Lenders, (ii) is a "representative" of the Lenders within the meaning of Section 9-105 of the UCC and (iii) is acting as an independent contractor, the rights and duties of which are limited to those expressly set forth in this Agreement and the other Loan Documents. Each of the Lenders agrees to assert no claim against the Agent on any agency theory or any other theory of liability for breach of fiduciary duty, all of which claims each Lender waives. Neither the Agent nor any of its Affiliates nor any of their respective officers, directors, employees, agents or representatives shall be liable to any Lender for any action taken or omitted to be taken by it hereunder or under any other Loan Document, or in connection herewith or therewith, except for damages caused by its or their own gross negligence or willful misconduct. (b) If the Agent shall request instructions from all Lenders, Requisite Lenders, Requisite Revolving Lenders or all affected Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any other Loan Document, then the Agent shall be entitled to refrain from such act or taking such action unless and until the Agent shall have received instructions from all Lenders, Requisite Lenders, Requisite Revolving Lenders or all affected Lenders, as the case may be, and the Agent shall not incur liability to any Person by reason of so refraining. The Agent shall be fully justified in failing or refusing to take any action hereunder or under any other Loan Document (a) if such action would, in the opinion of the Agent, be contrary to law or the terms of this Agreement or any other Loan Document, (b) if such action would, in the opinion of the Agent, expose the Agent to liabilities beyond the limits of this Agreement or (c) if the Agent shall not first be indemnified to its satisfaction against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Without limiting the foregoing, no Lender shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any other Loan Document in accordance with the instructions of all Lenders, Requisite Lenders, Requisite Revolving Lenders or all affected Lenders, as applicable. 89 SECTION 10.02. AGENT'S RELIANCE, ETC. Neither the Agent nor any of its Affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or the other Loan Documents, except for damages caused by its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel, independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (c) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations made in or in connection with this Agreement or the other Loan Documents; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or the other Loan Documents on the part of any Borrower or to inspect the Collateral (including the books and records); (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or the other Loan Documents or any other instrument or document furnished pursuant hereto or thereto; and (f) shall incur no liability under or in respect of this Agreement or the other Loan Documents by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopy, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 10.03. FUNB AND AFFILIATES. With respect to its Commitments hereunder, FUNB shall have the same rights and powers under this Agreement and the other Loan Documents as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include FUNB in its individual capacity. FUNB and its Affiliates may lend money to, invest in, and generally engage in any kind of business with, any Borrower, any of its Affiliates and any Person who may do business with or own securities of any Borrower or any such Affiliate, all as if FUNB were not the Agent and without any duty to account therefor to Lenders. FUNB and its Affiliates may accept fees and other consideration from any Borrower for services in connection with this Agreement or otherwise without having to account for the same to Lenders. FUNB may also purchase or hold Equity Interests or warrants in KMC Holdings or any Borrower and make subordinated loans to any Borrower. Each Lender acknowledges the potential conflict of interest between FUNB as a Lender holding disproportionate interests in the Loans, FUNB as a member or subordinated debt holder, of the Borrower and FUNB as Agent. SECTION 10.04. LENDER CREDIT DECISION. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial information given it by the Borrowers and such other documents and information as it has deemed appropriate, made its own credit and financial analysis of the Borrowers and its own decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. Each Lender acknowledges the potential conflict of interest of each other Lender as a 90 result of Lenders holding disproportionate interests in the Loans, and expressly consents to, and waives any claim based upon, such conflict of interest. SECTION 10.05. INDEMNIFICATION. Each of the Lenders agrees to indemnify the Agent (to the extent not reimbursed by the Borrowers and without limiting the obligations of Borrowers hereunder), ratably according to their respective Pro Rata Shares, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any action taken or omitted by the Agent in connection therewith; PROVIDED, HOWEVER, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limiting the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement and each other Loan Document, to the extent that the Agent is not reimbursed for such expenses by the Borrowers. SECTION 10.06. SUCCESSOR AGENT. The Agent may resign at any time by giving not less than thirty (30) days' prior written notice thereof to Lenders and the Borrowers. Upon any such resignation, the Requisite Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Requisite Lenders and shall have accepted such appointment within 30 days after the resigning Agent's giving notice of resignation, then the resigning Agent may, on behalf of Lenders, appoint a successor Agent, which shall be a Lender, if a Lender is willing to accept such appointment, or otherwise shall be a commercial bank or financial institution or a subsidiary of a commercial bank or financial institution if such commercial bank or financial institution is organized under the laws of the United States of America or of any State thereof and has a combined capital and surplus of at least $300,000,000. If no successor Agent has been appointed pursuant to the foregoing, by the 30th day after the date such notice of resignation was given by the resigning Agent, such resignation shall become effective and the Requisite Lenders shall thereafter perform all the duties of Agent hereunder until such time, if any, as the Requisite Lenders appoint a successor Agent as provided above. Any successor Agent appointed by the Requisite Lenders hereunder shall be subject to the approval of Borrowers, such approval not to be unreasonably withheld or delayed; PROVIDED that such approval shall not be required if a Default or an Event of Default shall have occurred and be continuing. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the resigning Agent. Upon the earlier of the acceptance of any appointment as Agent hereunder by a successor Agent or the effective date of the resigning Agent's resignation, the resigning Agent shall be discharged from its duties and obligations under this Agreement and the other Loan Documents, except that any indemnity rights or other rights in favor of such resigning Agent shall continue. After any resigning Agent's resignation hereunder, the provisions of this SECTION 10.06 shall inure to its 91 benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement and the other Loan Documents. SECTION 10.07. PAYMENTS; NON-FUNDING LENDERS; INFORMATION; ACTIONS IN CONCERT. (a) LOANS; PAYMENTS. Whenever the Agent receives a payment of principal, interest, fee or premium (if any) or other payment, or whenever the Agent makes an application of funds, in connection with the Loans or the Notes (including, without limitation, any payment or application from any Collateral), the Agent will on the date such payment is received or applied, if on or prior to 11:00 a.m. (Eastern time) on such date, or otherwise on the next Business Day, pay over to each Lender as instructed by such Lender in writing, an amount equal to such Lender's Pro Rata Share of such payment provided that such Lender has funded all Loans required to be made by it and has purchased all participation required to be purchased by it under this Agreement and the other Loan Documents as of such date. To the extent that any Lender (a "NON-FUNDING LENDER") has failed to fund all such payments and Loans or failed to fund the purchase of all such participation, the Agent shall be entitled to set off the funding short-fall against that Non-Funding Lender's Pro Rata Share of all payments received from the Borrowers. All payments by Agent shall be made by wire transfer to such Lender's account (as specified by such Lender) not later than 2:00 p.m. (Eastern time) on the applicable Business Day. (b) RETURN OF PAYMENTS. (i) If Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by the Agent from the Borrowers and such related payment is not received by Agent, then the Agent will be entitled to recover such amount from such Lender on demand without set-off, counterclaim or deduction of any kind. (ii) If the Agent determines at any time that any amount received by the Agent under this Agreement must be returned to any Borrower or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Loan Document, the Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Agent on demand any portion of such amount that the Agent has distributed to such Lender, together with interest at such rate, if any, as the Agent is required to pay to any Borrower or such other Person, without set-off, counterclaim or deduction of any kind. (c) NON-FUNDING LENDERS. The failure of any Non-Funding Lender to make any portion of its Loans or any payment required by it hereunder on the date specified therefor shall not relieve any other Lender (each such other Lender, an "OTHER LENDER") of its obligations to make any such Loan on such date, but neither any Other Lender nor the Agent nor the Collateral Agent shall be responsible for the failure of any Non-Funding Lender to make any Loan. Notwithstanding anything set forth herein to the contrary, a Non-Funding Lender shall not have any voting or consent rights under or with respect to any Loan Document or constitute a "Lender" (or be included in the calculation of "Requisite Lenders" or "Requisite Revolving Lenders" hereunder) for any voting or consent rights under or with respect to any Loan Document. 92 (d) DISSEMINATION OF INFORMATION. The Agent will use reasonable efforts to provide Lenders with any notice of Default or Event of Default received by the Agent from, or delivered by the Agent to, the Borrowers, with notice of any Event of Default of which the Agent has actually become aware and with notice of any action taken by the Agent following any Event of Default; PROVIDED, however, that the Agent shall not be liable to any Lender for any failure to do so, except to the extent that such failure is attributable to the Agent's gross negligence or willful misconduct. Lenders acknowledge that the Borrowers are required to provide financial statements and other documents to Lenders pursuant to this Agreement and agree that the Agent shall have no duty to provide the same to Lenders. (e) ACTIONS IN CONCERT. Anything in this Agreement to the contrary notwithstanding, each Lender hereby agrees with each other Lender that no Lender shall take any action to protect or enforce its rights arising out of this Agreement or the Notes (including exercising any rights of set-off) without first obtaining the prior written consent of the Agent, the Collateral Agent and Requisite Lenders, it being the intent of Lenders that any such action to protect or enforce rights under this Agreement and the Notes shall be taken in concert and at the direction or with the consent of Agent and the Collateral Agent. SECTION 10.08. COLLATERAL MATTERS. (a) The Lenders hereby irrevocably authorize the Collateral Agent, at its option and in its reasonable business judgment, to release any Lien upon any Collateral (i) upon the termination of the Commitments and payment and satisfaction of all Loans and all other Obligations and which the Collateral Agent has been notified in writing are then due and payable; (ii) constituting property being sold or disposed of if the applicable Borrower certifies to the Collateral Agent that the sale or disposition is made in compliance with SECTION 6.03 (and the Collateral Agent may rely conclusively on any such certificate, without further inquiry); or (iii) constituting property leased to the applicable Borrower under a lease which has expired or been terminated in a transaction permitted under this Agreement or which will expire imminently and which has not been, and is not intended by such Borrower to be, renewed or extended and with respect to which such Borrower has not exercised any purchase option. Except as provided above, the Collateral Agent will not release any of the Liens without the prior written authorization of the Requisite Lenders; PROVIDED that the Collateral Agent may not release the Liens on Collateral valued in the aggregate in excess of $500,000 without the prior written authorization of the Requisite Lenders and may not release all or substantially all of the Collateral without the consent of the Lenders. Upon request by the Collateral Agent or the Borrowers at any time, the Lenders will confirm in writing the Collateral Agent's authority to release any Liens upon particular types or items of Collateral pursuant to this SECTION 10.08(a). (b) Upon receipt by the Collateral Agent of any authorization required pursuant to SECTION 10.08(a) from the Requisite Lenders or Lenders, as applicable, of the Collateral Agent's authority to release any Liens upon particular types or items of Collateral, and upon at least five (5) Business Days' prior written request by the applicable Borrower, and provided that no Event of Default has occurred and is then continuing, the Collateral Agent shall (and is hereby irrevocably authorized by the Lenders to) execute such documents as may be necessary to evidence the release of the Liens upon such Collateral; PROVIDED, HOWEVER, that (i) the Collateral Agent shall not be required to 93 execute any such document on terms which, in the Collateral Agent's opinion, would expose the Collateral Agent to liability or create any obligation or entail any consequence other than the release of such Liens without recourse or warranty, and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of the applicable Borrower in respect of) all interests retained by the applicable Borrower, including (without limitation) the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (c) The Collateral Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by any Borrower or is cared for, protected or insured or has been encumbered, or, other than a duty to act without recklessness, willful misconduct or gross (but not mere) negligence, that the Liens have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to the pursuant to this SECTION 10.08 or pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, the Collateral Agent may act in any manner it may deem appropriate, in its reasonable business judgment, given the Collateral Agent's own interest in the Collateral in its capacity as one of the Lenders and that the Collateral Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing. SECTION 10.09. AGENCY FOR PERFECTION. Each Lender hereby appoints each other Lender as agent for the purpose of perfecting the Lenders' security interest in assets which, in accordance with Article 9 of the UCC can be perfected only by possession. Should any Lender (other than the Collateral Agent) obtain possession of any such Collateral, such Lender shall notify the Collateral Agent thereof, and, promptly upon the Collateral Agent's request therefor shall deliver such Collateral to the Collateral Agent. SECTION 10.10. CONCERNING THE COLLATERAL AND THE RELATED LOAN DOCUMENTS AND THE COLLATERAL AGENT. (a) Each Lender authorizes and directs the Collateral Agent to enter into this Agreement and the other Loan Documents relating to the Collateral, for the ratable benefit of the Lenders. Each Lender agrees that any action taken by the Collateral Agent or Requisite Lenders in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral, and the exercise by the Collateral Agent or the Requisite Lenders of their respective powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. (b) The Collateral Agent with respect to the administration of the Collateral shall have the same rights, obligations and status as the Agent as are set forth in SECTION 10.01, 10.02, 10.03, 10.04, 10.05, and 10.06 above. ARTICLE XI MISCELLANEOUS 94 SECTION 11.01. NOTICES; ACTION ON NOTICES, ETC. (a) Notices and other communications provided for herein shall be in writing and shall be delivered by a courier service of recognized standing (specifying one (1) day delivery), or by registered or certified mail, postage prepaid, return receipt requested (or, if by telecopy communications equipment of the sending party, delivered by such equipment) addressed, if to the Borrowers, at KMC Telecom Inc., 1545 Route 206, Suite 300, Bedminster, NJ 07921; Attention: President; (telecopy no. (908) 719-8775, confirmation no. (908) 470-2200) with a copy to Alan M. Epstein Esq., Kelley Drye & Warren LLP, 101 Park Avenue, New York, NY 10178; (telecopy no. (212) 808-7897, confirmation no. (212) 808-7800), if to the Agent, at First Union National Bank, Communications/Media Finance-PA4829, 1339 Chestnut Street, Philadelphia, PA 19107, Attention: Elizabeth Elmore (telecopy no. (215) 786-7721, confirmation no. (215) 786-4321), and if to the Collateral Agent, at Newcourt Commercial Finance Corporation, c/o The CIT Group, Inc. - Structured Finance Group, Two Gatehall Drive, First Floor, Parsippany, NJ 07054, Attention: Media and Communications, Vice President-Credit (telecopy no. (973) 355-7643, confirmation no. (973) 355-7630), with copies to Newcourt Commercial Finance Corporation, c/o The CIT Group, Inc. - Structured Finance Group, Two Gatehall Drive, First Floor, Parsippany, NJ 07054, Attention: Vice President - Credit (telecopy no. (973) 355-7641, confirmation no. (973) 355-7630) and Attention: Vice President - Legal (telecopy no. (973) 355-7645, confirmation no. (973) 355-7609). All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given (a) five Business Days after mailing when sent by registered or certified mail, postage prepaid, return receipt requested, or (b) upon receipt, if by courier service or any telecopy communications equipment of the sender, in each case addressed to such party as provided in this Section or in accordance with the latest unrevoked direction from such party. (b) Each Borrower agrees that the Agent or the Collateral Agent may act upon any notice, consent, certificate, cable, telex or other instrument or writing believed by the Agent or the Collateral Agent to be genuine, that the Agent or the Collateral Agent may consult with legal counsel, selected by the Agent or the Collateral Agent and shall not be liable to any Borrower for any action taken or omitted to be taken in good faith by Lender in accordance with the advice of such counsel. SECTION 11.02. NO WAIVERS; AMENDMENTS. (a) No failure or delay of the Agent, the Collateral Agent or any Lender to exercise any right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, preclude any other or further exercise thereof or the exercise of any other right. No waiver of any provision of this Agreement or any other Loan Document nor consent to any departure by any Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Agent and the Requisite Lenders (or, if applicable, all Lenders), and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Borrower in any case shall entitle any Borrower to any other or further notice or demand in similar or other circumstances. (b) Subject to the provisions of this SECTION 11.02(b), the Requisite Lenders (or the Agent with the consent in writing of the Requisite Lenders) and the Borrowers may enter into agreements supplemental hereto for the purpose of 95 adding or modifying any provisions to the Loan Documents or changing in any manner the rights of the Lenders or the Borrowers hereunder or waiving any Event of Default or Default hereunder; PROVIDED, any Interest Rate Agreement which constitutes a Loan Document may be amended or modified solely with the consent of the parties thereto; PROVIDED, FURTHER, HOWEVER, that no such supplemental agreement shall, without the consent of each Lender affected thereby: (i) Postpone or extend the Revolving Credit Commitment Termination Date, the maturity date for the Loans or any other date fixed for any payment of principal of, or interest on, the Loans or any fees or other amounts payable to such Lender except with respect to (A) any modifications of the provisions relating to prepayments of Loans and other Obligations and (B) a waiver of the application of the default rate of interest pursuant to SECTION 2.05(b) hereof. (ii) Reduce the principal amount of any Loans, or reduce the rate or extend the time of payment of interest or fees thereon. (iii) Reduce the percentage specified in the definition of Requisite Lenders or Requisite Revolving Lenders or any other percentage of Lenders specified to be the applicable percentage in this Agreement to act on specified matters or amend the definition of "Pro Rata Share". (iv) Increase the amount of any Commitment of any Lender hereunder or increase or decrease any Lender's Pro Rata Share. (v) Permit any Borrower to assign its rights under this Agreement. (vi) Release all or substantially all of the Collateral. (vii) Amend this SECTION 11.02(b). No amendment of any provision of this Agreement relating to the Agent or the Collateral Agent shall be effective without the written consent of the Agent or the Collateral Agent, as applicable. SECTION 11.03. GOVERNING LAW AND JURISDICTION. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CONFLICTS OF LAWS PRINCIPLES. THE BORROWERS, THE AGENT, THE COLLATERAL AGENT AND THE LENDERS CONSENT TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN THE CITY AND STATE OF NEW YORK AND WAIVE ANY OBJECTION RELATING TO IMPROPER VENUE OR FORUM NON CONVENIENS TO THE CONDUCT OF ANY PROCEEDING BY SUCH COURT. SECTION 11.04. EXPENSES. The Borrowers will pay, and have joint and several liability for, all documented out-of-pocket third-party expenses (including in each case all reasonable attorneys' and paralegals' fees and related expenses and costs), (i) incurred by the Agent, the Collateral Agent and the Documentation Agent in connection with the negotiation, preparation and 96 execution of the Loan Documents (whether or not the transactions contemplated hereby shall be consummated), subject, however, to the limitations set in those certain letters dated September 25, 1998 between KMC Holdings and the Agent, and KMC Holdings and the Documentation Agent, with respect to the fees and expenses of counsel for the Agent and the Documentation Agent, (ii) incurred by the Agents, in connection with the administration of the Loan Documents, and the creation, perfection, priority and protection of the Liens in the Collateral, and (iii) incurred by any Agent or any Lender in connection with the enforcement of the rights of any Agent or any Lender in connection with this Agreement, any other Loan Documents or the Collateral, or any restructuring or workout of this Agreement or the other Loan Documents. SECTION 11.05. EQUITABLE RELIEF. Each Borrower recognizes that, in the event such Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, or any other Loan Document, any remedy at law may prove to be inadequate relief to the Agent, the Collateral Agent and the Lenders; therefore, such Borrower agrees that the Agent or the Collateral Agent, if it so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. SECTION 11.06. INDEMNIFICATION; LIMITATION OF LIABILITY; LUCENT RELATIONSHIPS. (a) The Borrowers jointly and severally agree to protect, indemnify and hold harmless the Agent, the Collateral Agent each Lender and each of their respective officers, affiliates, directors, employees, attorneys, accountants, consultants, representatives and agents (collectively called the "INDEMNITEES") from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements (including, without limitation, payment by the Agent, the Collateral Agent or any Lender of any obligations due or past due under any contract or agreement to which any Borrower is or becomes a party) of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for and consultants of such Indemnitees in connection with any investigative, administrative or judicial proceeding, whether or not such Indemnitees shall be designated a party thereto), which may be imposed on, incurred by, or asserted against such Indemnitees (whether direct, indirect, or consequential and whether based on any federal or state laws or other statutory regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or at equitable cause or in contract or otherwise) in any manner relating to or arising out of this Agreement or any of the other Loan Documents, or any act, event or transaction related or attendant thereto, the agreements of the Agent, the Collateral Agent or the Lenders contained herein, the making of Loans, the management of such Loans or the Collateral (including any liability under Environmental Laws) or the use or intended use of the proceeds of such Loans hereunder (collectively, the "INDEMNIFIED MATTERS"); PROVIDED that the Borrowers shall not have any obligation to any Indemnitee hereunder with respect to Indemnified Matters caused by or resulting from the willful misconduct or gross negligence of such Indemnitee; PROVIDED, FURTHER that no Borrower shall have any obligation to any Indemnitee hereunder with respect to taxes that are imposed on the net income of any Indemnitee or any franchise or doing business taxes imposed on any Indemnitee. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrowers shall contribute the maximum portion which they are permitted to pay and satisfy under applicable 97 law, to the payment and satisfaction of all Indemnified Matters incurred by the Indemnitees. (b) To the extent permitted by applicable law, no claim may be made by the Borrowers or any other Person against the Agent, the Collateral Agent, any Lender or any of their respective affiliates, directors, officers, employees, agents, attorneys, accountants, representatives or consultants for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by any of the Loan Documents or any act, omission or event occurring in connection therewith; and the Borrowers hereby waive, release and agree not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. (c) The Borrowers agree not to, and hereby irrevocably waive any right to, (i) assert in any action or proceeding relating to any of the Loan Documents or the transactions contemplated thereby, any claim, counterclaim, cross claim or defense arising from any act or omission of Lucent other than in Lucent's capacity as a Lender under the Loan Documents, and (ii) assert any right of setoff in lieu of making payment under the Loan Documents arising from any act or omission of Lucent other than in Lucent's capacity as a Lender under the Loan Documents. SECTION 11.07. SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All warranties and representations made by any Borrower in any Loan Document shall survive the execution and delivery of this Agreement and the other Loan Documents and the making and repayment of the Obligations. The confidentiality obligations of each Borrower in SECTION 11.16, the indemnification obligations of each Borrower in SECTION 11.06, and to the extent the second sentence of SECTION 11.13 is applicable, all covenants of each Borrower, survive the repayment of the Obligations. SECTION 11.08. SUCCESSORS AND ASSIGNS; ASSIGNMENTS; PARTICIPATIONS. (a) GENERAL. The terms and provisions of the Loan Documents shall be binding upon and inure to the benefit of the Borrowers, the Agent, the Collateral Agent and the Lenders and their respective successors and assigns, except that (i) no Borrower shall have any right to assign its rights or obligations under the Loan Documents and (ii) any assignment by any Lender must be made in compliance with SUBSECTION (c) below. With respect to any Borrower, successors and assigns shall include, without limitation, any receiver, trustee or debtor-in-possession of or for such Borrower. Notwithstanding the foregoing, any Lender may at any time, without the consent of the Borrowers or the Agent, assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank or to an affiliate of such Lender or as collateral security for any loan or financing or in connection with any securitization or other similar transaction; PROVIDED, HOWEVER, that no such assignment shall release the transferor Lender from its obligations hereunder. The Agent shall be entitled to utilize its Register to determine the payee of any Note for all purposes hereof. Any request, authority or consent of any Person, who at the time of making such request or giving such authority or consent is the holder of 98 any Note, shall be conclusive and binding on any subsequent holder, transferee or assignee of such Note or of any Note or Notes issued in exchange therefor. (b) Participations. (i) Subject to the terms set forth in this Section 11.08(b), any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Note held by such Lender, any Commitment of such Lender or any other interest of such Lender under the Loan Documents on a pro rata or non-pro rata basis in an aggregate principal amount of at least $5,000,000. Notice of such participation to the Agent shall be required prior to any participation becoming effective with respect to a Participant which is not a Lender or an Affiliate thereof. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under the Loan Documents shall remain unchanged, such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, such Lender shall remain the holder of any such Note for all purposes under the Loan Documents, such Lender shall be solely responsible for any withholding taxes or any filing or reporting requirements in connection therewith relating to such Participant, all amounts payable by the Borrowers under this Agreement shall be determined as if such Lender had not sold such participating interests, and the Borrowers and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents except that, for purposes of Section 2.13 hereof, the Participants shall be entitled to the same rights as if they were Lenders, provided that no Participant shall be entitled to receive any greater amount pursuant to Section 2.13 than such Lender would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no transfer occurred. (ii) Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents other than any amendment, modification or waiver with respect to any Loan or Commitment in which such Participant has an interest which forgives principal, interest or fees or reduces the interest rate or fees payable pursuant to the terms of this Agreement with respect to any such Loan or Commitment, postpones any date fixed for any regularly-scheduled payment of principal of, or interest or fees on, any such Loan or Commitment, or releases all or substantially all of the Collateral, if any, securing any such Loan. (iii) The Borrowers agree that each Participant shall be deemed to have the right of setoff provided in SECTION 9.09 hereof in respect of its participating interest in amounts owing under the Loan Documents to the same extent as if the amount of its participating interest were owing directly to it as a Lender under the Loan Documents, PROVIDED that each Lender shall retain the right of setoff provided in SECTION 9.09 hereof with respect to the amount of participating interests sold to each Participant except to the extent such Participant exercises its right of setoff. The Lenders agree to share with each Participant, and each Participant, by exercising the right of setoff provided in SECTION 9.09 99 hereof, agrees to share with each Lender, any amount received pursuant to the exercise of its right of setoff, such amounts to be shared in accordance with SECTION 9.09 as if each Participant were a Lender. (c) Assignments. (i) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time assign to one or more banks or other entities ("PURCHASERS") all or a portion of its rights and obligations under this Agreement (including, without limitation, its Commitment and the Loans owing to it hereunder) in accordance with the provisions of this SECTION 11.08(c). Each assignment shall be of a constant, and not a varying, ratable percentage of all of the assigning Lender's rights and obligations under this Agreement. Such assignment shall be evidenced by an Assignment Agreement substantially in the form of EXHIBIT O attached hereto and shall not be permitted hereunder unless such assignment is either for all of such Lender's rights and obligations under the Loan Documents or, for Loans and Commitments in an aggregate principal amount equal to the lesser of $5,000,000 (which minimum amount may be waived by the Requisite Lenders after the occurrence of a Default) and such Lender's Commitment Amount. (ii) Upon (i) delivery to the Agent of a notice of assignment (a "NOTICE OF ASSIGNMENT"), together with any consent required hereunder, and (ii) payment of a $3,500 processing fee to the Agent for processing such assignment if such assignment is to a Person which is not an affiliate of the assigning Lender, such assignment shall become effective on the effective date specified in such Notice of Assignment. The assigning Lender shall be obligated to reimburse the Agent for all other costs and expenses associated with the preparation and execution of such assignment (including reasonable attorneys' fees arising out of such preparation and execution of such assignment). The Notice of Assignment shall contain a representation by the Purchaser to the effect that none of the consideration used to make the purchase of the Commitment and Loans under the applicable assignment agreement are "plan assets" as defined under ERISA and that the rights and interests of the Purchaser in and under the Loan Documents will not be "plan assets" under ERISA. On and after the effective date of such assignment, such Purchaser, if not already a Lender, shall for all purposes be a Lender party to this Agreement and any other Loan Documents executed by the Lenders and shall have all the rights and obligations of a Lender under the Loan Documents, to the same extent as if it were an original party hereto, and no further consent or action by the Borrowers, the Lenders or the Agent shall be required to release the transferor Lender with respect to the percentage of the aggregate Commitment and Loans assigned to such Purchaser. Upon the consummation of any assignment to a Purchaser pursuant to this SECTION 11.08(C)(ii), the transferor Lender, the Agent and the Borrowers shall make appropriate arrangements so that replacement Notes are issued to such transferor Lender and new Notes or, as appropriate, replacement Notes, are issued to such Purchaser, in each case in principal amounts reflecting their Commitment and their Loans, as adjusted pursuant to such assignment. 100 (iii) The Agent shall maintain at its address referred to in SECTION 11.01 a copy of each assignment delivered to and accepted by it pursuant to this SECTION 11.08 and a register (the "REGISTER") for the recordation of the names and addresses of the Lenders and the Commitment of and principal amount of the Loans owing to, each Lender from time to time and whether such Lender is an original Lender or the assignee of another Lender pursuant to an assignment under this SECTION 11.08. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrowers, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. SECTION 11.09. SEVERABILITY. In case any one or more of the provisions contained in this Agreement or any other Loan Document shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. SECTION 11.10. COVER PAGE, TABLE OF CONTENTS AND SECTION HEADINGS. The cover page, Table of Contents and section headings used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 11.11. COUNTERPARTS. This Agreement may be signed in counterparts with the same effect as if the signatures thereof and hereto were upon the same instrument. SECTION 11.12. APPLICATION OF PAYMENTS. Notwithstanding any contrary provision contained in this Agreement or in any of the other Loan Documents, upon the occurrence and during the continuance of any Event of Default, each Borrower irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received by the Agent or any Lender from such Borrower or with respect to any of the Collateral, and such Borrower does hereby irrevocably agree that the Agent or any Lender shall have the continuing exclusive right to apply and reapply any and all payments received at any time or times hereafter, whether with respect to the Collateral or otherwise, against the Obligations in such manner as the Agent or any Lender may deem advisable, notwithstanding any entry by the Agent or any Lender upon any of its books and records, subject, however, to the provisions of SECTION 2.08(c). SECTION 11.13. MARSHALLING; PAYMENTS SET ASIDE. Neither the Agent nor the Collateral Agent shall be under any obligation to marshall any assets in favor of any Borrower or any other party or against or in payment of any or all of the Obligations. To the extent that any Borrower makes a payment or payments to any Agent or any Lender or the Agent, the Collateral Agent or any Lender enforces its security interests or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect 101 as if such payment had not been made or such enforcement or setoff had not occurred. SECTION 11.14. SERVICE OF PROCESS. EACH BORROWER WAIVES PERSONAL SERVICE OF ANY PROCESS UPON IT AND, CONSENTS THAT ALL SERVICE OF PROCESS SHALL BE MADE BY REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO SUCH BORROWER AT THE ADDRESS INDICATED IN SECTION 11.01 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5) BUSINESS DAYS AFTER SAME SHALL HAVE BEEN POSTED AS AFORESAID. SECTION 11.15. WAIVER OF JURY TRIAL, ETC. EACH OF THE BORROWERS, THE AGENT, THE COLLATERAL AGENT AND THE LENDERS WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN THE AGENT, THE COLLATERAL AGENT OR ANY LENDER AND ANY BORROWER ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION THEREWITH OR THE TRANSACTIONS RELATED THERETO. EACH OF THE BORROWERS, THE AGENT, THE COLLATERAL AGENT AND THE LENDERS HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY OF THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. SECTION 11.16. CONFIDENTIALITY. No Borrower shall at any time before or after payment in full and satisfaction of all of the Obligations, reveal, divulge or make known, or knowingly permit to be so revealed, divulged or made known, to any Person (including Persons within its own organization who do not have a definite need to know for the purpose of performance of this Agreement), the terms or conditions of the Fee Letters; PROVIDED that the foregoing shall not apply to information required to be disclosed by order of a court of competent jurisdiction or in connection with any governmental investigation (in each case to the extent disclosure is required, but no further) so long as such Borrower notifies the Agent in writing of any circumstances of which such Borrower is aware that may lead to such a requirement or order, so as to allow the Agent to take steps to contest such order or investigation; PROVIDED, FURTHER, that the foregoing shall not apply to information which is required to be disclosed by such Borrower or information which in the reasonable determination of such Borrower is desirable for such Borrower to disclose, pursuant to federal or state securities laws, pursuant to the rules or regulations of the FCC, any PUC or other applicable Governmental Authority, or to Persons who are consultants, advisors (including but not limited to attorneys and auditors), officers, directors or employees of such Borrower, provided that each such Person is required by such Borrower to keep such information confidential. 102 SECTION 11.17. ENTIRE AGREEMENT, ETC. This Agreement (including all schedules and exhibits referred to herein), the Notes, the Fee Letters and all other Loan Documents constitute the entire contract among the parties hereto with respect to the subject matter hereof and thereof and shall supersede and take the place of any other instrument purporting to be an agreement of the parties hereto relating to such subject matter. SECTION 11.18. NO STRICT CONSTRUCTION. The parties hereto have participated, jointly in the negotiation and drafting of this Agreement. In the event of any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of authorship of any provisions of this Agreement. 103 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the day and year first above written. KMC TELECOM INC., as a Borrower By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM II, INC., as a Borrower By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM III, INC., as a Borrower By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM OF VIRGINIA, INC., as a Borrower By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM LEASING I LLC, as a Borrower BY: KMC TELECOM INC., as Sole Member By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM LEASING II LLC, as a Borrower BY: KMC TELECOM II, INC., as Sole Member By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM LEASING III LLC, as a Borrower BY: KMC TELECOM III, INC., as Sole Member By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC TELECOM.COM, INC., as a Borrower By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer KMC III SERVICES LLC, as a Borrower BY: KMC Telecom III, Inc., as Sole Member By: /s/ ---------------------------------------------- Name: James D. Grenfell Title: Chief Financial Officer NEWCOURT COMMERCIAL FINANCE CORPORATION, an affiliate of The CIT Group, Inc., as a Lender and as Collateral Agent By: /s/ ---------------------------------------------- Name: Michael V. Monahan Title: Vice President FIRST UNION NATIONAL BANK, as a Lender and as Administrative Agent By: /s/ ---------------------------------------------- Name: Elizabeth Elmore Title: Senior Vice President GENERAL ELECTRIC CAPITAL CORPORATION, as a Lender By: /s/ ---------------------------------------------- Name: Mark F. Mylon Title: Manager-Operations CANADIAN IMPERIAL BANK OF COMMERCE, as a Lender By: /s/ ---------------------------------------------- Name: Ellen Marshall Title: Managing Director CIBC World Markets Corp., as Agent LUCENT TECHNOLOGIES INC., as a Lender By: /s/ ---------------------------------------------- Name: Dina Fede Title: Director-Customer Finance BANKBOSTON, N.A., as a Lender By: /s/ ---------------------------------------------- Name: Michael A. Ashton Title: Vice President CREDIT SUISSE FIRST BOSTON, as a Lender By: /s/ ---------------------------------------------- Name: Jeffrey B. Ulmer Title: Vice President By: /s/ ---------------------------------------------- Name: Douglas E. Maher Title: Vice President DRESDNER BANK AG NEW YORK AND GRAND CAYMAN BRANCHES, as a Lender By: /s/ ---------------------------------------------- Name: John P. Flesler Title: Senior Vice President By: /s/ ---------------------------------------------- Name: Constance Loosemore Title: Assistant Vice President MORGAN STANLEY SENIOR FUNDING, INC., as a Lender By: /s/ ---------------------------------------------- Name: T. Morgan Edwards II Title: Vice President By: /s/ ---------------------------------------------- Name: Title: MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST, as a Lender By: /s/ ---------------------------------------------- Name: Shelia Finnely Title: Senior Vice President UNION BANK OF CALIFORNIA, as a Lender By: /s/ ---------------------------------------------- Name: Keith M. Wilson Title: Vice President KEYPORT LIFE INSURANCE COMPANY, as a Lender By: /s/ ---------------------------------------------- Name: Brian W. Good Title: Vice President & Portfolio Manager STEIN ROE FLOATING RATE LIMITED LIABILITY COMPANY, as a Lender By: /s/ ---------------------------------------------- Name: Brian W. Good Title: Vice President, Stein Roe & Farnham Incorporated as Advisor to the Stein Roe Floating Rate Limited Liability Company ANNEX A COMMITMENT AMOUNTS REVOLVING LOANS
Lender Revolving Loan Commitment Amount Newcourt Commercial Finance Corporation $ 22,500,000 Canadian Imperial Bank of Commerce $ 22,500,000 First Union National Bank $ 37,500,000 General Electric Capital Corporation $ 22,500,000 BankBoston, N.A. $ 14,000,000 Credit Suisse First Boston $ 17,500,000 Dresdner Bank AG New York & Grand $ 14,000,000 Cayman Branches Morgan Stanley Senior Funding, Inc. $ 17,500,000 Union Bank of California, N.A. $ 7,000,000 TOTAL $175,000,000
TERM A LOANS
Lender Term A Loan Commitment Amount Newcourt Commercial Finance Corporation $ 3,250,000 Canadian Imperial Bank of Commerce $ 3,250,000 First Union National Bank $ 3,250,000 General Electric Capital Corporation $ 3,250,000 BankBoston, N.A. $ 6,000,000 Credit Suisse First Boston $ 7,500,000 Dresdner Bank AG New York & Grand $ 6,000,000 Cayman Branches Keyport Life Insurance Company $ 5,000,000 Morgan Stanley Dean Witter Prime $25,000,000 Income Trust Morgan Stanley Senior Funding, Inc. $ 7,500,000 Stein Roe Floating Rate Limited $ 2,000,000 Liability Compan Union Bank of California, N.A. $ 3,000,000 TOTAL $75,000,000
TERM B LOANS
Lender Term B Loan Commitment Amount Lucent Technologies Inc. $450,000,000 TOTAL COMMITMENTS $700,000,000
ANNEX B FINANCIAL COVENANT INFORMATION
ITEM 2 FISCAL QUARTER ENDING MINIMUM REVENUES March 31, 2000 $ 24,935,000 June 30, 2000 $ 33,833,000 September 30, 2000 $ 43,122,000 December 31, 2000 $ 52,827,000 March 31, 2001 $ 65,937,000 June 30, 2001 $ 80,205,000 September 30, 2001 $ 92,926,000 December 31, 2001 $103,370,000
ITEM 2
115% OF EBITDA EBITDA LOSSES FISCAL QUARTER ENDING LOSSES LESS $7,500,000 March 31, 2000 ($72,368,000) ($70,429,000) June 30, 2000 ($78,372,000) ($75,649,000) September 30, 2000 ($64,507,000) ($63,593,000) December 31, 2000 ($49,948,000) ($50,933,000) March 31, 2001 ($25,563,000) ($29,729,000) June 30, 2001 $ 1,082,000(1) ($ 6,227,000)
ITEM 3
FISCAL QUARTER ENDING 85% OF EBITDA EBITDA LESS $7,500,000 September 30, 2001 $20,668,000 $16,815,000 December 31, 2001 $37,435,000 $36,541,000
- - --------------------- (1) This is a positive number.
ITEM 4 CUMULATIVE CAPITAL EXPENDITURES - - ------ PLUS $25,000,000 FISCAL QUARTER ENDING ------------------------------- - - --------------------- March 31, 2000 742,645,000 June 30, 2000 825,986,000 September 30, 2000 895,254,000 December 31, 2000 935,558,000 March 31, 2001 963,623,000 June 30, 2001 992,069,000 September 30, 2001 1,031,824,000 December 31, 2001 1,060,558,000
ITEM 5 75% OF MINIMUM ACCESS LINES - - ------ --------------------------- FISCAL QUARTER ENDING March 31, 2000 106,672 June 30, 2000 137,394 September 30, 2000 168,485 December 31, 2000 203,380 March 31, 2001 246,606 June 30, 2001 296,940 September 30, 2001 349,859 December 31, 2001 403,132
ANNEX C REVOLVING LOAN COMMITMENT REDUCTIONS
PAYMENT DATE COMMITMENT REDUCTION April 1, 2003 5.00% July 1, 2003 3.75% October 1, 2003 3.75% January 1, 2004 3.75% April 1, 2004 3.75% July 1, 2004 6.25% October 1, 2004 6.25% January 1, 2005 6.25% April 1, 2005 6.25% July 1, 2005 6.25% October 1, 2005 6.25% January 1, 2006 6.25% April 1, 2006 6.25% July 1, 2006 7.50% October 1, 2006 7.50% January 1, 2007 7.50% April 1, 2007 7.50%
TERM A LOAN REDUCTIONS
Percentage of Outstanding Principal PAYMENT DATE Balance of Term A Loans TO BE REPAID April 1, 2002 0.25% July 1, 2002 0.25% October 1, 2002 0.25% January 1, 2003 0.25% April 1, 2003 0.25% July 1, 2003 0.25% October 1, 2003 0.25% January 1, 2004 0.25% April 1, 2004 0.25% July 1, 2004 0.25% October 1, 2004 0.25% January 1, 2005 0.25% April 1, 2005 0.25% July 1, 2005 0.25% October 1, 2005 0.25% January 1, 2006 0.25% April 1, 2006 0.25% July 1, 2006 0.25% October 1, 2006 0.25% January 1, 2007 0.25% April 1, 2007 47.50% July 1, 2007 47.50%
TERM B LOAN REDUCTIONS
Percentage of Outstanding Principal PAYMENT DATE Balance of Term B Loans TO BE REPAID July 1, 2003 5.00% October 1, 2003 3.75% January 1, 2004 3.75% April 1, 2004 3.75% July 1, 2004 3.75% October 1, 2004 6.25% January 1, 2005 6.25% April 1, 2005 6.25% July 1, 2005 6.25% October 1, 2005 6.25% January 1, 2006 6.25% April 1, 2006 6.25% July 1, 2006 6.25% October 1, 2006 7.50% January 1, 2007 7.50% April 1, 2007 7.50% July 1, 2007 7.50%
SCHEDULE 1.01(A) APPLICABLE MARGIN FOR REVOLVING LOANS
- - ------------------------------------------------------------------------------- Applicable Applicable Margin for Margin for Base Rate LIBOR Loans Loans - - ------------------------------------------------------------------------------- Total Leverage Ratio > 12.0x or EBITDA negative 3.00% 4.00% - The Total Leverage Ratio > = 10.0x and < 12.0x 2.75% 3.75% The Total Leverage Ratio > = 8.0x and < 10.0x 2.50% 3.50% The Total Leverage Ratio > = 6.0x and < 8.0x 2.25% 3.25% The Total Leverage Ratio < 6.0x 2.00% 3.00% - - -------------------------------------------------------------------------------
APPLICABLE MARGIN FOR TERM A LOANS
- - ------------------------------------------------------------------------------- Applicable Applicable Margin for Margin for Base Rate LIBOR Loans Loans - - ------------------------------------------------------------------------------- The Total Leverage Ratio > = 12.0x or EBITDA 3.25% 4.25% negative 3.00% 4.00% The Total Leverage Ratio > = 10.0x and < 12.0x 2.75% 3.75% The Total Leverage Ratio > = 8.0x and < 10.0x 2.50% 3.50% The Total Leverage Ratio > = 6.0x and < 8.0x 2.25% 3.25% The Total Leverage Ratio < 6.0x - - -------------------------------------------------------------------------------
APPLICABLE MARGIN FOR TERM B LOANS
- - ------------------------------------------------------------------------------- Applicable Applicable Base Rate LIBOR Margin Margin - - ------------------------------------------------------------------------------- The Consolidated Leverage Ratio > 12.0x or EBITDA 3.25% 4.25% - negative The Consolidated Leverage Ratio > 10.0x and < 12.0x 3.00% 4.00% - The Consolidated Leverage Ratio > 8.0x and < 10.0x 2.75% 3.75% - The Consolidated Leverage Ratio > 6.0x and < 8.0x 2.50% 3.50% - The Consolidated Leverage Ratio < 6.0x 2.25% 3.25% - - -------------------------------------------------------------------------------
EX-10.8 5 AMENDMENT NO. 2 AMENDMENT NUMBER TWO TO THE GENERAL AGREEMENT AMONG KMC TELECOM INC., KMC TELECOM II, INC., KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC AND LUCENT TECHNOLOGIES INC. This Amendment Number Two (hereinafter this "Amendment Two") is made effective as of December 22, 1998, by and among KMC Telecom Inc., a Delaware corporation, KMC Telecom II, Inc., a Delaware corporation, KMC Telecom Leasing I LLC, a Delaware limited liability company and KMC Telecom Leasing II LLC, a Delaware limited liability company, each with offices located at 1545 Route 206, Suite 300, Bedminster, New Jersey 07921 (hereinafter collectively referred to as "Customer"), and Lucent Technologies Inc., a Delaware corporation, acting through its Global Service Providers Group, with offices located at 600 Mountain Avenue, Murray Hill, New Jersey 07074 (hereinafter "Seller"). WHEREAS, Customer and Seller previously entered into that certain General Agreement (Contract Number LNM970313MP), effective March 6, 1997, as modified and amended by Amendment Number 1 (Contract Number LNM 970922MP), effective as of October 15, 1997 (as so amended, the "General Agreement"), setting forth the terms and conditions pursuant to which Seller agreed to supply and Customer agreed to procure certain of Seller's Products, Licensed Materials and Services (as such terms are defined therein); WHEREAS, Customer and Seller desire to amend and modify the General Agreement as set forth herein; and WHEREAS, all terms used herein but not defined herein shall have the meanings ascribed to them in the General Agreement. NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. SCOPE OF GENERAL AGREEMENT The definition of "Customer" contained in the General Agreement is hereby amended to additionally include KMC Telecom of Virginia, Inc., a Virginia public service company ("KMC-Virginia"), KMC Telecom III, Inc., a Delaware corporation ("KMC III") and KMC Telecom Leasing III LLC, a Delaware limited liability company ("KMC Leasing III"); it being the intent and understanding among the parties that KMC-Virginia, KMC III, and KMC Leasing III shall be authorized to procure Products, Licensed Materials and Services from Seller under and pursuant to the terms and conditions of the General Agreement. 2. TERM OF GENERAL AGREEMENT Section 1.2 of the General Agreement is hereby amended to provide that the Term shall expire on March 5, 2003. 3. PURCHASE COMMITMENT AND FINANCIAL CONSIDERATIONS In consideration for the discounts, allowances and incentives set forth in Appendix A of the General Agreement (as modified hereby), KMC III and KMC Leasing III agree to procure directly and exclusively from Seller, consistent with the purchase requirements set forth in the financing documents between the parties, Seller's Products, and related Licensed Materials and Services which are available and may become available during the Term, in each case meeting Customer's requirements for up to 27 Tier III cities and up to 100 Tier IV cities, so long as at all times the purchase price therefor (taking into account all of the terms and conditions of the competitive offer) is competitive with the purchase price generally offered by any other third-party vendor of the particular Product, Licensed Material or Service in question in the United States. Either party's obligation to perform under this Amendment is contingent on Seller providing financing for all Seller's Products, and related Licensed Materials and Services to be sold to Customer hereunder in accordance with that certain Loan and Security Agreement, dated as of February __, 1999, among KMC III, KMC Leasing III, the financial institutions signatory thereto, Seller as agent and __________ as collateral agent. 4. DEFINITIONS The following definitions are hereby added to Section A-1.2, "Definitions" of Appendix A: o "Data Networking Products" means Seller's intelligent switching, access and applications and network services Products, including but not limited to the PacketStar(TM) Access Concentrator(TM), PathStar(TM) Access Server, PortMaster(R) Integrated Access Concentrator and PacketStarTM IP GateWay 1000. The table of Data Networking Products in Section 6 may be expanded or amended from time to time by mutual agreement of the parties. 5. MODIFICATIONS TO APPENDIX A The provision of Appendix A of the General Agreement shall be revised in the following respects: (A) The first sentence of Section A-1.5 "Network Standardization" shall be replaced with the following: "Subject to the provisions of Section 3 of Amendment Two, Customer agrees to standardize its network exclusively on Seller's 5ESS(R)-2000 Switch Systems Products, Transmission Systems Products, fiber optic cable and associated apparatus, access systems, voice messaging systems, Power Systems and Data Networking Products during the Term, such that in the event Customer requires any equipment and/or software which is functionally comparable to Sellers Products and related Licensed Materials available for purchase under this Agreement, then Customer agrees to purchase all of its requirements for such equipment and software from Seller. 2 (B) The parties acknowledge that, effective June 30, 1998, the Transmission Systems discounts available to Customer were amended and that effective as of June 30, 1998, the table entitled "Transmission Systems Products Discount Schedule" in Section A-1.15 of Appendix A is replaced with the following: - - -------------------------------------------------------------------------------- TRANSMISSION SYSTEMS PRODUCTS* DISCOUNT - - -------------------------------------------------------------------------------- DDM PLUS 27% - - -------------------------------------------------------------------------------- DDM-2000 FiberReach OC-1 25% - - -------------------------------------------------------------------------------- DDM-2000 OC-3 hardware & Software 45% - - -------------------------------------------------------------------------------- DDM-2000 OC-12 Shelf 85% - - -------------------------------------------------------------------------------- DDM-2000 OC-12 Commons 43% - - -------------------------------------------------------------------------------- DDM-2000 OC-12 Optics 50% - - -------------------------------------------------------------------------------- DDM-2000 OC-12 Software 43% - - -------------------------------------------------------------------------------- Dual 2Fiber OC-48 A/D Ring Term 70%** Two Systems (ED8C902-30 G-3 e/w the following): TG3 (DS1) Cp LAA18 System Controller LAA23B System Memory 4 Mbyte LAA25 Line Controller (4 Mg) A/D & ring LAA28 Overhead Controller LAA21 Adapter Plate Filler Plate - - -------------------------------------------------------------------------------- FT-2000 OC-48 Lightwave System Commons (spares) 50% - - -------------------------------------------------------------------------------- FT-2000 OC-48 Low Speed Cards (DS3, IS3, OC-3, OC-12) 40% - - -------------------------------------------------------------------------------- FT-2000 OC-48 Lightwave System Optics 65% - - -------------------------------------------------------------------------------- FT-2000 OC-48 Lightwave System Software 65% - - -------------------------------------------------------------------------------- SLC(R)-2000 Multi Services Distant Terminals (MSDT) 35% - - -------------------------------------------------------------------------------- SLC(R)-2000 Access System - Common Units 40% - - -------------------------------------------------------------------------------- SLC(R)-2000 Access System - POTS/SPOTS Units 35% - - -------------------------------------------------------------------------------- SLC(R)-2000 Access System - Special Service Units 40% - - -------------------------------------------------------------------------------- SLC(R)-2000 Access System - Software 00% - - -------------------------------------------------------------------------------- SLC(R)-SERIES 5 Carrier System - Common Units 35% - - -------------------------------------------------------------------------------- SLC(R)-SERIES 5 Carrier System - POTS/SPOTS Units 35% - - -------------------------------------------------------------------------------- SLC(R)-SERIES 5 Carrier System - Special Service Units 35% - - -------------------------------------------------------------------------------- DACS IV 2000 Systems see 1.15.1 below - - -------------------------------------------------------------------------------- 3 - - -------------------------------------------------------------------------------- TRANSMISSION SYSTEMS PRODUCTS* DISCOUNT - - -------------------------------------------------------------------------------- DACS II Systems (hardware & Software) 27% - - -------------------------------------------------------------------------------- * The above Products do not include cabling or power equipment. Unless otherwise specified, the discounts shown above apply to Transmission Systems Products (hardware) only. The discount for the cables used in the systems set forth above shall be twenty percent (20%) off the List Price. ** This 70% discount only applies to Lucent order code ED8C902-30 G-3 which is equipped with a dual bay, two complete OC-48 systems and commons for one shelf. For commons ordered singularly, the 50% discount shall apply. 6. ADDITIONS TO APPENDIX A The following sections are hereby added to Appendix A of the General Agreement. 6.1 PRICING PLAN A new Section A-1.22 is hereby added to Appendix A of the General Agreement: "A-1.22 PRICING PLAN FOR DATA NETWORKING PRODUCTS In consideration for the Customer purchase commitment set forth in Section 3 of this Amendment No. 2, Seller will provide the discounts set forth below for all purchases of the Data Networking Products described therein which are made by Customer during the Term: - - -------------------------------------------------------------------------------- DATA NETWORKING PRODUCTS DISCOUNT - - -------------------------------------------------------------------------------- PacketStar(TM) Access Concentrator 10 30% - - -------------------------------------------------------------------------------- PacketStar(TM) Access Concentrator 60 40% - - -------------------------------------------------------------------------------- PacketStar(TM) Access Concentrator 120 40% - - -------------------------------------------------------------------------------- PathStar(TM) Access Server (PSAS) 40% - - -------------------------------------------------------------------------------- PortMaster(R)4 Integrated Access Concentrator (PM4) 30% - - -------------------------------------------------------------------------------- PacketStar(TM) IP GateWay 1000 25%" - - -------------------------------------------------------------------------------- 6.2 SUPPORT SERVICES FOR DATA NETWORKING PRODUCTS A new Section A-1.23 is hereby added to Appendix A: 4 "1.23 SUPPORT SERVICES In addition to its obligations under the "Warranty" clause of the General Agreement, Seller will make available maintenance and other technical support services to Customer for Seller's Data Networking Products under mutually agreed-upon, separate support agreement(s)." 6.3 TRAINING INCENTIVE FOR DATA NETWORKING PRODUCTS A new Section A-1.24 is hereby added to Appendix A: "1.24 TRAINING INCENTIVE In consideration for Customer's purchase commitment set forth in Section 3 of this Amendment, (a) for each one million two hundred fifty thousand dollars ($1,250,000) in Customer's purchases of Seller's PathStar(TM) Access Server Products, Seller will provide Customer with two (2) tuition-free seats at a five (5) day course related to Data Networking Products; and (b) for each one million two hundred fifty thousand dollars ($1,250,000) in Customer's purchases of Seller's PortMaster(R) 4 Integrated Access Concentrator, PacketStar(TM) IP GateWay 1000, PacketStar(TM) Access Concentrator 10, PacketStar(TM) Access Concentrator 60, or PacketStar(TM) Access Concentrator 120 Products, Seller will provide Customer with two (2) tuition-free seats at a five (5) day course related to Data Networking Products. Seller, at its option, may offer training regionally. Customer shall use the foregoing training days earned by it within twelve (12) months after the shipment of the relevant Data Networking Products. Customer shall responsible for all associated travel and living expenses for Customer personnel in connection with attendance at the foregoing courses. In the event that Seller sends its personnel to a Customer site for on-site training, Customer shall be responsible for all reasonable travel and living expenses for the instructor and for providing equipment needed for hands-on training. It is understood and agreed that any such equipment used in a training setting must not be part of Customer's network product environment." 7. ENTIRE AGREEMENT Except as specifically modified, amended or supplemented herein, all terms and conditions of the General Agreement shall remain in full force and effect. The terms and conditions contained in this Amendment Two and those nonconflicting terms and conditions of the General Agreement supersede all prior oral and written understandings among the parties and shall constitute the entire agreement among the parties with respect to the subject matter herein. This Amendment Two shall not be modified or amended except by a writing signed by an authorized representative of each of the parties. 5 IN WITNESS WHEREOF, the parties have caused this Amendment Two to be executed by their duly authorized representatives on the date(s) indicated. KMC TELECOM INC. KMC TELECOM LEASING I LLC By: KMC Telecom I, Inc., as Sole Member By: /s/ By: /s/ ----------------------------------- ----------------------------------- Typed Name: Michael A. Sternberg Typed Name: Michael A. Sternberg --------------------------- --------------------------- Title: President Title: President -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- KMC TELECOM II, INC. KMC TELECOM LEASING II LLC By: KMC Telecom II, Inc., as Sole Member By: /s/ By: /s/ ----------------------------------- ----------------------------------- Typed Name: Michael A. Sternberg Typed Name: Michael A. Sternberg --------------------------- --------------------------- Title: President Title: President -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- KMC TELECOM III, INC. KMC TELECOM LEASING III LLC By: KMC Telecom III, Inc., as Sole Member By: /s/ By: /s/ ----------------------------------- ----------------------------------- Typed Name: Michael A. Sternberg Typed Name: Michael A. Sternberg --------------------------- --------------------------- Title: President Title: President -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- KMC TELECOM OF VIRGINIA, INC. LUCENT TECHNOLOGIES INC. By: /s/ By: /s/ ----------------------------------- ----------------------------------- Typed Name: Michael A. Sternberg Typed Name: Mark Wilson --------------------------- --------------------------- Title: President Title: Vice President - Sales -------------------------------- -------------------------------- Date: Date: --------------------------------- --------------------------------- 6 EX-10.9 6 AMENDMENT NO. 3 AMENDMENT NUMBER THREE TO THE GENERAL AGREEMENT AMONG KMC TELECOM INC., KMC TELECOM II, INC., KMC TELECOM III, INC., KMC TELECOM OF VIRGINIA, INC., KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC, KMC LEASING III LLC AND LUCENT TECHNOLOGIES INC. This Amendment Number Three (hereinafter this "Amendment Three") is made effective as of November 15, 1999, by and among KMC Telecom Inc., a Delaware corporation, KMC Telecom II, Inc., a Delaware corporation, KMC Telecom III, Inc., a Delaware corporation, KMC Telecom of Virginia, Inc., a Virginia public service company, KMC Telecom Leasing I LLC, a Delaware limited liability company, KMC Telecom Leasing II LLC, a Delaware limited liability company, and KMC Telecom Leasing III LLC, a Delaware limited liability company, each with offices located at 1545 Route 206, Suite 300, Bedminster, New Jersey 07921 (hereinafter collectively referred to as "Customer"), and Lucent Technologies Inc., a Delaware corporation, acting through its Global Service Providers Group, with offices located at 600 Mountain Avenue, Murray Hill, New Jersey 07074 (hereinafter "Seller"). WHEREAS, Customer and Seller previously entered into that certain General Agreement (Contract Number LNM97O313MP), effective March 6, 1997, as modified and amended by Amendment Number One (Contract Number LNM970922MP), effective as of October 15, 1997 and Amendment Number Two, effective December 22, 1998 (as so amended, the "General Agreement"), setting forth the terms and conditions pursuant to which Seller agreed to supply and Customer agreed to procure certain of Seller's Products, Licensed Materials and Services (as such terms are defined therein); and 1 WHEREAS, Customer and Seller desire to amend and modify the General Agreement as set forth herein; NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. SCOPE OF GENERAL AGREEMENT The definition of "Customer" contained in the General Agreement is hereby amended to additionally include KMC Telecom IV, Inc., a Delaware corporation ("KMC IV") and KMC Telecom Leasing IV LLC, a Delaware limited liability company ("KMC Leasing IV"); it being the intent and understanding among the parties that KMC IV and KMC Leasing IV shall be authorized to procure Products Licensed Materials and Services from Seller under and pursuant to the terms and conditions of the General Agreement. FINANCING Customer's obligations under this Amendment are contingent on Seller providing financing subject to terms and conditions to be mutually agreed. PURCHASE COMMITMENT AND FINANCIAL CONSIDERATIONS In consideration for the discounts, allowances and incentives set forth in Appendix A of the General Agreement (as modified hereby), Customer agrees to procure directly and exclusively from Seller, consistent with the provisions of Section 2 above, Seller's Products and related Licensed Materials and Services which are available and may become available during the Term, in each case meeting the Customer's technical requirements for conversion of Customer's existing Tier I, II, III and IV cities to packet technology and/or growth to the existing TOM technology, and for KMC IV's and KMC Leasing IV's nine (9) additional Tier III cities and ninety-eight (98) 2 additional Tier IV cities, so long as at all times the purchase price therefor (taking into account all of the terms and conditions of the competitive offer) is competitive with the purchase price generally offered by any other third-party vendor of the particular Product, Licensed Material or Service in question in the United States. MODIFICATIONS TO APPENDIX A The provisions of Appendix A of the General Agreement shall be revised in the following respects: The table entitled "Discount Schedule for 5ESS(R)-2000 Switch Products" in Section A-1.7 of Appendix A and the paragraph below the table are replaced with the following: - - -------------------------------------------------------------------------------- INITIAL PERIPHERAL PRODUCT TYPE SWITCH DISCOUNT LARGE GROWTH DISCOUNT GROWTH DISCOUNT - - -------------------------------------------------------------------------------- 5ESS Switch 83% 77% 25% - - -------------------------------------------------------------------------------- 5ESS CDX Switch 83% 77% 25% - - -------------------------------------------------------------------------------- 5ESS VCDX Switch 83% 77% 25% - - -------------------------------------------------------------------------------- The parties acknowledge that the above discounts were effective October 1, 1999. Large Growth is defined as the addition of seven (7) or more STSX-1 cards. Any other growth shall be considered Peripheral Growth. Dedicated hardware and Software for PRIs only shall receive a seventy-seven percent (77%) discount. The following products shall be added to the table in Section A-1.22, "Pricing Plan for Data Networking Products" (this Section was added in Amendment Two). Unless otherwise specified in writing by Lucent, the Warranty Periods for Data Networking Products are twelve (12) months for the hardware and ninety (90) days for the Software. - - -------------------------------------------------------------------------- DATA NETWORKING PRODUCTS DISCOUNT - - -------------------------------------------------------------------------- MAX TNT(TM) WAN Access Switch 30% - - -------------------------------------------------------------------------- PacketStar(TM)PSAX 2300 Access Concentrator 45% - - -------------------------------------------------------------------------- GX 550(TM)Smart Core ATM Switch 35% - - -------------------------------------------------------------------------- Stinger(TM) DSL Access Concentrator 35% - - -------------------------------------------------------------------------- Copper Mountain CopperEdge(TM) 200* 32% - - -------------------------------------------------------------------------- Copper Mountain CopperEdge(TM) 150* 32% - - -------------------------------------------------------------------------- PacketStar(TM) PSAX 50 Broadband Service Unit 35% - - -------------------------------------------------------------------------- 3 - - -------------------------------------------------------------------------- DATA NETWORKING PRODUCTS DISCOUNT - - -------------------------------------------------------------------------- PacketStar(TM) PSAX 100 Broadband Service Unit 35% - - -------------------------------------------------------------------------- PacketStar(TM) PSAX 600 Broadband Service Concentrator 35% - - -------------------------------------------------------------------------- Cajun(TM) 330R Stackable Switching System 35% - - -------------------------------------------------------------------------- Cajun(TM) 550R Stackable Switching System 35% - - -------------------------------------------------------------------------- ConnectStar(TM) Interworking Call Router (formerly 35% Broadband Interworking Connection Router (BICR)) - - -------------------------------------------------------------------------- * The Warranty Period for these Products is twelve (12) months. The following Access Products shall be added tothe table entitled "Transmission Systems Products Discount Schedule" in Section A-1.15 (this table was replaced in Amendment Two). - - --------------------------------------------------------------------------- ACCESS PRODUCTS DISCOUNT - - --------------------------------------------------------------------------- CopperCom Gateway(TM) * 19% - - --------------------------------------------------------------------------- CopperCom MXR(TM) * 19% - - --------------------------------------------------------------------------- VINA ConnectReach * 50% - - --------------------------------------------------------------------------- VINA ConnectReach Plus * 40% - - --------------------------------------------------------------------------- 7 R/E(TM) Connection Gateway (previously PacketStar(TM) 50% Connection Gateway (PCG))** - - --------------------------------------------------------------------------- * The Warranty Period for these Products is twelve (12) months. ** The Warranty Periods for the 7 R/E Connection Gateway are twelve (12) months for the hardware and eighteen (18) months for the Software. The following new Section A-1.25 is hereby added to Appendix A: A-1.25 PRICING PLAN FOR OPTICAL NETWORKING PRODUCTS In consideration for the Customer purchase commitment set forth in Section 3 of this Amendment Three, Seller will provide the discounts set forth below for all purchases of the Optical Networking Product(s) described therein which are made by Customer during the Term. This table of Optical Networking Products may be expanded or amended from time to time by mutual agreement of the parties. 4 - - --------------------------------------------------------------------------- OPTICAL NETWORKING PRODUCTS DISCOUNT - - --------------------------------------------------------------------------- WaveStar(TM) TDM 2.5G 50% - - --------------------------------------------------------------------------- The following new Section A-1.26 is hereby added to Appendix A: A-1.26 PRICING PLAN FOR 7R/E(TM) PACKET SOLUTIONS Seller will provide firm price quotations to Customer for its 7R/E(TM) Packet Solutions purchases. To constitute a 7R/E Packet Solution it must contain at least a minimum of one unit each of a Call Feature Server, One-Link Manager, and Packet Gateway purchased and installed at one time (it also may contain more than one unit of each of these components) in addition to other 7R/E hardware and Software elements (hereinafter referred to as "7R/E Packet Solution"). A 7R/E Packet Solution does not include the 5ESS(R) Switch or circuit switching network elements that may interface with the 7R/E Packet Solution products. List Prices are not yet finalized for 7R/E components. Seller commits to a minimum twenty percent (20%) price savings for a 7R/E configuration utilizing pure packet access when compared to a comparable 5ESS TDM configuration. Access vehicles (e.g., RLAGs, IADs, etc.) are not included in the 7R/E pricing. The Warranty Period for 7R/E hardware (whether or not the hardware is part of a 7R/E Packet Solution) is twelve (12) months. The Warranty Period for Software licensed with a new 7R/E Packet Solution installation (all three elements set forth above required to constitute a Packet Solution must be installed at the same time for this twelve (12) month Software warranty to apply) is twelve (12) months. The Warranty Period for any other 7R/E Software including, but not limited to, upgrades or updates to the initial Software or new releases of Software is three (3) months. ADDITIONAL CONSIDERATIONS At Customer's request, Seller is providing Customer with a copy of its schedule of anticipated release dates for certain of its Products. This Schedule is attached hereto as Exhibit B. If there is a slip in the availability date that impacts Customer's deployment schedule, Seller will, at Seller's expense, either 5 (a) provide Customer with an acceptable substitute and change it out to the required Product when available, or (b) purchase on Customer's behalf an acceptable non-Lucent substitute and change it out to the required Product when available. In the event Seller purchases non-Lucent Products in accordance with Subparagraph (b), said purchases will be treated as a Lucent Product for the purposes of the purchase commitment and will be subject to the terms and conditions of the financing agreement. Additionally, Seller will provide to Customer, concurrently with the signing of this Amendment, a list of the Products currently being purchased by Customer from Seller. This list will include a description of the product, comcode, current list price and the current discounted price. Lastly, at Customer's request, attached hereto as Exhibit C is a summary that compares the older city pricing and the planned city pricing, showing the expected savings by location. ENTIRE AGREEMENT Except as specifically modified, amended or supplemented herein, all terms and conditions of the General Agreement shall remain in full force and effect. The terms and conditions contained in this Amendment Three and those nonconflicting terms and conditions of the General Agreement supersede all prior oral and written understandings among the parties and shall constitute the entire agreement among the parties with respect to the subject matter herein. This Amendment Three shall not be modified or amended except by a writing signed by an authorized representative of each of the parties. 6 IN WITNESS WHEREOF, the parties have caused this Amendment Three to be executed by their duly authorized representatives on the date(s) indicated. KMC TELECOM INC. KMC TELECOM LEASING I LLC By KMC Telecom Inc., as Sole Member By: /s/ By: /s/ ------------------------------ ------------------------------------ Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg ---------------------- ---------------------------- Title: President Title: President --------------------------- --------------------------------- Date: Date: ---------------------------- ---------------------------------- KMC TELECOM II, INC. KMC TELECOM LEASING II LLC By: KMC Telecom II, Inc., as Sole Member By: /s/ By: /s/ ------------------------------ ------------------------------------ Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg ---------------------- ---------------------------- Title: President Title: President --------------------------- --------------------------------- Date: Date: ---------------------------- ---------------------------------- KMC TELECOM III, INC. KMC TELECOM LEASING III LLC By KMC Telecom III, Inc., as Sole Member By: /s/ By: /s/ ------------------------------ ------------------------------------ Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg ---------------------- ---------------------------- Title: President Title: President --------------------------- --------------------------------- Date: Date: ---------------------------- ---------------------------------- 7 KMC TELECOM IV, INC. KMC TELECOM LEASING IV LLC By KMC Telecom IV, Inc., as Sole Member By: /s/ By: /s/ ------------------------------ ------------------------------------ Typed Name: Michael A. Stenberg Typed Name: Michael A. Stenberg ---------------------- ---------------------------- Title: President Title: President --------------------------- --------------------------------- Date: Date: ---------------------------- ---------------------------------- By: By: KMC TELECOM OF VIRGINIA, INC. LUCENT TECHNOLOGIES INC. By: /s/ By: /s/ ------------------------------ ------------------------------------ Typed Name: Michael A. Stenberg Typed Name: Bill Plunkett ---------------------- ---------------------------- Title: President Title: --------------------------- --------------------------------- Date: Date: ---------------------------- ---------------------------------- 8 EXHIBIT A Financing Term Sheet A copy of the Financing Term Sheet shall be placed behind this page 9 EXHIBIT B - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- WAVESTAR TDM 2.5G - - ------------------------------------------------------------------------------- R. 1.0 4/99 - - ------------------------------------------------------------------------------- R. 2.0 6/99 9/99 - - ------------------------------------------------------------------------------- R. 3.0 w/UPSR Ring Termination 12/99 3/00 - - ------------------------------------------------------------------------------- R. 4.0 6/00 9/00 - - ------------------------------------------------------------------------------- R. 5.0 3/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR TDM 10G 2-FIBER - - ------------------------------------------------------------------------------- R. 1.0 12/99 3/00 - - ------------------------------------------------------------------------------- R. 2.0 9/00 - - ------------------------------------------------------------------------------- R. 3.0 3/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR TDM 10G (OC-192 4F) - - ------------------------------------------------------------------------------- R. 1.0 6/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR OLS 40G/80G - - ------------------------------------------------------------------------------- R. 3.3 10/99 - - ------------------------------------------------------------------------------- R. 6.0 9/15/00 - - ------------------------------------------------------------------------------- R. 7.0 3/15/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR OLS 400G - - ------------------------------------------------------------------------------- R. 2.0 9/30/99 - - ------------------------------------------------------------------------------- R. 3.0 3/31/00 - - ------------------------------------------------------------------------------- R. 4.0 12/15/00 - - ------------------------------------------------------------------------------- R. 5.0 9/15/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR ISTN - - ------------------------------------------------------------------------------- R. 1.0 12/99 6/00 - - ------------------------------------------------------------------------------- R. 2.0 6/00 12/00 - - ------------------------------------------------------------------------------- R. 3.0 3/01 - - ------------------------------------------------------------------------------- R. 4.0 9/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR BANDWIDTH MANAGER - - ------------------------------------------------------------------------------- R. 1.0 - 1.1 Now - - ------------------------------------------------------------------------------- R. 1.2 Now - - ------------------------------------------------------------------------------- R. 1.3 10/99 12/99 - - ------------------------------------------------------------------------------- R. 2.0 (w/TL1 cut through for DDM & FT) 1/00 3/31/00 - - ------------------------------------------------------------------------------- R. 3 6/30/00 - - ------------------------------------------------------------------------------- R. 4.0 3/01 - - ------------------------------------------------------------------------------- R. 5.0 9/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- WAVESTAR ALL METRO OLS - - ------------------------------------------------------------------------------- R. 1.0 3/31/00 - - ------------------------------------------------------------------------------- R. 2.0 12/15/00 - - ------------------------------------------------------------------------------- R. 3.0 6/15/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- WAVESTAR OPTICAIR OLS - - ------------------------------------------------------------------------------- R. 1.0 3/00 - - ------------------------------------------------------------------------------- R. 2.0 3/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- FT-2000 OC-48 - - ------------------------------------------------------------------------------- R. 9.1 1/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- ANYMEDIA ACCESS SYSTEM - - ------------------------------------------------------------------------------- R. 1.0 9/98 - - ------------------------------------------------------------------------------- R. 1.2 4/99 6/99 - - ------------------------------------------------------------------------------- R. 1.5 6/99 8/99 - - ------------------------------------------------------------------------------- R. 1.7 - HDT 8/99 - - ------------------------------------------------------------------------------- R. 1.2.4 - as a PAS Server 1/00 3/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- DDM-2000 - OC3/12 - - ------------------------------------------------------------------------------- R. 15.0 10/99 12/99 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- DDM-2000 BAM - - ------------------------------------------------------------------------------- R. 1.0 06/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- FIBERREACH - - ------------------------------------------------------------------------------- R. 4.0 (TARP) 09/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- VINA TECH - - ------------------------------------------------------------------------------- ConnectReach Plus Now - - ------------------------------------------------------------------------------- ConnectReach Now - - ------------------------------------------------------------------------------- R. 1.0 7/99 - - ------------------------------------------------------------------------------- VFDE 12/99 - - ------------------------------------------------------------------------------- R. 2.0 8/99 - - ------------------------------------------------------------------------------- R. 3.0 11/99 - - ------------------------------------------------------------------------------- R. 3.0.6 11/99 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- COPPER MOUNTAIN - - ------------------------------------------------------------------------------- CPE for Voice and Data w/PAS interop 10/99 11/99 - - ------------------------------------------------------------------------------- CPE for Voice and Data w/o PAS, standalone 10/99 - - ------------------------------------------------------------------------------- CE200 Now - - ------------------------------------------------------------------------------- CE150 (for MTU use) Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- HDSL 2 - Data 12/99 - - ------------------------------------------------------------------------------- HDSL 2 - Derived Voice w/ PAS 11/99 - - ------------------------------------------------------------------------------- SDSL - Data Now - - ------------------------------------------------------------------------------- SDSL - Derived Voice w/ PAS 7/99 11/99 - - ------------------------------------------------------------------------------- IDSL - Data Now - - ------------------------------------------------------------------------------- IDSL - Derived Voice w/ PAS 11/99 - - ------------------------------------------------------------------------------- Rel. 2.4 01/00 - - ------------------------------------------------------------------------------- Rel. 2.9 03/00 - - ------------------------------------------------------------------------------- Rel. 3.0 07/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- DACS II - - ------------------------------------------------------------------------------- Rel. 8.2 (Digital Signal Processing Platform) Now - - ------------------------------------------------------------------------------- Rel. 8.3 (Low Density SONET and SDH Unit) Now - - ------------------------------------------------------------------------------- Rel. 9.0 (Integrated Communications Interface Pack) 4Q99 - - ------------------------------------------------------------------------------- Rel. 9.1 (ATM Processing Shelf) 4Q99 - - ------------------------------------------------------------------------------- Rel. 10.0 (High Speed Unit - SONET) 1Q00 - - ------------------------------------------------------------------------------- Rel. 10.1 (High Speed Unit - SDH) 3Q00 - - ------------------------------------------------------------------------------- Rel. 11.0 (High Density Unit) 3Q00 - - ------------------------------------------------------------------------------- Rel. 12.0 (NextGen DACS) 2001 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- DACS 4/4/1 - - ------------------------------------------------------------------------------- R. 2.0 05/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- FT-2000 OC-48 - - ------------------------------------------------------------------------------- R. 9.0 TARP 01/00 - - ------------------------------------------------------------------------------- R. 9.1 01/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 5ESS ANYMEDIA SWITCH - - ------------------------------------------------------------------------------- 5E14 Software Release 4Q99 1q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 7 R/E PACKET SOLUTIONS - - ------------------------------------------------------------------------------- 7 R/E Packet Local Solution R1 (IP) 12/99 06/00 - - ------------------------------------------------------------------------------- 7 R/E Packet Local Solution R2 (IP) 06/00 12/00 - - ------------------------------------------------------------------------------- 7 R/E Packet Local Solution R3 (ATM) 12/00 06/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 7 R/E Packet Tandem/Toll Solution R1.0 10/99 04/00 - - ------------------------------------------------------------------------------- 7 R/E Packet Tandem/Toll Solution R1.1 11/99 05/00 - - ------------------------------------------------------------------------------- 7 R/E Packet Tandem/Toll Solution R1.2 03/00 09/00 - - ------------------------------------------------------------------------------- 7 R/E Packet Tandem/Toll Solution R2.0 06/00 12/00 - - ------------------------------------------------------------------------------- 7 R/E Packet Tandem/Toll Solution R3.0 12/00 06/01 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- 7 R/E PACKET DRIVER - - ------------------------------------------------------------------------------- Release 1.3 - Modem pooling w/TNT 12/99 06/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- Release 1.4 - Internet Telephony, OneLink 03/00 09/00 - - ------------------------------------------------------------------------------- Release 2.0 - Data Offload on TNT 06/00 12/00 - - ------------------------------------------------------------------------------- Release 2.1 - IP and VPN feature enhancements 09/00 03/01 - - ------------------------------------------------------------------------------- Release 3.0 (Phase 2) - Integrated VtoA Offer - 12/00 06/01 IWG - - ------------------------------------------------------------------------------- Phase 3 - Packet SM and 7R/E Elements 2H01 1H02 - - ------------------------------------------------------------------------------- Phase 4 - Renaissance existing SMs 2002 2002 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PATHSTAR ACCESS SERVER - - ------------------------------------------------------------------------------- Rel. 1.0 4/99 5/99 - - ------------------------------------------------------------------------------- Rel. 2.0 6/99 7/99 - - ------------------------------------------------------------------------------- Rel. 3.0 2/00 3/00 - - ------------------------------------------------------------------------------- Rel. 4.0 1Q00 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PACKETSTAR CONNECTION GATEWAY - - ------------------------------------------------------------------------------- Rel. 1 4/99 7/99 - - ------------------------------------------------------------------------------- Rel. 2 9/99 12/99 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- AC120 - - ------------------------------------------------------------------------------- UPSR 1Q00 1Q00 - - ------------------------------------------------------------------------------- APS (2 node configs only) 7/99 9/99 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PSAX2300 - - ------------------------------------------------------------------------------- Rel. 6.1 Now - - ------------------------------------------------------------------------------- Rel. 6.1.1 12/99 - - ------------------------------------------------------------------------------- Rel. 6.2 03/00 - - ------------------------------------------------------------------------------- Rel. 7.0 4Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- COPPERCOM GATEWAY - - ------------------------------------------------------------------------------- Redundancy - - ------------------------------------------------------------------------------- GSC (1:1) 1Q00 - - ------------------------------------------------------------------------------- ATM (1:1) 1Q00 - - ------------------------------------------------------------------------------- T1 (1:N) 1Q00 - - ------------------------------------------------------------------------------- Power (1:1) Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Voice - - ------------------------------------------------------------------------------- Loop/Ground Start Now - - ------------------------------------------------------------------------------- PCM Now - - ------------------------------------------------------------------------------- ADPCM 32 Now - - ------------------------------------------------------------------------------- ADPCM 16 1Q00 - - ------------------------------------------------------------------------------- Echo Cancellation Now - - ------------------------------------------------------------------------------- Fax Auto Detect 1Q00 - - ------------------------------------------------------------------------------- Silence Suppression 2Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- GR-203 - - ------------------------------------------------------------------------------- Multiple I/F Groups Now - - ------------------------------------------------------------------------------- EOC/Alarms/PPS Now - - ------------------------------------------------------------------------------- Lucent Certification 11/15/99 - - ------------------------------------------------------------------------------- Flow Through Provisioning 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- T1 Line Card - - ------------------------------------------------------------------------------- T1-4 port Now - - ------------------------------------------------------------------------------- T1-8 port 2Q00 - - ------------------------------------------------------------------------------- STS-1 2Q00 - - ------------------------------------------------------------------------------- Hot Remove 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- ATM Line Card - - ------------------------------------------------------------------------------- ATM - DS3 - Dual Port Now - - ------------------------------------------------------------------------------- ATM - OC3 - Dual Port 2Q00 - - ------------------------------------------------------------------------------- ATM - DS3 - Quad Port 2Q00 - - ------------------------------------------------------------------------------- Data Pass Through 1Q00 - - ------------------------------------------------------------------------------- Daisy Chaining 1Q00 - - ------------------------------------------------------------------------------- Hot Remove 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Management - - ------------------------------------------------------------------------------- Craft Interface Now - - ------------------------------------------------------------------------------- Element Management System Rel 1 4Q99 - - ------------------------------------------------------------------------------- Element Management System Rel 2 1Q00 - - ------------------------------------------------------------------------------- Lucent Integration Under Review - - ------------------------------------------------------------------------------- Alarm Contacts 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Voice of Frame Relay - - ------------------------------------------------------------------------------- Interworking Function FRF.8 Now - - ------------------------------------------------------------------------------- PCM Now - - ------------------------------------------------------------------------------- Configurable ATM/Frame Now - - ------------------------------------------------------------------------------- ADPCM 32 1Q00 - - ------------------------------------------------------------------------------- ADPCM 16 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Packet Trunk Interface - - ------------------------------------------------------------------------------- PTI Logic Card 2Q00 - - ------------------------------------------------------------------------------- MGCP 2Q00 - - ------------------------------------------------------------------------------- 10/100/1000 Mbps I/F 2Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- xDSL Modems - - ------------------------------------------------------------------------------- SDSL Now - - ------------------------------------------------------------------------------- ADSL Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- Voice - - ------------------------------------------------------------------------------- 16 Ports Now - - ------------------------------------------------------------------------------- Loop Start Now - - ------------------------------------------------------------------------------- Ground Start 1Q00 - - ------------------------------------------------------------------------------- PCM Now - - -------------------------------------------------------------------------------- ADPCM 32 Now - - ------------------------------------------------------------------------------- ADPCM 16 1Q00 - - ------------------------------------------------------------------------------- Echo Cancellation Now - - ------------------------------------------------------------------------------- Silence Suppression 2Q00 - - -------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Data - - ------------------------------------------------------------------------------- RIP 1 & 2 Now - - ------------------------------------------------------------------------------- RFC 1483 Now - - ------------------------------------------------------------------------------- PPP Now - - ------------------------------------------------------------------------------- Classical IP Now - - ------------------------------------------------------------------------------- NAT Now - - ------------------------------------------------------------------------------- DHCP Now - - ------------------------------------------------------------------------------- Firewall Now - - ------------------------------------------------------------------------------- 10Base T Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Management - - ------------------------------------------------------------------------------- Console Port Now - - ------------------------------------------------------------------------------- Telnet over Ethernet Now - - ------------------------------------------------------------------------------- Proxy Through Gateway 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- COPPERCOM MXR - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- xDSL Modems - - ------------------------------------------------------------------------------- SDSL Now - - ------------------------------------------------------------------------------- ADSL Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Voice - - ------------------------------------------------------------------------------- 16 Ports Now - - ------------------------------------------------------------------------------- Loop Start Now - - ------------------------------------------------------------------------------- Ground Start 1Q00 - - ------------------------------------------------------------------------------- PCM Now - - ------------------------------------------------------------------------------- ADPCM 32 Now - - ------------------------------------------------------------------------------- ADPCM 16 1Q00 - - ------------------------------------------------------------------------------- Echo Cancellation Now - - ------------------------------------------------------------------------------- Silence Suppression 2Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Data - - ------------------------------------------------------------------------------- RIP 1 & 2 Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- RFC 1483 Now - - ------------------------------------------------------------------------------- PPP Now - - ------------------------------------------------------------------------------- Classical IP Now - - ------------------------------------------------------------------------------- NAT Now - - ------------------------------------------------------------------------------- DHCP Now - - ------------------------------------------------------------------------------- Firewall Now - - ------------------------------------------------------------------------------- 10Base T Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Management - - ------------------------------------------------------------------------------- Console Port Now - - ------------------------------------------------------------------------------- Telnet over Ethernet Now - - ------------------------------------------------------------------------------- Proxy Through Gateway 1Q00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- CAJUN 330R - - ------------------------------------------------------------------------------- OC 12 ATM Uplink 03/00 - - ------------------------------------------------------------------------------- OC 3 ATM Uplink 05/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- CAJUN 550R - - ------------------------------------------------------------------------------- OC 12 ATM Uplink 03/00 - - ------------------------------------------------------------------------------- OC 3 ATM Uplink 05/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- GX 550 - - ------------------------------------------------------------------------------- Jade - - ------------------------------------------------------------------------------- OC3/STM-1, OC12/STM-4 Now - - ------------------------------------------------------------------------------- Full Redundancy (excluding GR253 APS) Now - - ------------------------------------------------------------------------------- CBX 500 Rel. 3.0 SW functionality Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Jade.1 - - ------------------------------------------------------------------------------- Rapid upgrade Now - - ------------------------------------------------------------------------------- IP Navigator Now - - ------------------------------------------------------------------------------- Amethyst & Jade NMS merge Now - - ------------------------------------------------------------------------------- Priority reroute Now - - ------------------------------------------------------------------------------- OC-48/STM-16 software support Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Jade M2 - - ------------------------------------------------------------------------------- GR 253 Direct Trunk APS for OC12/STM-4 Now - - ------------------------------------------------------------------------------- GR 253 Direct Trunk APS for OC48/STM-16 Now - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- Eurpoa (Rel. 8.0) - - ------------------------------------------------------------------------------- BIO 2 06/00 - - ------------------------------------------------------------------------------- GR 253 OC-3/STM-1, OC-12//STM-4, OC-48/STM-16 06/00 Direct Trunk / UNI APS - - ------------------------------------------------------------------------------- Frame BIO 06/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- PRODUCT RELEASE SCHEDULE - - ------------------------------------------------------------------------------- CI OR FSA GA - - ------------------------------------------------------------------------------- 4 port OC-3/STM-1 FOS/POS 06/00 - - ------------------------------------------------------------------------------- 1 port OC-12/STM-4 FOS/POS 06/00 - - ------------------------------------------------------------------------------- IP Navigator & Frame Relay 06/00 - - ------------------------------------------------------------------------------- 4 port DS3 ATM via GX 250 06/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- MAX TNT - - ------------------------------------------------------------------------------- Re. 8.0 01/00 - - ------------------------------------------------------------------------------- 96 Modem Cards 02/00 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- STINGER - - ------------------------------------------------------------------------------- TAOS 7.11.1 Now - - ------------------------------------------------------------------------------- TAOS 8.0.x 2Q00 - - ------------------------------------------------------------------------------- 24-port ADSl and HDSL2 Line Interface Modules 2Q00 - - ------------------------------------------------------------------------------- EXHIBIT C OLD PRICE / NEW PRICE CITY COMPARISON OLD NEW TDM QUOTES REDUCTION KMC Central Office $2,816,827 $2,567,658 -8.85% ILEC Tandem $483,473 $422,106 -12.69% LSO Cob $966,946 $844,212 -12.69% AT&T Cob $123,476 $122,350 -0.91% MCI Cob $200,410 $146,926 -26.69% IXC Cob $200,410 $146,926 -26.69% Fees/Make Ready $500,000 $500,000 0.00% Shipping (5%) $264,577 $212,509 -19.68% Subtotal $5,556,119 $4,962,687 -10.68% Switching Machine $2,551,741 51,950,000* -23.58% Grand Total $8,107,860 $6,912,687 -14.74% * List price not yet firm. This price is budgetary and exemplifies a model with pure packet access. Seller commits to a minimum twenty percent (20%) price savings when compared to a 5ESS TDM Switch configuration. Access vehicles (e.g., RLAGs, IADs, etc.) are not included in the pricing. EX-10.10 7 AMENDMENT NO. 4 AMENDMENT NUMBER FOUR TO THE GENERAL AGREEMENT AMONG KMC TELECOM INC., KMC TELECOM II, INC., KMC TELECOM III, INC., KMC TELECOM IV, INC., KMC TELECOM OF VIRGINIA, INC., KMC TELECOM LEASING I LLC, KMC TELECOM LEASING II LLC, KMC TELECOM LEASING III LLC, KMC TELECOM LEASING IV LLC AND LUCENT TECHNOLOGIES INC. This Amendment Number Four (hereinafter this "AMENDMENT FOUR") is made effective as of February 15, 2000, by and among KMC Telecom Inc., a Delaware corporation, KMC Telecom II, Inc., a Delaware corporation, KMC Telecom III, Inc., a Delaware corporation, KMC Telecom IV, Inc., a Delaware corporation, KMC Telecom of Virginia, Inc., a Virginia public service company, KMC Telecom Leasing I LLC, a Delaware limited liability company, KMC Telecom Leasing II LLC, a Delaware limited liability company, KMC Telecom Leasing III LLC, a Delaware limited liability company, KMC Telecom Leasing IV LLC, a Delaware limited liability company, each with offices located at 1545 Route 206, Suite 300, Bedminster, New Jersey 07921 (hereinafter collectively referred to as "CUSTOMER"), and Lucent Technologies Inc., a Delaware corporation acting through its Global Service Providers Group, with offices located at 600 Mountain Avenue, Murray Hill, New Jersey 07074 (hereinafter "SELLER"). WHEREAS, Customer and Seller previously entered into that certain General Agreement (Contract Number LNM970313MP), effective March 6, 1997, as modified and amended by Amendment Number One (Contract Number LNM970922MP), effective as of October 15, 1997, as further modified and amended by Amendment Number Two, effective as of December 22, 1998, as further modified and amended by Amendment Number Three, effective as of November 15, 1999 (as so amended, the "GENERAL AGREEMENT"), setting forth the terms and conditions pursuant to which Seller agreed to supply and Customer agreed to procure certain of Seller's Products, Licensed Materials and Services (as such terms are defined therein); and WHEREAS, Customer and Seller desire to amend and modify the General Agreement as set forth herein; and WHEREAS, all terms used herein but not defined herein shall have the meanings ascribed to them in the General Agreement. NOW THEREFORE, in consideration of the mutual promises hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. SCOPE OF GENERAL AGREEMENT The definition of "Customer" contained in the General Agreement is hereby amended to additionally include KMC III Services LLC, a Delaware limited liability company ("KMC SERVICES"), it being the intent and understanding among the parties that KMC Services shall be authorized to procure Products, Licensed Materials and Services from Seller under and pursuant to the terms and conditions of the General Agreement. 2. ENTIRE AGREEMENT Except as specifically modified, amended or supplemented herein, all terms and conditions of the General Agreement shall remain in full force and effect. The terms and conditions contained in this Amendment Four and those nonconflicting terms and conditions of the General Agreement supersede all prior oral and written understandings among the parties and shall constitute the entire agreement among the parties with respect to the subject matter herein. This Amendment Number Four shall not be modified or amended except by a writing signed by an authorized representative of each of the parties. 3. COUNTERPARTS This Amendment Number Four may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 4. GOVERNING LAW This Amendment Number Four shall be governed by the laws of the State of New York. IN WITNESS WHEREOF, the parties have caused this Amendment Number Four to be executed by their duly authorized representatives as of the day and year first above written. KMC TELECOM INC. KMC TELECOM LEASING I LLC By: KMC Telecom Inc., as Sole Member By: /s/ By: /s/ -------------------------- -------------------------------- Name: James D. Grenfell Name: James D. Grenfell Title:Chief Financial Officer Title:Chief Financial Officer KMC TELECOM II, INC. KMC TELECOM LEASING II LLC By: KMC Telecom II, Inc., as Sole Member By: /s/ By: /s/ ----------------------------- -------------------------------- Name: James D. Grenfell Name: James D. Grenfell Title:Chief Financial Officer Title:Chief Financial Officer KMC TELECOM III, INC. KMC TELECOM LEASING III LLC By: KMC Telecom III, Inc., as Sole Member By: /s/ By: /s/ ----------------------------- -------------------------------- Name: James D. Grenfell Name: James D. Grenfell Title:Chief Financial Officer Title:Chief Financial Officer KMC TELECOM IV, INC. KMC TELECOM LEASING IV LLC By: KMC Telecom IV, Inc., as Sole Member By: /s/ By: /s/ ----------------------------- -------------------------------- Name: James D. Grenfell Name: James D. Grenfell Title:Chief Financial Officer Title:Chief Financial Officer KMC TELECOM OF VIRGINIA, INC. KMC III SERVICES LLC By: KMC Telecom III, Inc., as Sole Member By: /s/ By: /s/ ----------------------------- -------------------------------- Name: James D. Grenfell Name: James D. Grenfell Title:Chief Financial Officer Title:Chief Financial Officer LUCENT TECHNOLOGIES INC. By: /s/ ----------------------------- Name: William H. Pittman Title:Area Vice President EX-21.1 8 SUBSIDIARIES OF KMC TELECOM HOLDINGS, INC. SUBSIDIARIES OF KMC TELECOM HOLDINGS, INC. COMPANY STATE OF INCORPORATION/ORGANIZATION KMC Telecom Inc. Delaware KMC Telecom II, Inc. Delaware KMC Telecom III, Inc. Delaware KMC Telecom IV, Inc. Delaware KMC Telecom V, Inc. Delaware KMC Telecom of Virginia, Inc. Virginia (subsidiary of KMC Telecom Inc.) KMC Telecom of Virginia IV, Inc. Virginia (subsidiary of KMC Telecom of Virginia, Inc.) KMC Telecom Leasing I LLC Delaware (subsidiary of KMC Telecom Inc.) KMC Telecom Leasing II LLC Delaware (subsidiary of KMC Telecom II, Inc.) KMC Telecom Leasing III LLC Delaware (subsidiary of KMC Telecom III, Inc.) KMC Telecom Leasing IV LLC Delaware (subsidiary of KMC Telecom IV, Inc.) KMC Telecom.com, Inc. Delaware KMC III Services LLC Delaware (formerly KMC III LLC) (subsidiary of KMC Telecom III, Inc.) KMC Telecom Financing, Inc. Delaware KMC Financial Services LLC Delaware (formerly KMC Services LLC) KMC Network Technologies LLC Delaware EX-27.1 9 FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET OF KMC TELECOM HOLDINGS, INC. AS OF DECEMBER 31, 1999 AND THE RELATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 12-MOS Dec-31-1999 Jan-1-1999 Dec-1-1999 85,966,000 0 32,924,000 (5,551,000) 0 151,839,000 676,291,000 (36,967,000) 886,040,000 208,846,000 576,137,000 250,470,000 0 6,000 (384,419,000) 886,040,000 0 64,313,000 0 110,309,000 114,713,000 0 69,411,000 (225,716,000) 0 (225,716,000) 0 0 0 (225,716,000) (360.88) (360.88)
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