-----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, J8fPcrYcbyHS9APLNGCJ9z/HUguOTVvFh5IIRJ86uhbRTWwK9x7OvJCUYehURnnL vusA5mdqclvQgKVDHpaZHQ== 0000940180-98-001033.txt : 19981002 0000940180-98-001033.hdr.sgml : 19981002 ACCESSION NUMBER: 0000940180-98-001033 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19981001 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MJD COMMUNICATIONS INC CENTRAL INDEX KEY: 0001062613 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 133725229 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-56365 FILM NUMBER: 98719137 BUSINESS ADDRESS: STREET 1: 521 EAST MOREHEAD ST STREET 2: STE 250 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043448150 S-4/A 1 AMENDMENT NO. 3 TO FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1998 REGISTRATION NO. 333-56365 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 3 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MJD COMMUNICATIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 4813 13-3725229 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) ---------------- 521 EAST MOREHEAD STREET, SUITE 250 CHARLOTTE, NORTH CAROLINA 28202 (704) 344-8150 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- WALTER E. LEACH, JR. SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY 521 EAST MOREHEAD STREET, SUITE 250 CHARLOTTE, NORTH CAROLINA 28202 (704) 344-8150 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: NEIL A. TORPEY, ESQ. PAUL, HASTINGS, JANOFSKY & WALKER LLP 399 PARK AVENUE NEW YORK, NEW YORK 10022 (212) 318-6000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION DATED OCTOBER 1, 1998 PROSPECTUS [LOGO OF MJD COMMUNICATIONS, INC. APPEARS HERE} MJD COMMUNICATIONS, INC. OFFER TO EXCHANGE ITS 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B AND FLOATING RATE CALLABLE SECURITIES DUE 2008, SERIES B, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008 AND FLOATING RATE CALLABLE SECURITIES DUE 2008 -------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. MJD Communications, Inc., a Delaware corporation (the "Company"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal" and together with this Prospectus, the "Exchange Offer"), to exchange its 9 1/2% Senior Subordinated Notes due 2008, Series B (the "Fixed Rate Exchange Notes") and Floating Rate Callable Securities due 2008, Series B (the "Floating Rate Exchange Notes" and, together with the Fixed Rate Exchange Notes, the "Exchange Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement (as defined in "Available Information") of which this Prospectus is a part, for an equal principal amount of its outstanding 9 1/2% Senior Subordinated Notes due 2008 (the "Fixed Rate Original Notes") and Floating Rate Callable Securities due 2008 (the "Floating Rate Original Notes" and, together with the Fixed Rate Original Notes, the "Old Notes") of which $125 million and $75 million principal amount, respectively, is outstanding. The Exchange Notes and the Old Notes are collectively referred to herein as the "Notes." The Company will accept for exchange any and all Old Notes that are validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on , 1998, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes will be issued and delivered promptly after the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. See "The Exchange Offer." Old Notes may be tendered only in integral multiples of $1,000. The Company has agreed to pay the expenses of the Exchange Offer. The Exchange Notes will be obligations of the Company evidencing the same debt as the Old Notes and will be entitled to the benefits of the same indenture, dated as of May 5,1998 (the "Indenture"), between the Company and United States Trust Company of New York, as trustee (the "Trustee"). The form and terms of the Exchange Notes are substantially the same as the form and terms of the Old Notes except that the Exchange Notes have been registered under the Securities Act. See "The Exchange Offer." (continued on following page) -------- SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER. -------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998. (continued from cover page) The Exchange Notes will bear interest from May 5, 1998. Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on the Old Notes accrued up until the date of the issuance of the Exchange Notes. Such waiver will not result in the loss of interest income to such holders, since the Exchange Notes will bear interest from the issue date of the Old Notes. Interest on the Exchange Notes will be payable semi-annually on May 1 and November 1 of each year, commencing on November 1, 1998 at the rate of 9 1/2% per annum in the case of the Fixed Rate Exchange Notes, and at a rate per annum equal to LIBOR (as defined in "Description of Notes) plus 418.75 basis points in the case of the Floating Rate Exchange Notes. The rate of interest on the Floating Rate Exchange Notes will be reset semi-annually. The Fixed Rate Exchange Notes will be redeemable, in whole or in part, at the option of the Company on or after May 1, 2003, and the Floating Rate Exchange Notes will be redeemable, in whole or in part, at the option of the Company, at any time, in each case, at the redemption prices, set forth herein, plus accrued and unpaid interest to the redemption date. In addition, at any time on or prior to May 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Fixed Rate Exchange Notes with the net cash proceeds of an Equity Sale (as defined in "Description of Notes"), at 109.5% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; provided, that at least 65% of the original aggregate principal amount of the Fixed Rate Exchange Notes originally issued remains outstanding immediately after any redemption. Upon a Change of Control (as defined in "Description of Notes"), each holder of the Exchange Notes shall have the right to require the Company to repurchase such holder's Exchange Notes, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date. See "Description of Notes-- Repurchase at the Option of the Holders Upon a Change of Control." Each broker-dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker- dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that, by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities. The Company has agreed that for a period of 180 days after consummation of the Exchange Offer, it will make this prospectus, as it may be amended or supplemented from time to time, available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." There has been no public market for the Old Notes. If a market for the Exchange Notes should develop, the Exchange Notes could trade at a discount from their principal amount. The Company does not intend to list the Exchange Notes on a national securities exchange or quotation system. There can be no assurance that an active public market for the Exchange Notes will develop. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-4 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act with respect to the Exchange Notes offered hereby. This Prospectus, which forms a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Exchange Notes offered hereby, reference is made to the Registration Statement. Statements contained in this prospectus as to the contents of certain documents filed as exhibits to the Registration Statement are not necessarily complete and, in each case, are qualified by reference to the copy of the document so filed. The Registration Statement can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326-1232. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such material also can be reviewed through the Commission's Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR"), which is publicly available through the Commission's web site (http://www.sec.gov). The Company intends to furnish to each holder of the Exchange Notes annual reports containing audited financial statements and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. The Company also will furnish to each holder of the Exchange Notes such other reports as may be required by applicable law. The principal executive offices of the Company are located at 521 East Morehead Street, Suite 250, Charlotte, North Carolina 28202 and its telephone number is (704) 344-8150. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION, BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD- LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF, ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS. THE SAFE HARBOR PROVISIONS FOR FORWARD LOOKING STATEMENTS PROVIDED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE SECURITIES ACT (AS DEFINED HEREIN) AND THE EXCHANGE ACT DO NOT APPLY TO INITIAL PUBLIC OFFERINGS AND THE COMPANY CANNOT AVAIL ITSELF OF THE PROTECTIONS PROVIDED THEREBY WITH RESPECT TO THE EXCHANGE OFFER. i SUMMARY The following is a summary of certain information contained elsewhere in this Prospectus. Reference is made to, and this Summary is qualified in its entirety by, the more detailed information, including the Company's Consolidated Financial Statements and notes thereto, and the Company's Pro Forma Consolidated Financial Statements and notes thereto, contained herein. Unless otherwise indicated, references to "MJD" or the "Company" include MJD Communications, Inc., a Delaware corporation, and its consolidated subsidiaries. On May 5, 1998 the Company sold and issued the Old Notes (the "Offering"). The Company acquired Kadoka Telephone Company, Columbine Telephone Company, Chautauqua & Erie Telephone Corporation and C-R Communications, Inc. in separate transactions during 1997 (the "1997 Acquisitions"). The Company acquired Taconic Telephone Corp. ("Taconic") on March 30, 1998, Ellensburg Telephone Company ("Ellensburg") on April 30, 1998 and Chouteau Telephone Company ("Chouteau" and collectively with the acquisitions of Ellensburg and Taconic and the 1997 Acquisitions, the "Completed Acquisitions") on June 1, 1998. The Company expects to acquire Utilities, Inc. ("Utilities") in a transaction during 1998 (the "Pending Acquisition" and together with the Completed Acquisitions, the "Acquisitions"). The Offering, the New Credit Facility (as defined in "Description of New Credit Facility"), the Taconic acquisition, the Ellensburg acquisition and the Chouteau acquisition are collectively referred to in this Prospectus as the "Completed Transactions." See "Glossary" for definitions of certain other terms used in this Prospectus. THE COMPANY MJD is a growing provider of local telecommunications services to customers in rural communities in the United States. The Company also provides complementary services such as long distance service, enhanced calling services and wireless telephony. Upon completion of the Pending Acquisition, the Company believes that it will be the eighteenth largest telephone company in the United States, and the largest telephone company in the United States that focuses primarily on acquiring and operating rural telecommunications service companies. For the year ended December 31, 1997, the Company had revenue and Adjusted EBITDA (as defined in "--Summary Consolidated Financial and Operating Data") of $43.0 million and $22.7 million, respectively. The Company provided net cash of $9.8 million from operating activities, used net cash of $39.0 million in investing activities and provided net cash of $31.7 million from financing activities for the year ended December 31, 1997. On a pro forma basis after giving effect to the Acquisitions, the Company would have had revenue and Adjusted EBITDA of $104.6 million and $53.2 million, respectively, for the year ended December 31, 1997. On a pro forma basis after giving effect to the Acquisitions, the Company provided net cash of $16.7 million from operating activities, used net cash of $269.6 million in investing activities, and provided net cash of $239.1 million from financing activities for the year ending December 31, 1997. For the six months ended June 30, 1998, the Company had revenue and Adjusted EBITDA of $35.3 million and $17.6 million, respectively. The Company provided net cash of $7.3 million from operating activities, used net cash of $174.3 million in investing activities and provided net cash of $174.2 million from financing activities during the six months ended June 30, 1998. On a pro forma basis after giving effect to the Acquisitions, the Company would have had revenue and Adjusted EBITDA of $56.0 million and $24.9 million, respectively, for the six months ended June 30, 1998. On a pro forma basis after giving effect to the Acquisitions, the Company provided net cash of $8.1 million from operating activities, used net cash of $220.1 million in investing activities and provided net cash of $215.2 million from financing activities for the six months ended June 30, 1998. The Company believes that the rural telecommunications market is particularly attractive due to limited competition and a favorable regulatory environment; in particular, pursuant to existing state and federal regulations, the Company is able to charge rates which enable it to recover its operating and capital costs, plus a reasonable (as determined by the relevant regulatory authority) rate of return on its invested capital. Rural local exchange carriers ("RLECs") which serve this market are characterized by stable operating results and strong cash flow margins. The Company has successfully completed acquisitions of fourteen RLECs in ten states 1 (Colorado, Illinois, Kansas, Maine, New Hampshire, New York, South Dakota, Washington, Oklahoma and Vermont (the "Current States")) and, pro forma for the Pending Acquisition, the Company will serve over 123,000 access lines and provide local telephone service to customers in rural locations in ten states. MJD has been successful in improving operating margins and reducing trailing acquisition multiples by centralizing many of the acquired companies' operations and increasing revenues through introducing innovative marketing strategies for enhanced and ancillary services. The Company believes that the attractive operating characteristics of rural markets and the Company's ability to draw on its existing corporate resources create the opportunity to achieve and maintain substantial operating efficiencies. The local telephone industry is comprised of a few large, well-known companies such as the RBOCs and a large number of small independent telephone companies. According to the United States Telecommunications Association ("USTA"), there are over 1,300 independent telephone companies with fewer than 25,000 access lines in the United States. The majority of these small telephone companies operate in thinly populated, rural areas with limited competition due to the unfavorable economics of constructing and operating a competing network in such areas. Many of these RLECs are owned by families or small groups of individuals and were founded shortly after World War I. The Company believes that the owners of some of these RLECs are increasingly interested in selling their companies, thereby creating significant future opportunities to acquire additional properties. The Company also believes that the RBOCs are increasingly likely to dispose of rural access lines in certain markets in order to focus more attention and resources on their urban markets. The Company was formed in 1991 to capitalize on consolidation opportunities in the RLEC market. The Company has assembled a senior management team with significant industry experience and a strong track record of acquiring and integrating RLECs. The seven most senior managers of the Company have an average of approximately 20 years of experience in the telecommunications industry with companies such as C&P Telephone (now a subsidiary of Bell Atlantic Corporation), Sprint Corporation, Frontier Corporation and C-TEC Corporation. As of May 31, 1998, senior management owned 24.0% of the common stock of the Company on a fully diluted basis. MJD also benefits from the financial and management expertise of its two primary equity investors, which are investment partnerships affiliated with Kelso & Company ("Kelso") and Carousel Capital Partners, L.P. ("Carousel" and collectively with Kelso, the "Equity Investors"), each of which owned 38.0% of the common stock of the Company on a fully diluted basis as of May 31, 1998. The Equity Investors have invested a total of $47.8 million of equity capital in MJD through May 31, 1998. Kelso is one of the oldest and most established firms specializing in leveraged investing, both as a principal and as a financial advisor, since 1971, and has significant experience with other media and communications properties. Carousel, founded in 1996, is a merchant bank with over $160.0 million in equity commitments, focused on investing in middle market companies located in the southeastern United States. BUSINESS STRATEGY The Company's objective is to become the leading provider of telecommunications services to rural communities and the preferred acquirer of RLECs in the United States. Key strategies in the development and fulfillment of the Company's objectives are discussed below. CONTINUED GROWTH THROUGH ACQUISITIONS. The Company expects to continue growing primarily by acquiring independent RLECs and by purchasing rural telephone operations from large telephone companies such as the RBOCs, GTE Corporation and others. The Company focuses its acquisition efforts on rural telephone companies that exhibit: (i) significant opportunities to realize management and operating synergies and economies of scale; (ii) positive economic and demographic characteristics; (iii) a positive regulatory and operating environment; (iv) deployment of advanced technology; and (v) strong mid-level management capabilities. Cellular, cable television, long distance resale, paging and wireless operations may also be acquired, but primarily as ancillary business segments of acquired RLECs. 2 IMPROVE OPERATING EFFICIENCY OF ACQUIRED RLECS. By consolidating RLECs under a single corporate organization, the Company has successfully achieved significant operating efficiencies that the Company believes the independent RLECs could not have individually attained. For example, the Company has consolidated the regulatory, accounting and billing functions of its acquired companies and has reduced the overhead costs associated with executive management of such companies. The Company's acquisition strategy is to acquire inherently sound operating RLECs which do not require dramatic changes to core operations. Upon acquiring such companies, the Company applies its operating, regulatory, marketing, technical and management expertise and its financial resources to improve the operations and profitability of the acquired RLECs. INCREASE REVENUE THROUGH ENHANCED SERVICE OFFERINGS. The Company believes that its local community presence and its brand recognition will allow it to grow its revenues by offering enhanced and ancillary telecommunications services to its existing customers. Unlike the RBOCs, MJD is not subject to regulatory restrictions that prohibit it from marketing other services such as long distance services in its existing franchise territories or elsewhere. The Company intends to pursue incremental revenue growth through: (i) traditional ancillary telephony service offerings such as enhanced calling services, including voice mail and conference calling; (ii) long distance resale services, including related products such as "800" service and long distance calling cards; (iii) multimedia services such as Internet access, cable television and other entertainment services; and (iv) various wireless services, including cellular, PCS and paging. For example, during the year ended December 31, 1997, ST Long Distance (the Company's long distance subsidiary) introduced its long distance service program in selected markets and realized an average first year penetration rate of approximately 57% in these markets. EXPAND EXISTING MARKET PRESENCE BY LAUNCHING CLEC SERVICES. The Company believes it has an opportunity to penetrate underserved markets adjacent to its franchise areas as a competitive local exchange carrier ("CLEC"). The Company believes that by pursuing this opportunity it may generate incremental revenue and Adjusted EBITDA growth by utilizing its existing network infrastructure, brand recognition and experienced personnel. The Company plans to offer an array of telecommunications services, such as local, long distance, data and wireless, to customers in rural and small urban markets (populations between 25,000 and 75,000) within approximately 200 miles of a Company-owned RLEC. The Company intends to implement its CLEC strategy by entering a market before other competitors and reselling the services of an incumbent LEC ("ILEC"), capturing a significant market share and then migrating these customers to its own facilities-based service. The Company is currently testing this strategy in New Hampshire and New York and plans on determining whether or not to expand its CLEC business based on the relative success achieved in these markets. See "Business--Business Strategy" and "Risk Factors--Future Capital Requirements; Expected CLEC Losses" and "--Competition--Risk of Inability to Compete as a CLEC." The New Hampshire and New York markets are the initial markets in which the Company's CLEC strategy is being evaluated. The Company plans to continue providing service in these markets for the foreseeable future. Entry into new markets will be based on a qualitative and quantitative assessment of our performance in these two test markets. There is no set schedule for the Company to perform such an assessment; rather, the testing and evaluation by the Company is ongoing. For purposes of the Indenture relating to the Notes, the Company will conduct its CLEC business through Unrestricted Subsidiaries, which will limit the amount the Company can invest in the CLEC business and exempt the CLEC subsidiaries from most of the covenants applicable to the Notes. See "Description of Notes." RECENT AND PENDING ACQUISITIONS The Company has recently completed, or plans to complete, the following RLEC acquisitions: TACONIC TELEPHONE CORP. On March 30, 1998, the Company acquired Taconic. Taconic, located in the Hudson Valley area of eastern New York, 30 miles southeast of Albany, operates approximately 24,800 access lines (approximately 83% residential). The Company purchased the common stock of Taconic for $67.5 million and assumed $9.2 million of debt of Taconic. In the year ended December 31, 1997, Taconic had revenues of $20.4 million. 3 ELLENSBURG TELEPHONE COMPANY. On April 30, 1998, the Company acquired Ellensburg. Ellensburg, located in Ellensburg, Washington, 100 miles southeast of Seattle, operates approximately 23,900 access lines (approximately 76% residential). The Company purchased the common stock of Ellensburg for $91.0 million. In the year ended December 31, 1997, Ellensburg had revenues of $14.7 million. CHOUTEAU TELEPHONE COMPANY. On June 1, 1998, the Company acquired Chouteau. Chouteau, located in Chouteau, Oklahoma, 30 miles east of Tulsa, operates approximately 3,400 access lines (approximately 84% residential). The Company purchased the common stock of Chouteau for $18.6 million and assumed $3.0 million of debt of Chouteau. In the year ended December 31, 1997, Chouteau had revenues of $4.3 million. UTILITIES, INC. On April 3, 1998, the Company entered into an agreement to acquire Utilities, which is expected to close in the third or fourth quarter of 1998. Utilities is headquartered in Standish, Maine, approximately 15 miles west of Portland. Utilities operates approximately 22,200 access lines in central and southern Maine, most of which are located in exchanges adjacent to exchanges operated by subsidiaries of the Company. In the year ended December 31, 1997, Utilities had revenues of $16.2 million (which excludes the revenues of certain cellular businesses of Utilities that are not being acquired by MJD). The Pending Acquisition is subject to certain closing conditions. See "Risk Factors--Risk That Pending Acquisition Will Not Be Consummated" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." ACQUISITION HISTORY The following summarizes each RLEC the Company has acquired to date and the Pending Acquisition.
ACCESS LINES LOCATION OF AS OF DATE PURCHASE RLEC ACQUIRED OPERATIONS DECEMBER 31, 1997 ACQUIRED PRICE - ------------------------ ------------------- ----------------- ------------- --------------- Sunflower Telephone Kansas/Colorado 4,675 May 1993 $19.7 million Company, Inc. Northland Telephone Maine/New Hampshire 20,493 August 1994 $39.7 million Company of Maine, Inc. STE/NE Acquisition Corp. Vermont 5,510 August 1994 $12.0 million d/b/a Northland Telephone Company of Vermont Sidney Telephone Company Maine 1,359 January 1996 $ 3.0 million Big Sandy Telecom, Inc. Colorado 893 June 1996 $ 3.1 million Bluestem Telephone Kansas 992 August 1996 $ 3.9 million Company Odin Telephone Illinois 1,164 August 1996 $ 5.0 million Exchange, Inc. Kadoka Telephone Co. South Dakota 580 January 1997 $ 2.9 million Columbine Telephone Colorado 1,085 April 1997 $ 4.6 million Company, Inc. Chautauqua & Erie New York 11,070 July 1997 $22.0 million Telephone Corporation C-R Communications, Inc. Illinois 910 October 1997 $ 4.0 million Taconic Telephone Corp. New York 24,832 March 1998 $67.5 million Ellensburg Telephone Washington 23,910 April 1998 $91.0 million Company Chouteau Telephone Oklahoma 3,394 June 1998 $18.6 million Company ------- Subtotal: 100,867 Utilities, Inc. Maine 22,239 Third/Fourth Not consummated Quarter 1998 (expected) ------- Total: 123,106 =======
The Company's principal executive offices are located at Morehead Place, 521 East Morehead Street, Suite 250, Charlotte, North Carolina 28202, and its phone number is (704) 344-8150. 4 THE EXCHANGE OFFER The Exchange Offer........ $1,000 principal amount of Fixed Rate Exchange Notes and Floating Rate Exchange Notes will be issued in exchange for each $1,000 principal amount of Fixed Rate Original Notes and Floating Rate Original Notes, respectively, validly tendered pursuant to the Exchange Offer. As of the date hereof, $125 million and $75 million in aggregate principal amount of Fixed Rate Original Notes and Floating Rate Original Notes, respectively, are outstanding. The Company will issue the Exchange Notes to tendering holders of Original Notes promptly after the Expiration Date. Resales................... Based on an interpretation by the staff of the Commission set forth in Morgan Stanley & Co., Incorporated, SEC No-Action Letter (available June 5, 1991) (the "Morgan Stanley Letter"), Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13, 1988) (the "Exxon Capital Letter") and similar letters, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any person receiving such Exchange Notes, whether or not such person is the holder (other than any such holder or other person which is (i) a broker-dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities, or (ii) an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act (collectively, "Restricted Holders")) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that (a) such Exchange Notes are acquired in the ordinary course of business of such holder or other person, (b) neither such holder nor such other person is engaged in or intends to engage in a distribution of such Exchange Notes, and (c) neither such holder nor other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes. If any person were to be participating in the Exchange Offer for the purposes of participating in a distribution of the Exchange Notes in a manner not permitted by the interpretation of the Staff of the Commission, such person (a) could not rely upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and (b) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each broker or dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker or dealer as a result of market-making or other activities, must acknowledge that it will deliver a prospectus in connection with any sale of such Exchange Notes. See "Plan of Distribution." Expiration Date........... 5:00 p.m., New York City time, on , 1998 unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. 5 Accrued Interest on the Exchange Notes and Old The Exchange Notes will bear interest from May 5, Notes.................... 1998. Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on such Old Notes accrued to the date of issuance of the Exchange Notes. Conditions to the The Exchange Offer is subject to certain Exchange Offer ... customary conditions. The conditions are limited and relate in general to proceedings which have been instituted or laws which have been adopted that might impair the ability of the Company to proceed with the Exchange Offer. As of the date of this Prospectus, none of these events had occurred, and the Company believes their occurrence to be unlikely. If any such conditions exist prior to the Expiration Date, the Company may (a) refuse to accept any Old Notes and return all previously tendered Old Notes, (b) extend the Exchange Offer or (c) waive such conditions. See "The Exchange Offer--Conditions." Procedures for Tendering Old Notes................ Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, or an Agent's Message (as defined in "The Exchange Offer") in connection with a book-entry transfer together with the Old Notes to be exchanged and any other required documentation to the Exchange Agent (as defined in "The Exchange Offer") at the address set forth herein and therein. Tendered Old Notes, the Letter of Transmittal and accompanying documents must be received by the Exchange Agent by 5:00 p.m. New York City time on the Expiration Date. See "The Exchange Offer-- Procedures for Tendering." By executing the Letter of Transmittal, each holder will represent to the Company that, among other things, the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such Exchange Notes, whether or not such person is the holder, that neither the holder nor any such other person is engaged in or intends to engage in a distribution of the Exchange Notes or has an arrangement or understanding with any person to participate in the distribution of such Exchange Notes, and that neither the holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. Special Procedures for Beneficial Holders....... Any beneficial holder whose Old Notes are registered in the name of such holder's broker, dealer, commercial bank, trust company or other nominee and who wishes to tender in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on such holder's behalf. If such beneficial holder wishes to tender on such holder's own behalf, such beneficial holder must, prior to completing and executing the Letter of Transmittal and delivering such holder's Old Notes, either make 6 appropriate arrangements to register ownership of the Old Notes in such holder's name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. See "The Exchange Offer-- Procedures for Tendering." Guaranteed Delivery Holders of Old Notes who wish to tender their Old Procedures............... Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes and a properly completed Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent (or comply with the procedures for book-entry transfer) prior to the Expiration Date may tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights......... Tenders may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. Acceptance of Old Notes and Delivery of Exchange Subject to certain conditions, the Company will Notes.................... accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Notes issued pursuant to the Exchange Offer will be delivered promptly after the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Certain Federal Income Tax Consequences......... The Company believes that the exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. A holder's holding period for Exchange Notes will include the holding period for Old Notes. For a discussion summarizing certain U.S. federal income tax consequences to holders of the Exchange Notes, see "Certain Federal Income Tax Consequences." Exchange Agent............ United States Trust Company of New York is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. The mailing address of the Exchange Agent is United States Trust Company of New York, P.O. Box 844 Cooper Station, New York 10276, Attention: Corporate Trust Services. Deliveries by hand before 4:30 p.m. should be delivered to United States Trust Company of New York, 111 Broadway, New York, New York 10006, Attention: Lower Level Corporate Trust Window and by hand after 4:30 p.m. should be delivered to 770 Broadway, 13th Floor, New York, New York 10003. For information with respect to the Exchange Offer, contact the Exchange Agent at telephone number 800-548-6565 or facsimile number (212) 420-6152. Use of Proceeds........... The Company will not receive any proceeds from the Exchange Offer. See "Use of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer pursuant to the Registration Agreement (as defined in "Summary of Terms of Exchange Notes"). No underwriter is being used in connection with the Exchange Offer. 7 SUMMARY OF TERMS OF EXCHANGE NOTES The Exchange Offer constitutes an offer to exchange up to $125 million and $75 million aggregate principal amount of the Fixed Rate Exchange Notes and Floating Rate Exchange Notes, respectively, for up to an equal aggregate principal amount of Fixed Rate Original Notes and Floating Rate Original Notes, respectively. The Exchange Notes will be obligations of the Company evidencing the same indebtedness as the Original Notes, and will be entitled to the benefit of the same indenture (the "Indenture"). The form and terms of the Fixed Rate Exchange Notes and the Floating Rate Exchange Notes are substantially the same as the form and terms of the Fixed Rate Original Notes and Floating Rate Original Notes, respectively, except that the Exchange Notes have been registered under the Securities Act. See "Description of the Notes." COMPARISON WITH OLD NOTES Freely Transferable....... The Exchange Notes will be freely transferable under the Securities Act by holders who are not Restricted Holders. Restricted Holders are restricted from transferring the Exchange Notes without compliance with the registration and prospectus delivery requirements of the Securities Act. The Fixed Rate Exchange Notes and the Floating Rate Exchange Notes will be identical in all material respects (including interest rate, maturity and restrictive covenants) to the Fixed Rate Old Notes and Floating Rate Old Notes, respectively, with the exception that the Exchange Notes will be registered under the Securities Act. See "The Exchange Offer--Terms of the Exchange Offer." Registration Rights....... The holders of Old Notes currently are entitled to certain registration rights pursuant to the Registration Agreement, dated as of April 30, 1998 (the "Registration Agreement"), by and among the Company and Salomon Smith Barney, BT Alex. Brown, NationsBanc Montgomery Securities LLC and Donaldson, Lufkin & Jenrette Securities Corporation, the initial purchasers of the Old Notes (collectively, the "Initial Purchasers"), including the right to cause the Company to register the Old Notes under the Securities Act if the Exchange Offer is not consummated prior to the Exchange Offer Termination Date (as defined in "The Exchange Offer"). See "The Exchange Offer--Conditions." However, pursuant to the Registration Agreement, such registration rights will expire upon consummation of the Exchange Offer. Accordingly, holders of Old Notes who do not exchange their Old Notes for Exchange Notes in the Exchange Offer will not be able to reoffer, resell or otherwise dispose of their Old Notes unless such Old Notes are subsequently registered under the Securities Act or unless an exemption from the registration requirements of the Securities Act is available. TERMS OF THE EXCHANGE NOTES Securities Offered........ $125 million aggregate principal amount of 9 1/2% Senior Subordinated Notes due 2008, Series B. $75 million aggregate principal amount of Floating Rate Callable Securities due 2008, Series B. 8 Issuer.................... MJD Communications, Inc. Maturity Date............. The Floating Rate Exchange Notes and the Fixed Rate Exchange Notes will mature on May 1, 2008. Interest on the Exchange Notes will be payable Interest Payment Dates.... semi-annually on each May 1 and November 1, commencing November 1, 1998. The Fixed Rate Exchange Notes will bear interest at a rate of 9 1/2% per annum. The Floating Rate Exchange Notes will bear interest at a rate per annum equal to LIBOR plus 418.75 basis points. The rate of interest on the Floating Rate Exchange Notes will be reset semi-annually. Subordination............. The Exchange Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt (as defined in "Description of Notes") of the Company, and effectively subordinated to all existing and future debt and other liabilities (including trade payables and accrued liabilities) of the Company's subsidiaries. The Company is a holding company that derives all of its operating income and cash flow from its subsidiaries. See "Risk Factors--Subordination; Holding Company Structure." As of June 30, 1998, after giving effect to the Pending Acquisition, the Company would have had approximately $146.3 million of Senior Debt outstanding (excluding unused commitments under the New Credit Facility) and total balance sheet liabilities of the Company's subsidiaries would have been approximately $230.8 million (including guaranties of $146.3 million of Senior Debt of the Company). In addition, as of June 30, 1998, the Company would have had $7.0 million of Debt that ranked parri passu to the Notes and no Debt outstanding that ranked subordinate to the Notes. See "Description of the Notes--Subordination." Sinking Fund.............. None. Optional Redemption....... The Fixed Rate Exchange Notes will be redeemable, in whole or in part, at the option of the Company, on or after May 1, 2003, and the Floating Rate Exchange Notes will be redeemable, in whole or in part, at the option of the Company, at any time, in each case at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. In addition, at any time on or prior to May 1, 2001, the Company may redeem up to 35% of the aggregate principal amount of the Fixed Rate Exchange Notes with the net cash proceeds of an Equity Sale, at a redemption price equal to 109.5% of the principal amount thereof, plus accrued interest to the date of redemption; provided that at least 65% of the aggregate principal amount of Fixed Rate Exchange Notes originally issued remains outstanding immediately after any redemption. See "Description of the Notes--Optional Redemption." 9 Change of Control......... Upon a Change of Control each holder of the Exchange Notes will have the right to require the Company to repurchase such holder's Exchange Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. See "Description of the Notes--Repurchase at Option of Holders upon a Change of Control." Certain Covenants......... The Indenture contains limitations on, among other things, (i) the ability of the Company and the Restricted Subsidiaries to incur additional Debt, (ii) the making of certain Restricted Payments, including Investments, (iii) the creation of certain Liens, (iv) the issuance and sale of Capital Stock of Restricted Subsidiaries, (v) Asset Sales, (vi) payment restrictions affecting Restricted Subsidiaries, (vii) transactions with Affiliates, (viii) the ability of the Company to incur layered Debt, (ix) the ability of the Company to enter lines of business outside the Telecommunications Business and (x) certain mergers, consolidations and transfers of assets by or involving the Company (the foregoing capitalized terms are defined in "Description of the Notes--Certain Definitions"). All of these limitations will be subject to a number of important qualifications. See "Description of the Notes--Certain Covenants." RISK FACTORS For a discussion of factors that should be considered in evaluating an investment in the Exchange Notes, see "Risk Factors." 10 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS) The following table sets forth summary financial information of the Company. The summary historical consolidated financial data for the years ended December 31, 1995, 1996, 1997 and the six months ended June 30, 1997 and 1998 are derived from the consolidated financial statements of the Company included elsewhere in this Prospectus which, in the case of the financial statements for the years ended December 31, 1995, 1996 and 1997 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The summary historical consolidated financial statement data for the six months ended June 30, 1997 and 1998 have been derived from unaudited consolidated statements of the Company, which, in the opinion of management, include all adjustments necessary for a fair presentation of such data. The summary historical consolidated financial statement data for the year ended December 31, 1994 are derived from consolidated financial statements of the Company, not included herein, which are audited by independent certified public accountants. The summary historical consolidated financial statement data for the year ended December 31, 1993 have been derived from unaudited consolidated financial statements of the Company, not included herein, which, in the opinion of management, includes all adjustments necessary for a fair presentation of such data. The summary pro forma combined financial data for the year ended December 31, 1997 as of and for the six months ended June 30, 1998 have been derived from Company prepared financial information, the audited consolidated financial statements and notes thereto of certain of the Acquisitions and the audited consolidated financial statements and notes thereto of the Company, which financial statements appear elsewhere in this Prospectus. The following summary pro forma combined financial and operating data are presented as if each of the Acquisitions, the New Credit Facility and the Offering had occurred on January 1, 1997 for the year ended December 31, 1997 and the six-month period ended June 30, 1998 in the case of operating data, and as of June 30, 1998 in the case of balance sheet data. The summary pro forma combined financial data have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have been achieved had the Acquisitions, the New Credit Facility and the Offering been consummated as of the assumed dates, nor are the results necessarily indicative of the Company's future results of operations. See "Risk Factors--Other Risks associated with Acquisitions." The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements, and notes thereto, the Pro Forma Consolidated Financial Statements, and notes thereto, and the individual financial statements and notes thereto of certain of the Acquisitions appearing elsewhere in this Prospectus.
ACTUAL ------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ---------------- (UNAUDITED) 1993 1994 1995 1996 1997 1997 1998 ------ ------- ------- ------- ------- ------- ------- STATEMENT OF OPERATIONS DATA: Operating revenues....... $7,066 $14,025 $24,749 $30,258 $42,972 $17,887 $35,262 Operating expenses....... 5,789 10,056 17,343 20,060 30,533 12,099 25,720 Income from operations..... 1,276 3,968 7,406 10,198 12,439 5,788 9,542 Interest expense, net... (791) (3,772) (7,267) (9,605) (9,293) (3,998) (9,707) Other income (expense)...... 750 1,755 892 829 1,515 127 759 Earnings (loss) before extraordinary item........... 930 1,011 484 (39) 2,785 1,077 205 Extraordinary item........... -- -- -- -- (3,612) -- (2,521) Net earnings (loss)......... $ 930 $ 997 $ 478 $ (72) $ (888) $ 1,055 $(2,352) PRO FORMA --------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1997 JUNE 30, 1998 ------------------------------ -------------------------------- COMPLETED AS ADJUSTED COMPLETED ACQUISITIONS, NEW FOR PENDING ACQUISITIONS, NEW CREDIT FACILITY ACQUISITION CREDIT FACILITY, AND OFFERING(1)(2) (2)(3) OFFERING AND UTILITIES(2)(4) ------------------ ----------- ---------------------------- STATEMENT OF OPERATIONS DATA: Operating revenues....... $ 88,391 $104,606 $ 56,033 Operating expenses....... 66,544 78,634 43,335 Income from operations..... 21,149 24,702 11,998 Interest expense, net... (29,704) (35,646) (18,044) Other income (expense)...... 3,160 3,388 90 Earnings (loss) before extraordinary item........... $ (4,482) $ (6,186) $ (4,193) Extraordinary item........... Net earnings (loss).........
ACTUAL PRO FORMA ------------------------------ -------------- AS OF AS OF AS OF JUNE 30, DECEMBER 31, JUNE 30, 1998 ----------------- ----------- ------------------ (UNAUDITED) PENDING 1996 1997 1998 ACQUISITION(4) ------- -------- ----------- -------------- BALANCE SHEET DATA: Cash and cash equivalents... $ 4,253 $ 6,822 $ 14,045 $ 15,456 Working capital............. 596 108 18,766 17,968 Property, plant and equipment, net............. 41,615 61,207 122,590 144,328 Total assets................ 97,020 144,613 370,714 450,767 Long-term debt.............. 73,958 131,912 302,387 372,886 Redeemable preferred stock.. 10,689 130 -- -- Total stockholders' equity (deficit).................. (2,142) (10,939) 18,783 15,783
11
ACTUAL -------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------------------ ------------------ (UNAUDITED) 1993 1994 1995 1996 1997 1997 1998 ------ ------- ------- ------- -------- ------- --------- OTHER FINANCIAL DATA: Adjusted EBITDA(5)...... -- $ 8,808 $14,050 $17,639 $ 22,670 $ 9,902 $ 17,565 Depreciation and amortization... $1,240 3,099 5,757 6,644 8,777 4,010 7,300 Capital expenditures... 293 1,768 4,439 8,439 8,239 2,922 3,332 Ratio of earnings to fixed charges(7)..... 2.5x 1.5x 1.1x 1.1x 1.5x 1.5x 1.1x Deficiency of earnings to fixed charges(7)..... -- -- -- -- -- -- -- SUMMARY CASH FLOW DATA: Net cash provided by operating activities..... $ 5,504 $ 6,039 $ 9,772 $ 9,840 $ 4,253 $ 7,325 Net cash provided by (used in) investing activities..... (50,846) (4,481) (19,790) (38,967) (7,155) (174,322) Net cash provided by financing activities..... 49,937 (2,903) 10,599 31,697 3,796 174,220 OPERATING DATA: Access lines in service........ 4,343 28,205 28,737 34,017 48,731 34,754 103,689 PRO FORMA ----------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1997 JUNE 30, 1998 -------------------------------- -------------------------------- COMPLETED AS ADJUSTED COMPLETED ACQUISITIONS, NEW FOR PENDING ACQUISITIONS, NEW CREDIT FACILITY ACQUISITION CREDIT FACILITY, AND OFFERING(1)(2) (2)(3) OFFERING AND UTILITIES(2)(4) ------------------ ------------- ---------------------------- OTHER FINANCIAL DATA: Adjusted EBITDA(5)...... $ 44,686 $ 53,209(6) $ 24,895(6) Depreciation and amortization... 20,377 25,120 12,806 Capital expenditures... 15,688 19,241 4,362 Ratio of earnings to fixed charges(7)..... -- -- -- Deficiency of earnings to fixed charges(7)..... $ 5,396 $ 7,556 $ 5,955 SUMMARY CASH FLOW DATA: Net cash provided by operating activities..... 13,216 16,655 8,098 Net cash provided by (used in) investing activities..... (219,783) (269,611) (220,100) Net cash provided by financing activities..... 193,057 239,076 215,244 OPERATING DATA: Access lines in service........ 100,867 123,106 126,340
- -------- (1) Gives effect to the Completed Acquisitions, the New Credit Facility and the Offering as if the closings thereof occurred on January 1, 1997. (2) The summary pro forma combined operating data reflect adjustments in connection with the relevant Acquisitions including: (i) amortization expense to reflect goodwill recorded for purchase accounting, (ii) elimination of certain specifically identified expenses related to duplicative management services, directors fees, employee salaries and related benefits, (iii) interest expense, net after giving effect to the New Credit Facility and the Offering, and (iv) income tax expense to reflect the effect that would result if the relevant Acquisitions had been combined and subject to an assumed federal statutory rate and the applicable state statutory tax rate for each of the relevant Acquisitions. (3) Gives effect to the Completed Acquisitions, the New Credit Facility, the Offering and the Pending Acquisition as if the closings thereof occurred on January 1, 1997. The Pending Acquisition is subject to certain closing conditions, See "Risk Factors--Risk that Pending Acquisition Will Not Be Consummated." (4) Gives effect to the Completed Acquisitions, the New Credit Facility, the Offering and the Pending Acquisition as if the closings thereof occurred on January 1, 1997 in the case of statement of operations data, and as of June 30, 1998 in the case of balance sheet data. The Pending Acquisition is subject to certain closing conditions. See "Risk Factors--Risk that Pending Acquisition Will Not Be Consummated." (5) Adjusted EBITDA represents net earnings (loss) plus interest expense, income taxes, depreciation and amortization, and extraordinary items. Adjusted EBITDA is presented because management believes it provides useful information regarding the Company's ability to incur and/or service debt. Management expects that investors may use this data to analyze and compare other telecommunications companies with the Company in terms of operating performance, leverage and liquidity. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net earnings (loss) as a measure of performance, or for cash flow as a measure of liquidity. The definition of EBITDA in the Indenture is designed to determine EBITDA for the purposes of contractually limiting the amount of debt which the Company may incur. Adjusted EBITDA presented herein differs from the definition of EBITDA in the Indenture, which excludes from the calculation of EBITDA (i) net income of Unrestricted Subsidiaries (as defined in the Indenture) unless such net income is actually dividended to the Company or a Restricted Subsidiary and (ii) net income of any Restricted Subsidiary to the extent there is any restriction on the ability of such Restricted Subsidiary to pay dividends to the Company (except that the Company's equity in the net income of any such Restricted Subsidiary is included to the extent of dividends actually received by the Company from such Restricted Subsidiary). The definition of EBITDA in the Indenture is a component of the term "Pro Forma EBITDA" in the Indenture, which is used in a financial covenant calculation therein. Pro Forma EBITDA, as defined in the Indenture, differs from Adjusted EBITDA primarily because it is calculated after giving effect to cost savings the Company believes will be achieved during the applicable period. Adjusted EBITDA as calculated by the Company is not necessarily comparable to similarly captioned amounts of other companies. (6) Pro forma Adjusted EBITDA does not include the elimination of historical expenses for duplicative supervisory and staff-level employees and net incremental costs of outsourcing certain functions. If such historical expenses were eliminated, pro forma Adjusted EBITDA would be $54.4 million and $25.3 million for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. (7) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes, minority interest and extraordinary items, plus fixed charges. Fixed charges include interest expense on all indebtedness, capitalized interest and rental expense on operating leases representing that portion of rental expense deemed to be attributable to interest. 12 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should carefully consider the risk factors set forth below in evaluating an investment in the Notes offered hereby. SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS The Company is highly leveraged due to the Offering. As of June 30, 1998, on a pro forma basis after giving effect to the Pending Acquisition, the Company would have had approximately $373.7 million of outstanding total consolidated indebtedness and stockholders' equity of $15.8 million (on an historical basis, the Company had stockholders' equity of approximately $18.8 million at June 30, 1998). The Indenture permits, subject to certain conditions, the incurrence of additional indebtedness, all of which may be Senior Debt or indebtedness of subsidiaries. The Company intends to incur substantial additional indebtedness (including secured indebtedness) following the Offering for the acquisition and expansion of RLECs and the introduction of new service offerings (including but not limited to the Company's proposed CLEC business). Moreover, although the CLEC business is expected to result in operating losses, at least in initial years, such losses will not reduce the Company's debt capacity under the Indenture because the business will be conducted through Unrestricted Subsidiaries. The Company expects its CLEC business to generate negative operating cash flow in the first three years of operation. See "--Future Capital Requirements; Expected CLEC Losses," "-- Subordination; Holding Company Structure" and "Description of Notes--Certain Covenants--Limitation on Debt." The Company's high degree of leverage could have important consequences, including (i) a substantial portion of the Company's sources of capital and cash flow from operations must be dedicated to debt service payments, thereby reducing the funds available to the Company for other purposes; (ii) the Company's ability to obtain additional debt financing in the future for working capital, capital expenditures, acquisitions, repayment of indebtedness or other purposes may be impaired, whether as a result of the covenants and other terms of its debt instruments or otherwise; (iii) the Company is substantially more leveraged than certain of its competitors, which may place the Company at a competitive disadvantage; (iv) the Company's high degree of leverage may limit its ability to effect acquisitions, offer new services and otherwise meet its growth objectives; and (v) the Company's high degree of leverage may hinder its ability to adjust rapidly to changing market conditions. In addition, the Company's operating and financial flexibility is limited by the Indenture and the New Credit Facility and may be limited by covenants contained in agreements governing future indebtedness of the Company and its subsidiaries. Such covenants will impose significant operating and financial restrictions on the Company and its subsidiaries and will restrict, limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, repay indebtedness prior to its stated maturity, sell assets, make investments, engage in transactions with affiliates, create liens or engage in mergers or acquisitions. There can be no assurance that such covenants will not adversely affect the Company's ability to finance its future operations or capital needs or to engage in other business activities that may be in the interest of the Company. See "Description of the Notes." SUBORDINATION; HOLDING COMPANY STRUCTURE The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future Senior Debt of the Company. As of June 30, 1998, after giving effect to the Pending Acquisition, the Company would have had approximately $146.3 million of Senior Debt outstanding (excluding unused commitments under the New Credit Facility). In the event of the bankruptcy, liquidation or reorganization of the Company, the assets of the Company will be available to pay the Notes only after all Senior Debt of the Company has been paid in full. Sufficient funds may not exist to pay amounts due on the Notes in such event. In addition, the subordination provisions of the Indenture provide that no cash payment may be made with respect to the Notes during the continuance of a 13 payment default under any Senior Debt of the Company. Furthermore, if certain nonpayment defaults exist with respect to certain Senior Debt of the Company, the holders of such Senior Debt will be able to prevent payments on the Notes for certain periods of time. See "Description of Notes--Subordination." The Company is a holding company that derives all of its operating income from the Company's subsidiaries. In addition to the Company, certain minority investors also hold (or have the right to purchase) a portion of the capital stock of such subsidiaries. To the extent that the capital stock of such subsidiaries is owned by persons other than the Company, such persons are generally entitled to receive a pro rata share of any distributions made by such subsidiaries to the Company. The holders of the Notes will have no direct claims against the Company's subsidiaries. Consequently, the right of holders of the Notes to participate in any distribution of assets of such subsidiaries upon any liquidation, bankruptcy, reorganization or otherwise will be subject to prior claims of creditors of such subsidiaries (including, the lenders under the Credit Facility, by virtue of guarantees of such indebtedness by the Company's subsidiaries). Therefore, the Notes will be effectively subordinated to all existing and future debt and other liabilities (including trade payables and accrued liabilities) of the Company's subsidiaries. As of June 30, 1998, after giving pro forma effect to the Pending Acquisition, total balance sheet liabilities of the Company's subsidiaries would have been approximately $230.8 million (including guarantees of $146.3 million of Senior Debt of the Company under the New Credit Facility). The Company's subsidiaries have other liabilities, including contingent liabilities, that could be substantial. The Company is dependent on the earnings and cash flow of its subsidiaries to meet its debt obligations, including its obligations with respect to the Notes. The ability of the Company's subsidiaries to make such payments or advances to the Company is limited by the laws of the relevant states in which such subsidiaries are organized or located, including, in some instances, by minimum capitalization requirements imposed by state regulatory bodies that oversee the telecommunications industry in such states. In certain circumstances, the prior or subsequent approval of such payments or advances by such subsidiaries to the Company is required from such regulatory bodies or other governmental entities. In addition, certain subsidiaries of the Company have debt the terms of which, under certain circumstances, could prohibit such subsidiaries' ability to pay dividends or make other payments or advances to the Company. Accordingly, there can be no assurance that the Company's subsidiaries will be able to, or will be permitted to, pay to the Company amounts necessary to service the Notes. In the event such amounts are not paid to the Company, the Company would be unable to make required principal and interest payments on the Notes. RISK THAT PENDING ACQUISITION WILL NOT BE CONSUMMATED The Pending Acquisition is subject to regulatory approvals, including the approval of the relevant public utilities commission in the state of the company to be acquired. No assurance can be given that the necessary approvals will be received. The agreement pertaining to the Pending Acquisition provides that if the acquisition is not completed by December 31, 1998, such agreement terminates. The Pending Acquisition is subject to certain other closing conditions, and there can be no assurance as to when, or if, such acquisition will be consummated. Failure to consummate the Pending Acquisition will not have any effect on the Company's historical financial statements. Investors should see the Unaudited Pro Forma Consolidated Financial Statements included elsewhere in this Prospectus to determine the impact on the Company's financial statements if the Pending Acquisition does occur. The Company believes that the failure to consummate the Pending Acquisition would not have a material adverse effect on its financial condition or results of operations. OTHER RISKS ASSOCIATED WITH ACQUISITIONS As part of its growth strategy, the Company regularly engages in, and is currently engaging in, discussions and negotiations with respect to possible acquisitions, some of which would be larger than the largest acquisitions completed or contemplated to date, and would involve substantially more than 25,000 access lines, if such acquisitions were consummated. This acquisition strategy presents certain substantial risks, including the following: RISK OF LACK OF FUTURE ACQUISITION OPPORTUNITIES. A significant portion of the Company's future growth is expected to come from acquisitions of other companies. The Company's ability to acquire additional businesses 14 will depend, among other things, on the Company's ability to identify suitable acquisition candidates, to negotiate acceptable terms for their acquisition and to complete the acquisitions. The Company will be subject to competition for suitable acquisition candidates and the number of acquisition candidates may be diminished in the future. The nature of the market for independent telecommunications companies is such that many acquisition opportunities come to the Company's attention only when the owners of such businesses approach the Company seeking a buyer. Accordingly, there can be no assurance that other independent telecommunications companies will approach the Company with similar opportunities in the same manner as has occurred in the past, or that such acquisition opportunities will otherwise come to the Company's attention. As a result, there can be no assurance that any such acquisitions will occur or that any such acquisitions, if made, would be made in a timely manner or on terms favorable to the Company. RISK OF UNAVAILABILITY OF CAPITAL TO FUND FUTURE ACQUISITIONS. The acquisitions made by the Company have required the expenditure of significant amounts of capital, a substantial portion of which the Company has had to fund through additional debt or equity financings. The Company's growth strategy hinges on its ability to continue to complete acquisitions beyond the Pending Acquisition. The Company does not presently have financing commitments sufficient to allow it to effect significant acquisitions. Inability to secure such financing could, therefore, have a substantial impact on the Company's ability to grow beyond the completion of the Pending Acquisition, or otherwise consummate any other acquisitions that it may wish to undertake. See "--Future Capital Requirements; Expected CLEC Losses." RISK OF FAILURE TO REALIZE ACQUISITION SYNERGIES. While the Company has previously been able to increase the profitability of the businesses it has acquired, there can be no assurance that it will continue to be able to do so in the future. Specifically, each of the Taconic, Utilities and Ellensburg acquisitions are significantly larger than any of the individual acquisitions that the Company has previously undertaken. The size and nature of such acquisitions could present complexities that the Company has not previously encountered, and could therefore interfere with the Company's ability to achieve results comparable to those it has achieved in the past. Furthermore, many of the acquisition synergies that the Company has recognized in the past have resulted from its ability to substitute the costs of the former senior management of acquired companies with management fees charged by the Company to its subsidiaries. To the extent regulators recognize such inter-company management fees as legitimate costs, the Company's operating subsidiaries are allowed, under current regulations, to recover such costs from their customers. However, the Company's ability to recover such costs is subject to periodic review by regulators. In addition, regulations governing the Company's ability to recover such costs are subject to change. There can be no assurance, therefore, that the Company will continue to be able to recover such costs, and failure to be able to do so could have a substantial impact on the Company's growth strategy, as well as a material adverse effect on its financial condition and results of operations. See "Risk Factors--Regulation" and "Regulation." In addition, the Company believes it will have opportunities to acquire access lines from RBOCs and other large companies. The Company expects that such opportunities would be limited to the possible acquisition of certain facilities and access lines, rather than businesses that have previously operated independently. Such acquisitions, should the Company be in a position to make them, would in all likelihood be more difficult for the Company to integrate into its existing operations. This in turn could interfere with the Company's ability to obtain the same results from such acquisitions as it might be able to obtain from the acquisition of a previously independent company. See "--Implementation of Growth Strategy." FUTURE CAPITAL REQUIREMENTS; EXPECTED CLEC LOSSES Expansion of the Company's existing RLEC networks and services, and the acquisition of new RLECs and other facilities, will require significant capital expenditures. Furthermore, the Company's plan to enter additional markets as a CLEC anticipates the Company's incurring initial losses, followed by significant capital expenditures. The Company's ability to succeed in its CLEC strategy is therefore predicated on its having 15 sufficient capital to sustain such losses and make such capital expenditures. The Indenture limits the Company's ability to make investments in the subsidiaries conducting the CLEC business, which could adversely affect its ability to successfully develop this business. In addition, there can be no assurances that the Company will be successful in implementing its CLEC strategy, or that it will be able to recover the initial losses it expects to sustain in relation to such business. Because the CLEC business will be conducted through Unrestricted Subsidiaries, any operating losses sustained will not reduce the Company's debt capacity under the Indenture. See "Description of Notes--Certain Covenants--Limitation on Debt." The Company will also require additional capital to complete its acquisitions, or if customer demand in the Company's markets exceeds current expectations, the Company's funding needs may increase. In addition, the Company expects to incur additional capital requirements as it seeks to take advantage of future opportunities. In order to take advantage of such opportunities, the Company expects that it will need to secure additional debt or equity financing. There can be no assurance, however, that the Company will be successful in raising sufficient additional debt or equity capital on terms that it will consider acceptable or that the Company's operations will produce cash flow in sufficient amounts to make up any shortfall. Failure to raise and generate sufficient funds may require the Company to delay or abandon some of its planned future expansion or expenditures, which could have a material adverse effect on the Company's growth and its ability to compete in the telecommunications industry. The Company's expectations of required future capital expenditures are based on the Company's current estimates. There can be no assurance that actual expenditures will not be significantly higher or lower. IMPLEMENTATION OF GROWTH STRATEGY The expansion and development of the Company's operations will depend, among other things, on the Company's ability to recruit and hire personnel, install facilities, implement and improve its operating and administrative systems and obtain and maintain any required government authorizations, franchises and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions. As a result, there can be no assurance that the Company will be able successfully to expand its existing networks, integrate newly acquired businesses or offer additional products and services in a timely manner in accordance with its strategic objectives. In addition, as a result of the Company's strategy to achieve rapid growth, the operating complexity of the Company is expected to increase. The Company's ability to manage its expansion effectively will depend on, among other things, the expansion, training and management of the Company's employee base and the Company's successful development of operational, financial and management plans, systems and controls. There can be no assurance that the Company will be able to satisfy these requirements or otherwise manage its growth effectively. Such failures could have a material adverse effect on the Company's results and financial condition. DEPENDENCE ON KEY PERSONNEL The Company's businesses are managed by a relatively small number of senior management and operating personnel, the loss of certain of whom could have a material adverse effect on the Company. The Company believes that its ability to manage its planned growth successfully will depend in large part on its continued ability to attract and retain highly skilled and qualified personnel. There can be no assurance that the Company will be able to retain its key employees or that the Company can attract or retain additional skilled personnel in the future. COMPETITION Industry trends of consolidation, deregulation and the utilization of new technologies all pose substantial risks to the Company's ability to compete effectively in the markets it serves and in the market for acquisitions. The effects of these trends on the Company could be substantial. The summary below sets forth a general summary of certain of the competitive risks facing the Company, and is not meant to be comprehensive. COMPETITION FOR ACQUISITIONS. The telecommunications industry is subject to a continuing trend toward combinations and strategic alliances, including consolidations among existing telecommunications providers, and 16 between such providers and new entrants into the field. This trend could lead to increased competition with the Company for acquisitions, which could have the effect of increasing the price for acquisitions or reducing the number of suitable acquisitions, thereby having an adverse effect on the Company's growth strategy. In addition, the Company's eligibility for certain subsidies decreases as the Company increases in size, thereby creating the potential that certain acquisition candidates will be less attractive to the Company than they would be to other potential buyers. The number of suitable acquisition candidates for the Company could therefore decrease as the Company increases in size. See "Risk Factors--Regulation" and "Regulation." COMPETITION FROM NEW MARKET ENTRANTS. In each of the areas served by the Company's networks, the services offered by the Company may compete with services offered by current and potential market entrants, including CLECs, IXCs, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end users. Many of the Company's current and potential competitors may have financial, personnel and other resources substantially greater than those of the Company, as well as other competitive advantages over the Company. The Company believes that various legislative initiatives, including the Telecommunications Act of 1996 (the "Telecommunications Act"), as well as a recent series of completed and proposed transactions between ILECs, IXCs and cable companies, may result in the introduction of competition in areas served by the Company, including from entities that do not currently compete with the Company in any significant way. The timing and effectiveness of any competitive entry will be affected by the implementation of the Telecommunications Act. This implementation is subject to change, and its full effect cannot be predicted with any accuracy. In addition, aggressive competition for customers in communities served by the Company could result in, among other things, reductions in the Company's customer base, the lowering of rates in order to compete, and increased marketing expenditures by the Company. Resulting reductions in the Company's customer base and rates and increases in the Company's costs could have a material adverse effect on the Company's financial condition and results of operations. COMPETING TECHNOLOGIES. Changes in technology, including in wireless technology, could lead to the introduction of competitive telecommunications systems in the rural areas served by the Company in ways that have not heretofore been economically viable. Such technologies could result in the introduction of novel services that the Company may be unable to provide, or would be ill-equipped to compete with using its existing facilities. RISK OF INABILITY TO COMPETE AS A CLEC. Finally, the Company's plans to enter new markets as a CLEC pose significant risks. Such plans call for the Company to compete as a new entrant in markets where its competitors will have established customers and brand identity. The CLEC market, therefore, is highly competitive and poses a significant competitive challenge for the Company. In particular, several well capitalized and experienced long distance carriers and others have entered or announced that they intend to enter the CLEC business. In addition, this market differs significantly from the markets in which the Company usually operates. Normally, the Company's markets are characterized by a protective regulatory environment that puts potential competitors at a significant disadvantage to the Company. See "Risk Factors-- Regulation." The Company, however, is inexperienced in competing for business in such a competitive marketplace, and there can be no assurance that it will be able to do so effectively. Moreover, the Indenture will limit the Company's ability to invest in the subsidiaries conducting the CLEC business, which could represent a competitive disadvantage. See "Description of Notes--Certain Covenants--Limitation on Restricted Payments." Because of such high levels of competition, the Company's ability to expand its operations and increase market share is uncertain. No assurance can be given that the Company can achieve growth in products or revenues or that the Company will not lose market share due to competitive pricing, the greater resources of its competitors or other factors. See "Business--Competition." 17 REGULATION The Company operates in a heavily regulated industry, and the majority of the Company's revenues generally have been supported by regulations. See "Regulation." Laws and regulations applicable to the Company and its competitors may be, and have been, challenged in the courts, and could be changed by Congress or regulators at any time. In addition, any of the following have the potential to have a significant impact on the Company: RISK OF LOSS OR REDUCTION OF ACCESS CHARGE REVENUES. The majority of the Company's revenues come from access charges, which are paid to the Company by intrastate carriers and interstate long distance carriers for originating and terminating calls in the regions served by the Company's RLECs. The amount of access charge revenues that the Company receives is calculated based on guidelines set by federal and state regulatory bodies, and such guidelines could change at any time. The FCC has indicated that it intends to begin a rulemaking during 1998 to reform the federal access charge system. States often mirror these federal rules in establishing intrastate access charges. It is unknown at this time what changes, if any, the FCC may eventually adopt. The FCC did adopt some changes to the federal access charge rules in May 1997. These rules are currently the subject of review by courts, the outcome of which review cannot be predicted. Furthermore, to the extent the Company's RLECs become subject to competition in their own local exchange areas, such access charges could be paid to competing local exchange providers rather than to the Company. Either of the above circumstances could have a material adverse effect on the Company's financial condition and results of operations. See "Business--Products and Services" and "Regulation." RISK OF LOSS OR REDUCTION OF UNIVERSAL SERVICE SUPPORT SUBSIDIES. The USSF revenues received by the Company are paid to the Company to support the high cost of its operations in rural markets. Revenues from such USSF subsidies represented 13.1% of the Company's revenues for the year ended December 31, 1997. If the Company's RLECs were unable to receive USSF subsidies, or if such subsidies were reduced, many of such RLECs would be unable to operate profitably. Furthermore, under the current regulatory scheme, as the number of access lines that the Company has in any given state increases, the rate at which it can recover certain subsidies decreases. Therefore, as the Company implements its growth strategy, its ability to recoup such subsidies is likely to decrease. In addition, the Company's RLECs generally benefit from a special status under the current laws, which prohibits potential competitors from receiving the same universal service support subsidies enjoyed by the Company. The effect of this advantage is that the Company's RLECs enjoy a significant barrier to entry by competitors, which could be removed by regulators at any time. The Telecommunications Act provides that competitors could obtain the same subsidies as the Company if a state commission determines that granting such subsidies to competitors would be in the public interest. If such universal service subsidies were to become available to potential competitors, there could be no assurance that the Company would be able to compete effectively or otherwise continue to operate profitably. Any shift in universal service regulation could, therefore, have a material adverse effect on the Company's financial condition and results of operations. Recently, the FCC made certain modifications to the universal service support system that limit the subsidies available to the Company, and which could adversely impact the Company's operations in the future. Furthermore, the method for calculating the amount of such subsidies is set to change in 2001. Subject to certain pending proceedings, it is expected that at such time, such subsidies will be calculated based on forward looking economic costs. This will be a new means of calculating such costs, and it is unclear whether such a methodology will accurately reflect the costs incurred by the Company's RLECs, and whether it will provide for the same amount of universal service support subsidies that such RLECs have enjoyed in the past. In addition, several parties have raised objections to the size of the universal service support fund and the types of services eligible for subsidization. The outcome of any of these events or issues, including any legislative or regulatory changes to universal service subsidies, could affect the amount of universal service support subsidies that the Company receives, and could have a material adverse effect on the Company's financial condition and results of operations. 18 RISK OF LOSS OF PROTECTED STATUS UNDER INTERCONNECTION RULES. The Company's RLECs enjoy certain protections under the Telecommunications Act against having to comply with the Telecommunications Act's more burdensome requirements governing the rights of competitors to interconnect to the Company's networks. See "Regulation." If state regulators make the public interest and other factual findings necessary to impose these interconnection requirements on the Company, more competitors could enter the Company's markets than is currently expected, and the Company could incur additional administrative and regulatory expenses as a result of such inter-connection requirements. RISK OF INABILITY TO OBTAIN INTERCONNECTION IN ADJACENT TERRITORIES. The Company seeks to enter the local telephone service business in neighboring geographic territories to its RLECs. If neighboring LECs are entitled to the same protections that the Company enjoys in its operating territories, the Company may be unable to obtain access to such networks, which could significantly detract from the Company's ability to implement its CLEC strategy. Even if neighboring LECs are not entitled to such protections, the Company could nonetheless be unable to obtain interconnection on favorable terms. RISKS POSED BY COSTS OF REGULATORY COMPLIANCE. Regulations create significant compliance costs for the Company. In addition, because regulations differ from state to state, the Company could face significant obstacles in obtaining information necessary to compete effectively as it tries to enter markets in different regulatory environments. Such information barriers could cause the Company to suffer substantial costs, obstacles and delays in entering such markets. Compliance costs and information barriers could also affect the Company's ability to evaluate and compete for new acquisition opportunities as they arise, and pose other obstacles to the Company's ability to grow or operate, any of which could be material. The Company's subsidiaries that provide intrastate services are also generally subject to certification and tariff filing requirements by state regulators. Challenges to these tariffs by regulators or third parties could cause the Company to incur substantial legal and administrative expenses. In addition, as the Company seeks to enter new mandates and ancillary business segments, it will be required to obtain necessary authorizations and be subject to a variety of additional ongoing regulatory requirements. CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS The telecommunications industry is subject to rapid and significant changes in technology, frequent new service introductions and evolving industry standards, the effect of which cannot be predicted. Thus, there can be no assurance that technological developments will not have a material adverse effect on the Company. The Company's future success may depend, to some extent, on its ability to anticipate such changes and to offer services that meet these standards on a timely basis. CONTROL BY LIMITED NUMBER OF STOCKHOLDERS; POTENTIAL CONFLICTS OF INTEREST As of May 31, 1998, the Equity Investors controlled approximately 76.0% on a fully diluted basis of the total voting power in the Company. As a result of such control and pursuant to the terms of certain agreements among the Company's stockholders, the Equity Investors will continue to have the ability to effectively control the future operations of the Company. See "Security Ownership of Certain Beneficial Owners and Management." The Company pays substantial management and consulting fees to its shareholders. See "Certain Relationships and Related Transactions." In addition to their investment in the Company, the Equity Investors or their affiliates currently have significant investments in other telecommunications companies and may in the future invest in other entities engaged in the telecommunications business or in related businesses (including entities engaged in business in areas in which the Company operates). As a result, the Equity Investors have, and may develop, relationships with businesses that are or may be competitive with the Company. In addition, the Company and the Equity Investors have agreed that such investors are under no obligation to offer the Company any investment or business opportunities of which they become aware, even if such opportunities are within the primary objectives of the Company. 19 LACK OF PUBLIC MARKET FOR THE NOTES The Exchange Notes will be new securities for which there is currently no public market. The Company does not intend to list the Exchange Notes on any national securities exchange or quotation system. The Initial Purchasers have advised the Company that they currently intend to make a market in the Exchange Notes but they are not obligated to do so and, if commenced, may discontinue such market making at any time. Accordingly, there can be no assurance as to the development of any market or liquidity of any market that may develop for the Exchange Notes. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the aggregate principal amount of Old Notes outstanding will decrease, with a resulting decrease in the liquidity of the market therefor. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange their Old Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of the Old Notes set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. In general, Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company currently does not anticipate that it will register the Old Notes under the Securities Act. LIMITATIONS ON REPURCHASE OF NOTES Upon a Change of Control, each holder of Notes will have the right, at the holder's option, to require the Company to repurchase all, or a portion, of such holder's Notes, as the case may be. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the repurchase price for all Notes tendered by the holders thereof. In addition, the Company's repurchase of Notes as a result of the occurrence of a Change of Control may be prohibited or limited by, or create an event of default under, the terms of agreements related to borrowings that the Company may enter into from time to time, including Senior Debt. See "Description of Notes--Repurchase at the Option of Holders upon a Change of Control." IMPACT OF THE YEAR 2000 ISSUE The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has assessed its systems and believes them to be year 2000 compliant. In addition, the Company has received assurance from its major software vendors that the products used by the Company are or will be year 2000 compliant by early 1999. If the systems of other companies on whose services the Company depends or with whom the Company's systems interface are not year 2000 compliant, it could have a material adverse effect on the Company. The Company will continue its year 2000 issue assessment and, if it comes to the attention of the Company's management that any of its systems, or the systems of those on whom the Company relies, are not year 2000 compliant, the Company expects to develop an action plan and devote the resources to address such problem. There can be no assurance that devoting further resources of the Company to the year 2000 issue, if the need should arise, would not have a material adverse effect on the Company. ENVIRONMENTAL AND WORKER HEALTH AND SAFETY MATTERS The Company's operations and properties are subject to federal, state and local laws and regulations relating to protection of the environment, natural resources, and worker health and safety, including laws and regulations governing the management, storage and disposal of hazardous substances, materials and wastes. Under certain 20 environmental laws, the Company could be held liable, jointly and severally and without regard to fault, for the costs of investigating and remediating any contamination at currently-owned or operated properties; or for contamination arising from the disposal by it or its predecessors of hazardous wastes at formerly-owned properties or at third party waste disposal sites. In addition, the Company could be held responsible for third-party property or personal injury claims relating to any such contamination or relating to violations of environmental laws, depending on proof of causation and similar matters. Although the Company has in the past been able to maintain substantial compliance with all such laws and regulations without incurring significant costs, changes in existing laws or regulations or future acquisitions of RLECs (or of other properties or businesses) could require the Company to incur substantial costs in the future relating to such matters. USE OF PROCEEDS The Company will not receive any proceeds from the Exchange Offer. In consideration of issuing the Exchange Notes as contemplated in this Prospectus, the Company will receive in exchange Old Notes of like principal amount, the terms of which are identical in all material respects to the Exchange Notes. The Old Notes surrendered in exchange for Exchange Notes will be retired and canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes will not result in any increase in the indebtedness of the Company. The Company has agreed to bear the expenses of the Exchange Offer pursuant to the Registration Agreement. No underwriter is being used in connection with the Exchange Offer. 21 CAPITALIZATION (DOLLARS IN THOUSANDS) The following table sets forth the total capitalization of the Company as of June 30, 1998, and such capitalization presented on a pro forma basis to give effect to the Pending Acquisition. The Pending Acquisition is subject to certain closing conditions. See "Risk Factors--Risk that Pending Acquisition Will Not Be Consummated." The information set forth below should be read in conjunction with the Company's consolidated financial statements, and notes related thereto, the financial statements related to certain of the Acquisitions and the unaudited pro forma consolidated financial statements, and notes related thereto, included elsewhere in this Prospectus. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
AS OF JUNE 30, 1998 ------------------------ ACTUAL PRO FORMA -------- --------------- PENDING ACQUISITION ----------- Cash and cash equivalents.............................. $ 14,045 $ 15,456 ======== ======== Demand notes payable................................... $ 815 $ 815 -------- -------- Put warrant obligation................................. 3,626 3,626 -------- -------- Long-term debt, including current portion: Existing term debt(1)................................. 6,814 6,814 Acquired term debt(2)................................. -- 12,504 Revolving credit facility............................. -- -- Tranche B loan facility............................... 13,965 71,960 Tranche C loan facility............................... 74,326 74,326 Other debt(3)......................................... 7,282 7,282 Senior subordinated notes(4).......................... 200,000 200,000 -------- -------- Total long-term debt................................. 302,387 372,886 -------- -------- Minority interest...................................... 397 430 -------- -------- Common stock subject to put option..................... -- 3,000 -------- -------- Stockholders' equity: Common stock.......................................... 2 2 Additional paid-in capital............................ 48,747 45,747 Retained earnings (deficit)........................... (30,203) (30,203) Accumulated other comprehensive income................ 237 237 -------- -------- Total stockholders' equity........................... 18,783 15,783 -------- -------- Total capitalization................................. $326,008 $396,540 ======== ========
- -------- (1) Existing term debt consists of fixed rate notes owed to Rural Utilities Service at 8.7% and 10.8% due December 31, 2009 and 2016, respectively. (2) Includes the acquired term debt of Utilities. Term debt of Utilities payable to RTFC includes the following terms: (i) variable rate through October 2008, (ii) fixed rate of 9.2% annually through October 2008 and (iii) fixed rate of 8.8% annually through October 2001, then variable. (3) Other debt consists of notes in the aggregate principal amount of $282,000 which bear interest at rates ranging between 5.8% to 9.5% annually and have maturity dates between 1998 and 2002. Other debt also consists of a note payable in the principal amount of $7.0 million which bears interest at 7% annually and matures in year 2005. (4) Includes $125 million of 9 1/2% Senior Subordinated Notes due 2008 and $75 million Floating Rate Callable Securities due 2008. 22 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (DOLLARS IN THOUSANDS) The following table sets forth selected financial information of the Company. The selected historical consolidated financial data for the years ended December 31, 1995, 1996, 1997 and the six months ended June 30, 1997 and 1998 are derived from the consolidated financial statements of the Company included elsewhere in this Prospectus which, in the case of the financial statements for the years ended December 31, 1995, 1996 and 1997 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The selected historical consolidated financial statement data for the six months ended June 30, 1997 and 1998 have been derived from unaudited consolidated statements of the Company, which, in the opinion of management, include all adjustments necessary for a fair presentation of such data. The selected historical consolidated financial statement data for the year ended December 31, 1994 are derived from consolidated financial statements of the Company, not included herein, which are audited by independent certified public accountants. The selected historical consolidated financial statement data for the year ended December 31, 1993 have been derived from unaudited consolidated financial statements of the Company, not included herein, which, in the opinion of management, includes all adjustments necessary for a fair presentation of such data. The selected pro forma combined financial data for the year ended December 31, 1997 and as of and for the six months ended June 30, 1998 have been derived from Company prepared financial information, the audited consolidated financial statements and notes thereto of certain of the Acquisitions and the audited consolidated financial statements and notes thereto of the Company, which financial statements appear elsewhere in this Prospectus. The following selected pro forma combined financial and operating data are presented as if each of the Acquisitions, the New Credit Facility and the Offering had occurred on January 1, 1997 for the year ended December 31, 1997 and the period ended June 30, 1998, respectively, in the case of statement of operations data, and as of June 30, 1998, in the case of balance sheet data. The selected pro forma combined financial data have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have been achieved had the Acquisitions, the New Credit Facility and the Offering been consummated as of the assumed dates, nor are the results necessarily indicative of the Company's future results of operations. See "Risk Factors--Other Risks Associated with Acquisitions." The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements, and notes thereto, the Pro Forma Consolidated Financial Statements, and notes thereto, and the individual financial statements and notes thereto of certain of the Acquisitions appearing elsewhere in this Prospectus.
ACTUAL PRO FORMA ------------------------------------------------------------ ------------------------------------------------ SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, 1997 JUNE 30, 1998 ------------------------------------------ ---------------- -------------------------------- --------------- COMPLETED COMPLETED ACQUISITIONS, ACQUISITIONS, NEW CREDIT NEW CREDIT AS ADJUSTED FACILITY AND (UNAUDITED) FACILITY AND FOR PENDING OFFERING AND 1993 1994 1995 1996 1997 1997 1998 OFFERING(1)(2) ACQUISITION(2)(3) UTILITIES(2)(4) ------ ------- ------- ------- ------- ------- ------- -------------- ----------------- --------------- STATEMENT OF OP- ERATIONS DATA: Operating reve- nues: Switched servic- es............. $4,803 $12,655 $22,763 $27,876 $39,257 $16,542 $29,456 $ 76,751 $ 91,589 $ 47,480 Other........... 2,263 1,369 1,986 2,383 3,715 1,346 5,776 11,640 13,017 8,553 ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Total operating revenues....... 7,066 14,025 24,749 30,258 42,972 17,887 35,262 88,391 104,606 56,033 ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Operating ex- penses: Plant opera- tions.......... 595 1,886 3,746 4,181 6,857 2,277 5,731 15,592 20,241 11,683 Corporate and customer serv- ice............ 2,270 3,991 6,433 7,577 11,581 4,532 8,762 23,361 26,040 12,960 Depreciation and amortization... 1,240 3,099 5,757 6,644 8,777 4,010 7,300 20,377 25,120 12,806 Other........... 1,684 1,081 1,407 1,658 3,318 1,280 3,927 7,913 8,504 6,586 ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Total operating expenses....... 5,789 10,056 17,343 20,060 30,533 12,099 25,720 67,242 79,905 44,035 ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Income from op- erations....... 1,276 3,968 7,406 10,198 12,439 5,788 9,542 21,149 24,702 11,998 ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Other income (expense): Net income (loss) on sale of investments and other assets......... 598 1,030 (29) (3) (19) -- 390 (9) (9) 430 Interest in- come........... 60 143 225 180 212 103 126 595 595 140 Dividend in- come........... -- 553 664 667 1,182 -- 45 1,182 1,381 180 Interest ex- pense.......... (791) (3,772) (7,267) (9,605) (9,293) (3,998) (9,707) (29,704) (35,646) (18,044) Other nonoperat- ing, net....... 62 29 33 (15) 140 24 198 1,392 1,421 (660) ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Total other in- come (ex- pense)......... (71) (2,017) (6,375) (8,776) (7,778) (3,872) (8,947) (26,544) (32,258) (17,953) ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Earnings (loss) before income taxes and extraordinary item........... 1,235 1,951 1,031 1,422 4,661 1,916 595 (5,396) (7,556) (5,955) Income tax (ex- pense) bene- fit............ (305) (940) (547) (1,462) (1,876) (839) (389) 914 1,371 1,761 ------ ------- ------- ------- ------- ------- ------- -------- -------- -------- Earnings (loss) before extraordinary item and minority interest ...... 930 1,011 484 (39) 2,785 1,077 205 $ (4,482) $ (6,186) $ (4,193) ======== ======== ======== Extraordinary item........... -- -- -- -- (3,612) -- (2,521) ------ ------- ------- ------- ------- ------- ------- Earnings (loss) before minority interest....... 930 1,011 484 (39) (826) 1,077 (2,316) Minority interest in income of subsidiaries... -- (14) (6) (33) (62) (22) (37) ------ ------- ------- ------- ------- ------- ------- Net earnings (loss)......... $ 930 $ 997 $ 478 $ (72) $ (888) $ 1,055 $(2,352) ====== ======= ======= ======= ======= ======= ======= STATEMENT OF OP- ERATIONS DATA: Operating reve- nues: Switched servic- es............. Other........... Total operating revenues....... Operating ex- penses: Plant opera- tions.......... Corporate and customer serv- ice............ Depreciation and amortization... Other........... Total operating expenses....... Income from op- erations....... Other income (expense): Net income (loss) on sale of investments and other assets......... Interest in- come........... Dividend in- come........... Interest ex- pense.......... Other nonoperat- ing, net....... Total other in- come (ex- pense)......... Earnings (loss) before income taxes and extraordinary item........... Income tax (ex- pense) bene- fit............ Earnings (loss) before extraordinary item and minority interest ...... Extraordinary item........... Earnings (loss) before minority interest....... Minority interest in income of subsidiaries... Net earnings (loss).........
23
ACTUAL PRO FORMA ------------------------------------------------------ -------------- AS OF AS OF AS OF DECEMBER 31, JUNE 30, JUNE 30, 1998 ----------------------------------------- ----------- -------------- (UNAUDITED) PENDING 1993 1994 1995 1996 1997 1998 ACQUISITION(4) ------- ------- ------- ------- -------- ----------- -------------- BALANCE SHEET DATA: Cash and cash equiva- lents.................. $ 421 $ 5,016 $ 3,672 $ 4,253 $ 6,822 $ 14,045 $15,456 Working capital......... 19 1,406 1,026 596 108 18,766 17,968 Property, plant and equipment, net......... 8,353 37,616 37,048 41,615 61,207 122,590 144,328 Total assets............ 24,324 82,281 79,218 97,020 144,613 370,714 450,767 Long-term debt.......... 18,034 66,991 64,180 73,958 131,912 302,387 372,886 Redeemable preferred stock.................. -- 6,618 6,701 10,689 130 -- -- Total stockholders' eq- uity (deficit)......... (275) (333) 103 (2,142) (10,939) 18,783 15,783
ACTUAL PRO FORMA ----------------------------------------------------------- ---------------------------------------------- SIX MONTHS ENDED SIX MONTHS YEAR ENDED JUNE 30, YEAR ENDED DECEMBER 31, ENDED JUNE 30, DECEMBER 31, 1997 1998 ----------------------------------------- ---------------- -------------------------------- ------------- COMPLETED ACQUISITIONS, COMPLETED NEW CREDIT ACQUISITIONS, FACILITY NEW CREDIT AS ADJUSTED OFFERING AND (UNAUDITED) FACILITY AND FOR PENDING UTILITIES 1993 1994 1995 1996 1997 1997 1998 OFFERING(1)(2) ACQUISITION(2)(3) (2)(4) ----- ------- ------- ------- ------- ------ -------- -------------- ----------------- ------------- OTHER FINANCIAL DATA: Adjusted EBITDA (5)............ -- $ 8,808 $14,050 $17,639 $22,670 $9,902 $ 17,565 $ 44,686 $ 53,209(6) $ 24,895(6) Capital expendi- tures.......... $ 293 1,768 4,439 8,439 8,239 2,922 3,332 15,688 19,241 4,362 Ratio of earnings to fixed charges (7)............ 2.5x 1.5x 1.1x 1.1x 1.5x 1.5x 1.1x -- -- -- Deficiency of earnings to fixed charges (7)............ -- -- -- -- -- -- -- $ 5,396 $ 7,556 $ 5,955 SUMMARY CASH FLOW DATA: Net cash provided by operating activities..... 5,504 6,039 9,772 9,840 4,253 7,325 13,216 16,655 8,098 Net cash provided by (used in) investing activities..... (50,846) (4,481) (19,790) (38,967) (7,155) (174,322) (219,783) (269,611) (220,100) Net cash provided by financing activities..... 49,937 (2,903) 10,599 31,697 3,796 174,220 193,057 239,076 215,244 OPERATING DATA: Access lines in service........ 4,343 28,205 28,737 34,017 48,731 34,754 103,689 100,867 123,106 126,340
- ------- (1) Gives effect to the Completed Acquisitions, the New Credit Facility and the Offering as if the closings thereof occurred on January 1, 1997. (2) The selected pro forma combined operating data reflect adjustments in connection with the relevant Acquisitions including: (i) amortization expense to reflect goodwill recorded for purchase accounting, (ii) elimination of certain specifically identified expenses related to duplicative management services, directors fees, employee salaries and related benefits, (iii) interest expense, net after giving effect to the New Credit Facility and the Offering, and (iv) income tax expense to reflect the effect that would result if the relevant Acquisitions had been combined and subject to an assumed federal statutory rate and the applicable state statutory tax rate for each of the relevant Acquisitions. (3) Gives effect to the Completed Acquisitions, the New Credit Facility, the Offering and the Pending Acquisition as if the closings thereof occurred on January 1, 1997. The Pending Acquisition is subject to certain closing conditions, See "Risk Factors--Risk that Pending Acquisition Will Not Be Consummated." (4) Gives effect to the Completed Acquisitions, the New Credit Facility, the Offering and the Pending Acquisition as if the closings thereof occurred on January 1, 1997, in the case of statement of operations data, and as of June 30, 1998 in the case of balance sheet data. The Pending Acquisition is subject to certain closing conditions. See "Risk Factors--Risk that Pending Acquisition Will Not Be Consummated." (5) Adjusted EBITDA represents net earnings (loss) plus interest expense, income taxes, depreciation and amortization, and extraordinary items. Adjusted EBITDA is presented because management believes it provides useful information regarding the Company's ability to incur and/or service debt. Management expects that investors may use this data to analyze and compare other telecommunications companies with the Company in terms of operating performance, leverage and liquidity. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net earnings (loss) as a measure of performance, or for cash flow as a measure of liquidity. The definition of EBITDA in the Indenture is designed to determine EBITDA for the purposes of contractually limiting the amount of debt which the Company may incur. Adjusted EBITDA presented herein differs from the definition of EBITDA in the Indenture, which excludes from the calculation of EBITDA (i) net income of Unrestricted Subsidiaries (as defined in the Indenture) unless such net income is actually dividended to the Company or a Restricted Subsidiary and (ii) net income of any Restricted Subsidiary to the extent there is any restriction on the ability of such Restricted Subsidiary to pay dividends to the Company (except that the Company's equity in the net income of any such Restricted Subsidiary is included to the extent of dividends actually received by the Company from such Restricted Subsidiary). The definition of EBITDA in the Indenture is a component of the term "Pro Forma EBITDA" in the Indenture, which is used in a financial covenant calculation therein. Pro Forma EBITDA, as defined in the Indenture, differs from Adjusted EBITDA primarily because it is calculated after giving effect to cost savings the Company believes will be achieved during the applicable period. Adjusted EBITDA as calculated by the Company is not necessarily comparable to similarly captioned amounts of other companies. (6) Pro forma Adjusted EBITDA does not include the elimination of historical expenses for duplicative supervisory and staff-level employees and net incremental costs of outsourcing certain functions. If such historical expenses were eliminated, pro forma Adjusted EBITDA would be $54.4 million and $25.3 million for the year ended December 31, 1997 and the six months ended June 30, 1998, respectively. (7) For purposes of determining the ratio of earnings to fixed charges, earnings are defined as earnings before income taxes, minority interest and extraordinary items, plus fixed charges. Fixed charges include interest expense on all indebtedness, capitalized interest and rental expense on operating leases representing that portion of rental expense deemed to be attributable to interest. 24 THE EXCHANGE OFFER TERMS OF THE EXCHANGE OFFER GENERAL In connection with the sale of Old Notes to the Initial Purchasers pursuant to the Purchase Agreement, dated April 30, 1998, among the Company and Salomon Smith Barney, BT Alex. Brown Incorporated, NationsBanc Montgomery Securities LLC and Donaldson, Lufkin & Jenrette Securities Corporation (collectively, the "Initial Purchasers"), the holders of the Old Notes became entitled to the benefits of the Registration Agreement. Under the Registration Agreement, the Company became obligated to (a) file a registration statement in connection with a registered exchange offer within 60 days after May 5, 1998, the date the Old Notes were issued (the "Issue Date"), and (b) cause the registration statement relating to such registered exchange offer to become effective within 150 days after the Issue Date. The Exchange Offer being made hereby, if consummated within the required time periods, will satisfy the Company's obligations under the Registration Agreement. This Prospectus, together with the Letter of Transmittal, is being sent to all such beneficial holders known to the Company. Upon the terms and subject to the conditions set forth in this Prospectus and in the accompanying Letter of Transmittal, the Company will accept all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Company will issue $1,000 principal amount of Exchange Notes in exchange for each $1,000 principal amount of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. Based on an interpretation by the staff of the Commission set forth in the Morgan Stanley Letter, the Exxon Capital Letter and similar letters, the Company believes that Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any person who received such Exchange Notes, whether or not such person is the holder (other than Restricted Holders) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such Exchange Notes are acquired in the ordinary course of such holder's or other person's business, neither such holder nor such other person is engaged in or intends to engage in any distribution of the Exchange Notes and such holders or other persons have no arrangement or understanding with any person to participate in the distribution of such Exchange Notes. If any person were to be participating in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes in a manner not permitted by the interpretation by the Staff of the Commission, such person (a) could not rely upon the Morgan Stanley Letter, the Exxon Capital Letter or similar letters and (b) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each broker-dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker- dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired by such broker- dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after consummation of the Exchange Offer, it will make this Prospectus, as it may be amended or supplemented from time to time, available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Company will not receive any proceeds from the Exchange Offer. See "Use of Proceeds." The Company has agreed to bear the expenses of the Exchange Offer pursuant to the Registration Agreement. No underwriter is being used in connection with the Exchange Offer. 25 The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Notes for the purposes of receiving the Exchange Notes from the Company and delivering Exchange Notes to such holders. If any tendered Old Notes are not accepted for exchange because of an invalid tender or the occurrence of certain conditions set forth herein under "--Conditions" without waiver by the Company, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders of Old Notes who tender in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes, pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes in connection with the Exchange Offer. See "--Fees and Expenses." In the event the Exchange Offer is consummated, the Company will not be required to register the Old Notes. In such event, holders of Old Notes seeking liquidity in their investment would have to rely on exemptions to registration requirements under the securities laws, including the Securities Act. See "Risk Factors--Consequences of Failure to Exchange." EXPIRATION DATE; EXTENSIONS; AMENDMENT The term "Expiration Date" shall mean the expiration date set forth on the cover page of this Prospectus, unless the Company, in its sole discretion, extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent of any extension by oral or written notice and will issue a public announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Such announcement may state that the Company is extending the Exchange Offer for a specified period of time. The Company reserves the right (a) to delay accepting any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer and not accept Old Notes not previously accepted if any of the conditions set forth herein under "--Conditions" shall have occurred and shall not have been waived by the Company (if permitted to be waived by the Company), by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (b) to amend the terms of the Exchange Offer in any manner deemed by it to be advantageous to the holders of the Old Notes. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Notes of such amendment and the Company may extend the Exchange Offer, depending upon the significance of the amendment and the manner of disclosure to holders of the Old Notes, if the Exchange Offer would otherwise expire during such extension period. Without limiting the manner in which the Company may choose to make public announcement of any extension, amendment or termination of the Exchange Offer, the Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to an appropriate news agency. INTEREST ON THE EXCHANGE NOTES The Exchange Notes will bear interest from May 5, 1998 payable semiannually on May 1 and November 1 of each year, commencing November 1, 1998, at the rate of 9 1/2 per annum in the case of the Fixed Rate Exchange 26 Notes and at a rate per annum equal to LIBOR plus 418.75 basis points in the case of the Floating Rate Exchange Notes. The rate of interest on the Floating Rate Exchange Notes will be reset semi-annually. Holders of Old Notes whose Old Notes are accepted for exchange will be deemed to have waived the right to receive any payment in respect of interest on the Old Notes accrued up until the date of the issuance of the Exchange Notes. PROCEDURES FOR TENDERING To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by instruction 2 of the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile or an Agent's Message in connection with a book entry transfer, together with the Old Notes and any other required documents. To be validly tendered, such documents must reach the Exchange Agent before 5:00 p.m., New York City time, on the Expiration Date. Delivery of the Old Notes may be made by book-entry transfer in accordance with the procedures described below. Confirmation of such book-entry transfer must be received by the Exchange Agent prior to the Expiration Date. The term "Agent's Message" means a message, transmitted by a book-entry transfer facility to, and received by, the Exchange Agent, forming a part of a confirmation of a book-entry transfer, which states that such book-entry transfer facility has received an express acknowledgment from the participant in such book-entry transfer facility tendering the Notes that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Company may enforce such agreement against such participant. The tender by a holder of Old Notes will constitute an agreement between such holder and the Company in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Delivery of all documents must be made to the Exchange Agent at its address set forth below. Holders may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect such tender for such holders. The method of delivery of Old Notes and the Letter of Transmittal and all other required documents to the Exchange Agent is at the election and risk of the holders. Instead of delivery by mail, it is recommended that holders use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery to the Exchange Agent before 5:00 p.m. New York City time, on the Expiration Date. No Letter of Transmittal or Old Notes should be sent to the Company. Only a holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered on the books of the Company or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial holder whose Old Notes are registered in the name of its broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on its behalf. If such beneficial holder wishes to tender on its own behalf, such registered holder must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such holder's name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States (an "Eligible Institution") unless the Old Notes tendered pursuant thereto are tendered (a) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (b) for the account of an Eligible Institution. In the event that signatures on a Letter of Transmittal 27 or a notice of withdrawal, as the case may be, are required to be guaranteed, such guarantee must be by an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by appropriate bond powers and a proxy which authorizes such person to tender the Old Notes on behalf of the registered holder, in each case signed as the name of the registered holder or holders appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Company, evidence satisfactory to the Company of their authority so to act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt), and withdrawal of the tendered Old Notes will be determined by the Company in its sole discretion, which determination will be final and binding. The Company reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Company's acceptance of which would, in the opinion of counsel for the Company, be unlawful. The Company also reserves the right to waive any irregularities or conditions of tender as to particular Old Notes. The Company's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Company shall determine. None of the Company, the Exchange Agent or any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to such holder by the Exchange Agent to the tendering holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Company reserves the right in its sole discretion to (a) purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or, as set forth under "--Conditions," to terminate the Exchange Offer in accordance with the terms of the Registration Agreement and (b) to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers will differ from the terms of the Exchange Offer. By tendering, each holder will represent to the Company that, among other things, (a) the Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of such holder or other person, (b) neither such holder nor such other person is engaged in or intends to engage in a distribution of the Exchange Notes, (c) neither such holder or other person has any arrangement or understanding with any person to participate in the distribution of such Exchange Notes, and (d) such holder or other person is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Company or, if such holder or other person is such an affiliate, will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. Each broker-dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker- dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired by such broker- dealer as result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after consummation of the Exchange Offer, it will make this Prospectus, as it may be amended or 28 supplemented from time to time, available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The Company understands that the Exchange Agent will make a request promptly after the date of this Prospectus to establish accounts with respect to the Old Notes at DTC for the purpose of facilitating the Exchange Offer, and subject to the establishment thereof, any financial institution that is a participant in DTC's system may make book-entry delivery of Old Notes by causing DTC to transfer such Old Notes into the Exchange Agent's account with respect to the Old Notes in accordance with DTC's procedures for such transfer. Although delivery of the Old Notes may be effected through book- entry transfer into the Exchange Agent's account at DTC, an appropriate Letter of Transmittal properly completed and duly executed with any required signature guarantee, or an Agent's Message in lieu thereof, and all other required documents must in each case be transmitted to and received or confirmed by the Exchange Agent at its address set forth below on or prior to the Expiration Date, or, if the guaranteed delivery procedures described below are complied with, within the time period provided under such procedures. Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The Old Notes were issued on May 5, 1998 and there is no public market for them at present. To the extent Old Notes are tendered and accepted in the Exchange Offer, the principal amount of outstanding Old Notes will decrease with a resulting decrease in the liquidity in the market therefor. Following the consummation of the Exchange Offer, holders of Old Notes will continue to be subject to certain restrictions on transfer. Accordingly, the liquidity of the market for the Old Notes could be adversely affected. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (a) whose Old Notes are not immediately available or (b) who cannot deliver their Old Notes, the Letter of Transmittal or any other required documents to the Exchange Agent prior to the Expiration Date, may effect a tender if: (i) the tender is made through an Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby, and guaranteeing that, within three business days after the Expiration Date, the Letter of Transmittal (or facsimile thereof or Agent's Message in lieu thereof) together with the certificate(s) representing the Old Notes to be tendered in proper form for transfer and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing all tendered Old Notes in proper form for transfer and all other documents required by the Letter of Transmittal are received by the Exchange Agent within three business days after the Expiration Date. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date, unless previously accepted for exchange. To withdraw a tender of Old Notes in the Exchange Offer, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (a) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (b) identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes or, in the case of Old Notes transferred by book-entry transfer, the name and number of the account at DTC to be credited), (c) be signed by the Depositor in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to have the Trustee with respect to the Old Notes register the transfer of such Old Notes into the name 29 of the Depositor withdrawing the tender and (d) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) of such withdrawal notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no Exchange Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "--Procedures for Tendering" at any time prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, the Company will not be required to accept for exchange, or exchange, any Exchange Notes for any Old Notes, and may terminate or amend the Exchange Offer before the acceptance of any Old Notes for exchange, if the Exchange Offer violates any applicable law or interpretation by the staff of the Commission. If the Company determines in its sole discretion that the foregoing condition exists, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to the tendering holders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of holders who tendered such Old Notes to withdraw their tendered Old Notes, or (iii) waive such condition, if permissible, with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a prospectus supplement that will be distributed to the holders, and the Company will extend the Exchange Offer as required by applicable law. Pursuant to the Registration Agreement, if an Exchange Offer shall not be consummated prior to the Exchange Offer Termination Date, the Company will be obligated to cause to be filed with the Commission a shelf registration statement with respect to the Old Notes (the "Shelf Registration Statement") as promptly as practicable after the Exchange Offer Termination Date and thereafter use its best efforts to have the Shelf Registration Statement declared effective. "Exchange Offer Termination Date" means the date on which the earliest of any of the following events occurs: (a) applicable interpretations of the staff of the Commission do not permit the Company to effect the Exchange Offer, (b) any holder of Notes notifies the Company that either (i) such holder is not eligible to participate in the Exchange Offer or (ii) such holder participates in the Exchange Offer and does not receive freely transferable Exchange Notes in exchange for tendered Old Notes or (c) the Exchange Offer is not consummated within 180 days after the Issue Date. If any of the conditions described above exists, the Company will refuse to accept any Old Notes and will return all tendered Old Notes to exchanging holders of the Old Notes. 30 EXCHANGE AGENT United States Trust Company of New York has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance and requests for additional copies of this Prospectus or of the Letter of Transmittal and deliveries of completed Letters of Transmittal with tendered Old Notes should be directed to the Exchange Agent addressed as follows: By Registered, Certified or By Hand (before 4:30 p.m.) Overnight Mail: UNITED STATES TRUST COMPANY OF NEW UNITED STATES TRUST COMPANY OF NEW YORK YORK 111 Broadway Attn: Corporate Trust Services New York, New York 10006 P.O. Box 844 Cooper Station Attention: Lower Level Corporate New York, New York 10276 Trust Window By Hand (after 4:30 p.m.): By Facsimile: (For Eligible Institutions Only) UNITED STATES TRUST COMPANY OF NEW (212) 420-6152 YORK 770 Broadway, 13th Floor Telephone Number: New York, New York 10003 (800) 548-6565 The Company will indemnify the Exchange Agent and its agents for any loss, liability or expense incurred by them, including reasonable costs and expenses of their defense, except for any such loss, liability or expense caused by negligence or bad faith. FEES AND EXPENSES The expenses of soliciting tenders pursuant to the Exchange Offer will be borne by the Company. The principal solicitation for tenders pursuant to the Exchange Offer is being made by mail. Additional solicitations may be made by officers and regular employees of the Company and its affiliates in person, by telephone or facsimile. The Company will not make any payments to brokers, dealers, or other persons soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The Company may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Prospectus, Letters of Transmittal and related documents to the beneficial owners of the Old Notes, and in handling or forwarding tenders for exchange. The expenses to be incurred in connection with the Exchange Offer, including fees and expenses of the Exchange Agent and Trustee and accounting and legal fees and expenses, will be paid by the Company. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing Exchange Notes (or Old Notes for principal amounts not tendered or accepted for exchange) are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. ACCOUNTING TREATMENT The Company will not recognize any gain or loss for accounting purposes upon the consummation of the Exchange Offer. The expense of the Exchange Offer will be amortized by the Company over the term of the Exchange Notes under GAAP. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the notes thereto and the other financial data appearing elsewhere in this Prospectus. Adjusted EBITDA represents net earnings (loss) plus interest expense, income taxes, depreciation and amortization, and extraordinary items. Adjusted EBITDA is presented because management believes it provides useful information regarding the Company's ability to incur and/or service debt. Management expects that investors may use this data to analyze and compare other telecommunications companies with the Company in terms of operating performance, leverage and liquidity. Adjusted EBITDA is not a measurement of financial performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net earnings (loss) as a measure of performance, or for cash flow as a measure of liquidity. Adjusted EBITDA presented herein differs from the definition of EBITDA in the Indenture, which excludes from the calculation of EBITDA (i) net income of Unrestricted Subsidiaries (as defined in the Indenture) unless such net income is actually dividended to the Company or a Restricted Subsidiary and (ii) net income of any Restricted Subsidiary to the extent there is any restriction on the ability of such Restricted Subsidiary to pay dividends to the Company (except that the Company's equity in the net income of any such Restricted Subsidiary is included to the extent of dividends actually received by the Company from such Restricted Subsidiary). The definition of EBITDA in the Indenture is designed to determine EBITDA for the purposes of contractually limiting the amount of debt which the Company may incur. The definition of EBITDA in the Indenture is a component of the term "Pro Forma EBITDA" in the Indenture, which is used in a financial covenant calculation therein. Pro Forma EBITDA, as defined in the Indenture, differs from Adjusted EBITDA primarily because it is calculated after giving effect to cost savings the Company believes will be achieved during the applicable period. Adjusted EBITDA as calculated by the Company is not necessarily comparable to similarly captioned amounts of other companies. OVERVIEW General. MJD was founded in 1991 to participate in the consolidation opportunities that exist in the highly fragmented, independent, largely family-owned and operated, rural segment of the telecommunications industry. According to the USTA, as of December 31, 1997, there were over 1,300 independent telephone companies serving small towns in rural America. RLEC subscribers are predominantly residential and typically exhibit the stable economic and demographic characteristics often associated with rural America. As of December 31, 1997, the Company owned and operated eleven RLECs with 48,731 access lines in rural locations in eight states. For the year ended December 31, 1997, the Company had revenue and Adjusted EBITDA of $43.0 million and $22.7 million, respectively. The Company provided net cash of $9.8 million from operating activities, used net cash of $39.0 million in investing activities and provided net cash of $31.7 million from financing activities for the year ended December 31, 1997. Pro forma as of December 31, 1997, the Company believes it will be the eighteenth largest telephone company in the United States with over 123,000 access lines in ten states, and pro forma revenue and Adjusted EBITDA for the year ended December 31, 1997 of $104.6 million and $53.2 million, respectively. On a pro forma basis after giving effect to the Acquisitions, the Company provided net cash of $16.7 million from operating activities, used net cash of $269.6 million in investing activities, and provided net cash of $239.1 million from financing activities for the year ending December 31, 1997. The Company's operations have been characterized by stable growth and cash flow. The primary reasons for the growth in the Company's cash flow has been the acquisition of additional RLECs. In addition, the RLECs owned by the Company have realized access line growth and increases in minutes of use ("MOU"). Although new access line growth is correlated with general economic activity, economic downturns typically have not significantly impacted the Company's established base of access lines or MOU. 32 TOTAL MINUTES OF USE GROWTH UNDER MJD OWNERSHIP
1993 1994 1995 1996 1997 ---------- ----------- ----------- ----------- ----------- Sunflower-Kansas........ 51,176,520 50,895,394 51,274,642 52,393,074 60,791,553 Sunflower-Colorado...... 5,129,418 5,122,171 4,998,707 5,338,954 5,474,730 Northland-Maine......... 91,695,162* 227,850,913 245,268,456 291,489,937 Northland-Vermont....... 23,123,900* 55,819,538 63,293,970 68,263,915 Sidney.................. 21,169,908 23,411,177 Big Sandy............... 8,018,156* 17,149,198 Bluestem................ 2,657,899* 7,308,376 Odin.................... 6,775,410* 17,128,665 Kadoka.................. 6,686,692 Columbine............... 13,165,980 Chautauqua & Erie....... 76,854,224 C-R..................... 4,443,983 ---------- ----------- ----------- ----------- ----------- Total MJD........... 56,305,938 170,836,627 339,943,800 404,915,827 592,168,430 ========== =========== =========== =========== ===========
- -------- * Period includes less than 12 months. ACCESS LINE GROWTH UNDER MJD OWNERSHIP
1993 1994 1995 1996 1997 ----- ------ ------ ------ ------ Sunflower--Kansas............................. 306 302 305 326 332 Sunflower--Colorado........................... 4,037 4,097 4,140 4,232 4,343 Northland of Maine............................ 18,629 18,978 19,728 20,493 Northland of Vermont.......................... 5,177 5,314 5,409 5,510 Sidney........................................ 1,295 1,359 Big Sandy..................................... 865 893 Bluestem...................................... 1,018 992 Odin.......................................... 1,144 1,164 Kadoka........................................ 580 Columbine..................................... 1,085 C&E........................................... 11,070 C-R........................................... 910 ----- ------ ------ ------ ------ Total..................................... 4,343 28,205 28,737 34,017 48,731 ===== ====== ====== ====== ======
- -------- Note: Data is as of December 31 of the relevant year. REVENUES: The Company generates revenue primarily through: (i) the provision of basic local telephone service to customers within its service areas (including federal and state USSF revenues, which accounted for approximately 13.1% of 1997 revenue); (ii) the provision of network access to IXCs for origination and termination of interstate and intrastate long distance telephone calls; and (iii) the provision of ancillary services such as billing and collection, long distance resale, enhanced services, wireless services, cable services, Internet services and customer premises equipment sales. The revenues listed in clauses (i) and (ii) above are classified by the Company as "Switched Revenue." The revenues listed in clause (iii) above are classified by the Company as "Other Revenue."
% OF REVENUE ---------------- REVENUE SOURCE 1995 1996 1997 -------------- ---- ---- ---- Basic Local Service...................................... 16.8% 18.5% 17.8% Interstate and Intrastate Access......................... 67.2% 63.1% 63.6% USSF..................................................... 8.0% 10.5% 10.0% Other Services........................................... 8.0% 7.9% 8.6%
33 The Company's historically stable revenues are the result of the basic utility of telecommunications services, the highly regulated nature of the telecommunications industry and underlying cost recovery settlement and support mechanisms. The Company's subscribers are predominantly residential. Basic local service allows the user to place unlimited calls within a defined local calling area. USSF revenues are a subsidy paid to the Company to support the high cost of its operations in rural markets. Access revenues are generated by providing IXCs access to the Company's local network and its customers. Other service revenue is generated from the ancillary services described above. The Company's RLECs have two basic tiers of customers: (i) local customers located in the RLEC's LATA(s) who pay for local telephone service and (ii) the IXCs which pay the RLEC, directly or via NECA, for access to customers located within the RLEC's LATA(s). The RLECs provide access service to numerous IXCs and also bill and collect long distance charges from customers on behalf of the IXCs. The amount of access charge revenue associated with a particular IXC varies depending upon the RLEC's local customers' long distance calling patterns and choice of long distance carrier. OPERATING EXPENSES: The Company's operating expenses are categorized as plant operations, corporate and customer service, other expenses and depreciation and amortization. Year to year changes in such expenses are typically influenced by access line growth and general business inflationary adjustments. Plant operations expenses consist of operating expenses incurred by the Company in connection with the operation of its central offices and outside plant facilities and related operations. Corporate and customer service expenses consist of expenses generated by the Company's general management, accounting, engineering, marketing and customer service functional groups. Other expenses consist of miscellaneous expenses such as operating taxes. OTHER (INCOME) EXPENSES: The Company's income includes interest income, dividends, gain or loss on sale of assets and other miscellaneous, non- operating income. The Company's other expenses consist primarily of interest on the Company's debt and other non-operating expenses. RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the "Selected Consolidated Financial and Operating Data" and the Financial Statements and related notes thereto of the Company included elsewhere in this Prospectus. SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997 OPERATING REVENUE. Net revenue increased $17.4 million or 97.1% to $35.3 million for the six months ended June 30, 1998 from $17.9 million for the six months ended June 30, 1997. Revenue contribution from the RLECs acquired by the Company during 1997 and year-to-date 1998 provided approximately $6.0 million and $8.4 million of this increase, respectively, for the six months ended June 30, 1998. For RLECs owned and operated for a comparable period in 1998 and 1997, operating revenue improved approximately $3.0 million or 16.7% to $20.9 million from $17.9 million in 1997. Basic local service revenue increased $3.6 million to $6.8 million for the six months ended June 30, 1998 from $3.2 million for the six months ended June 30, 1997. This revenue increase is primarily attributable to an increase in access lines. The Company's access lines increased by 67,437 to 103,689 access lines from 36,252 access lines for the six months ended June 30, 1998 and 1997, respectively. The inclusion of access lines from the RLECs acquired by the Company during 1997 and year-to-date 1998 provided an increase of 65,815 access lines and internal growth in RLECs owned and operated by the Company at June 30, 1998 provided an increase of 1,622 access lines. Revenue contribution from the RLECs acquired during 1997 and year-to-date 1998 provided approximately $1.1 million and $2.2 million, respectively, of the increase in basic local service revenue for the six months ended June 30, 1998. For the RLECs owned and operated for a comparable period by the Company, basic local service revenues increased by $0.3 million to $3.5 million for the six months ended June 30, 1998 from $3.2 million for the six months ended June 30, 1997. 34 USSF revenues were approximately $2.4 million and $2.1 million in each of the six month periods ended June 30, 1998 and June 30, 1997, respectively. Interstate and intrastate revenues increased $9.0 million to $20.3 million for the six months ended June 30, 1998 from $11.3 million for the six months ended June 30, 1997. This revenue increase is attributable to an increase in access lines and MOUs and an increase in interstate and intrastate settlement revenues administered by NECA or a respective state's settlement methodologies. Revenue contribution from the RLECs acquired by the Company during 1997 and year-to-date 1998 provided approximately $3.1 million and $4.1 million, respectively, of the increase in interstate and intrastate revenues for the six months ended June 30, 1998. For the RLECs owned and operated for a comparable period in 1998 and 1997, interstate and intrastate revenues increased by $1.8 million to $13.1 million for the six months ended June 30, 1998 from $11.3 million for the six months ended June 30, 1997. Other services revenue increased $4.4 million to $5.8 million for the six months ended June 30, 1998 from $1.4 million for the six months ended June 30, 1997. Other services revenues consist of directory advertising, billing and collection for IXCs and other related telephone services. Revenue contribution from RLECs acquired by the Company during 1997 and year-to-date 1998 provided $1.4 million and $2.1 million, respectively, of the increase in Other services revenues for the six months ended June 30, 1998. For RLEC's owned and operated for a comparable period by the Company, Other services revenue increased by $0.9 million to $2.2 million for the six months ended June 30, 1998 from $1.3 million for the six months ended June 30, 1997. OPERATING EXPENSES. Operating expenses, which include plant operations, corporate and customer service, other operating expenses, and depreciation and amortization increased $13.6 million or 112.6% to $25.7 million for the six months ended June 30, 1998 from $12.1 million for the six months ended June 30, 1997. The increase was primarily due to the inclusion of operating expenses from the RLECs acquired by the Company during 1997 and year-to-date 1998, which contributed approximately $4.2 million and $6.1 million, respectively, for the six months ended June 30, 1998. For RLECs owned and operated for a comparable period in 1998 and 1997, operating expenses increased approximately $3.3 million or 27.3% to $15.4 million in 1998 from $12.1 million in 1997. The operating expense increase was primarily due to an increase in corporate and customer service expense driven by the Company's acquisition activities during the first and second quarter of 1998. The Company has grown the number of its access lines by approximately 100% since December 31, 1997, as a result of its acquisition of over 51,000 access lines. To support its expanded operations, the Company increased corporate staff in areas such as accounting, finance and human resources. Additionally, operating expense increases were attributable to start-up expenses of the Company's competitive local exchange carrier ("CLEC") subsidiary and an increase in depreciation and amortization. INCOME FROM OPERATIONS. As a result of the factors described above, income from operations increased $3.8 million or 64.8% to $9.5 million for the six months ended June 30, 1998 from $5.8 million for the six months ended June 30, 1997. The increase was primarily due to the inclusion of income from operations for RLECs acquired in 1997 and year-to-date 1998, which provided approximately $1.8 million and during the six months ended June 30, 1998 was $2.3 million of this increase, respectively, for the six months ended June 30, 1998. The income from operations margin was 27.1% in 1998 as compared to 32.4% in 1997. For RLECs owned and operated for a comparable period in 1997, income from operations decreased $330,000 or 5.7% to $5.5 million in 1998 from $5.8 million in 1997 and the income from operations margin was 26.1% in 1998 compared to 32.4% in 1997. The decrease in income from operations and its margin as a percent of revenues was related to the increase in operating expenses, as described above. OTHER INCOME (EXPENSE). Other expense increased $5.1 million or 131.1% to $8.9 million for the six months ended June 30, 1998 from $3.9 million for the six months ended June 30, 1997. The increase was primarily due to an increase in interest expense caused by the additional debt borrowed to complete acquisitions during 1997, to effect the Company's recapitalization in July 1997 and to complete acquisitions in the six months ended June 30, 1998. 35 YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 OPERATING REVENUE. Net revenue increased $12.7 million or 42.0% to $43.0 million in the year ended December 31, 1997 from $30.3 million in the year ended December 31, 1996. The inclusion of revenue from the acquisition by the Company in 1997 of Kadoka Telephone Co., Columbine Telephone Company, Chautauqua & Erie Telephone Corp. ("C&E") and C-R Communications, Inc. (collectively, the "1997 Acquisitions") as well as the full year results for the RLECs acquired by the Company in 1996 (collectively, the "1996 Acquisitions"), provided for 61.5% of the increase. For RLECs owned and operated for a comparable period in 1997 and 1996, net revenue improved approximately $4.9 million or 17.8% to $32.4 million in 1997 from $27.5 million in 1996. Basic local service revenue increased $2.0 million to $7.6 million for the year ended December 31, 1997 from $5.6 million for the year ended December 31, 1996. This revenue increase is attributable to an increase in access lines. The Company's access lines increased 14,714 to 48,731 access lines from 34,017 access lines for the years ended December 31, 1997 and 1996, respectively. The inclusion of access lines from the RLECs acquired by the Company during 1997 provided an increase of 13,645 access lines and internal growth in RLECs owned and operated by the Company at December 31, 1997 provided an increase of 1,069 access lines. Revenue contribution from the RLECs acquired in 1997 and 1996 provided $1.6 million of the increase in basic local service revenue for the year ended December 31, 1997. For the RLECs owned and operated for a comparable period by the Company, basic local service revenue increased by $0.4 million to $6.0 million for the year ended December 31, 1997 from $5.6 million for the year ended December 31, 1996. USSF revenues increased $1.1 million to $4.3 million for the year ended December 31, 1997 from $3.2 million for the year ended December 31, 1996. This increase is attributable to an increase in costs allocated to universal service support. For the RLECs owned and operated for a comparable period by the Company, USSF revenues increased by $0.4 million to $3.6 million dollars for the year ended December 31, 1997 from $3.2 million for the year ended December 31, 1996. Interstate and intrastate revenues increased $8.2 million to $27.3 million for the year ended December 31, 1997 from $19.1 million for the year ended December 31, 1996. This revenue increase is attributable to an increase in access lines and MOUs and an increase in interstate and intrastate settlement revenue administered by NECA or a respective state's settlement methodologies. Revenue contribution from the RLECs acquired in 1997 and 1996 provided $1.5 million and $2.8 million, respectively, of the increase in interstate and intrastate revenues for the year ended December 31, 1997. For the RLECs owned and operated for a comparable period by the Company, interstate and intrastate revenues increased by $3.9 million to $23.1 million for the year ended December 31, 1997 from $19.1 million for the year ended December 31, 1996. Other services revenues increased $1.3 million to $3.7 million for the year ended December 31, 1997 from $2.4 million for the year ended December 31, 1996. Revenue contribution from the RLECs acquired by the Company during 1997 and 1996 provided $0.1 million and $1.0 million, respectively, of the increase in Other services revenues for the year ended December 31, 1997. For the RLECs owned and operated for a comparable period by the Company, Other services revenues increased by $0.2 million to $2.6 million for the year ended December 31, 1997 from $2.4 million for the year ended December 31, 1996. OPERATING EXPENSES. Operating expenses, which include plant operations, corporate and customer service, other operating expenses, and depreciation and amortization, increased $10.5 million or 52.2% to $30.5 million in the year ended December 31, 1997 from $20.1 million during the year ended December 31, 1996. The increase was primarily attributable to the operating expenses incurred by the 1996 Acquisitions and the 1997 Acquisitions, which contributed an aggregate of $6.0 million to the increase. For RLECs owned and operated for a comparable period in 1997 and 1996, operating expenses increased approximately $4.5 million or 24.1% to $23.0 million in 1997 from $18.6 million in 1996. Most of this increase can be attributed to a $1.2 million increase in corporate and customer service, a $0.9 million change in other expense related to a change in regulatory treatment for a reciprocal use agreement with Bell Atlantic Corporation, and a $1.7 million increase in other expenses related to start-up expenses at STLD and an increase in toll costs related to new ISP activity. 36 INCOME FROM OPERATIONS. As a result of the factors described above, income from operations increased $2.2 million or 22.0% to $12.4 million in the year ended December 31, 1997 from $10.2 million in the year ended December 31, 1996. The income from operations margin was 28.9% in 1997 as compared to 33.7% in 1996. For RLECs owned and operated for comparable periods in 1997 and 1996, the income from operations increased $0.4 million or 4.7% to $9.3 million in 1997 from $8.9 million in 1996 and the income from operations margin decreased to 28.8% from 32.4%. The lower margins in 1997 are attributable to other expenses related to the Company's long distance business. OTHER INCOME (EXPENSE). Other expense decreased $1.0 million or 11.4% to $7.8 million in the year ended December 31, 1997 from $8.8 million during the year ended December 31, 1996. The increase was primarily due to the interest expense associated with the additional debt incurred to complete the 1996 Acquisitions and the 1997 Acquisitions. Such increase in other expenses was partially offset by an increase of $0.5 million in dividend and interest income on the Company's investments in 1997, which increase in dividend and interest income represented a 64.6% increase over 1996. EXTRAORDINARY ITEM. For the year ended December 31, 1997, the Company recognized $3.6 million (net of taxes) in expenses related to the early retirement of subordinated debt. YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 OPERATING REVENUE. Net revenue increased $5.5 million or 22.3% to $30.3 million in the year ended December 31, 1996 from $24.7 million in the year ended December 31, 1995. The inclusion of revenue from the RLECs acquired by the Company during 1996 provided approximately $2.8 million of the increase. For RLECs owned and operated for a comparable period in 1996 and 1995, operating revenue improved approximately $2.7 million or 11.0% to $27.5 million in 1996 from $24.7 million in 1995. Basic local service revenue increased $1.4 million to $5.6 million for the year ended December 31, 1996 from $4.2 million for the year ended December 31, 1995. This revenue increase is attributable to an increase in access lines. The Company's access lines increased 5,280 access lines to 34,017 access lines from 28,737 access lines for the year ended December 31, 1996 and 1995, respectively. The inclusion of access lines from the RLECs acquired by the Company during 1996 provided an increase of 4,322 access lines and internal growth in subsidiaries owned and operated by the Company at December 31, 1996 provided an increase of 958 access lines. Revenue contribution from the RLECs acquired by the Company during 1996 provided $0.6 million of the increase in basic local service for the year ended December 31, 1996. For the RLECs owned and operated for a comparable period by the Company, basic local service revenue increased by $0.8 million to $5.0 million for the year ended December 31, 1996 from $4.2 million for the year ended December 31, 1995. USSF revenues increased $1.2 million to $3.2 million for the year ended December 31, 1996 from $2.0 million for the year ended December 31, 1995. This increase is attributable to an increase in costs allocated to universal support services. Revenue contribution from the RLECs acquired by the Company during 1996, provided $0.3 million of the increase USSF revenues for the year ended December 31, 1996. For the RLECs owned and operated for a comparable period by the Company, USSF revenues increased by $0.9 million to $2.9 million for the year ended December 31, 1996 from $2.0 million for the year ended December 31, 1995. Interstate and intrastate revenues increased $2.5 million to $19.1 million for the year ended December 31, 1996 from $16.6 million for the year ended December 31, 1995. This revenue increase is attributable to an increase in access lines and MOUs and an increase in interstate and intrastate settlement revenues administered by NECA or a respective state's settlement methodologies. Revenue contribution from the RLECs acquired by the Company during 1996 provided $1.5 million of the increase in interstate and intrastate revenues for the year ended December 31, 1996. For the RLECs owned and operated for a comparable period by the Company, interstate and intrastate revenues increased by $1.0 million to $17.6 million for the year ended December 31, 1996 from $16.6 million for the year ended December 31, 1995. 37 Other services revenues increased $0.4 million to $2.4 million for the year ended December 31, 1996 from $2.0 million for the year ended December 31, 1995. Revenue contribution from the RLECs acquired by the Company during 1996 provided $0.4 million of this increase. For the RLECs owned and operated for a comparable period by the Company, there was no significant increase in other services revenues for the year ended December 31, 1996 over the year ended December 31, 1995. OPERATING EXPENSES. Operating expenses, which include plant operations, corporate and customer service, other operating expenses, and depreciation and amortization, increased $2.7 million or 15.7% to $20.1 million in the year ended December 31, 1996 from $17.3 million in the year ended December 31, 1995. This increase was primarily due to the inclusion of operating expenses from the RLECs acquired by the Company, which contributed approximately $1.6 million to the increase. For RLECs owned and operated for a comparable period in 1996 and 1995, operating expenses increased approximately $1.1 million or 6.2% to $18.4 million in 1996 from $17.3 million in 1995 primarily due to an increase in corporate and customer service. INCOME FROM OPERATIONS. As a result of the factors described above, income from operations increased $2.8 million or 37.7% to $10.2 million in the year ended December 31, 1996 from $7.4 million in the year ended December 31, 1995. The inclusion of income from operations for the 1996 Acquisitions accounted for most of the increase. The income from operations margin was 33.7% in 1996 as compared to 29.9% in 1995. For RLECs owned and operated for a comparable period in 1996, income from operations increased $1.7 million or 22.3% to $9.1 million in 1996 from $7.4 million in 1995 and the income from operations margin increased to 33.0% from 29.9%. OTHER INCOME (EXPENSES). Other expense increased $2.4 million or 37.7% to $8.8 million in the year ended December 31, 1996 from $6.4 million in the year ended December 31, 1995. The increase was due primarily to interest expense associated with additional debt incurred to complete the 1996 Acquisitions. LIQUIDITY AND CAPITAL RESOURCES Implementation of the Company's acquisition strategy has required a significant portion of the Company's capital resources. The Company historically has used the proceeds of bank debt and private equity offerings, supplemented by the Company's available cash flow, to fund the implementation of the Company's acquisition strategy. As a result of the financing of its acquisitions, the Company has a substantial amount of long-term indebtedness. The Company expects that payments under the New Credit Facility and payments to the holders of the Notes will be one of the Company's principal uses of cash for the foreseeable future. In the year ended December 31, 1997, the Company made principal payments of $22.1 million, or 116.0% of Adjusted EBITDA, to service its debt. In addition to debt service, the Company's principal liquidity requirements are expected to be for general corporate purposes, capital expenditures and to consummate the Pending Acquisition. The Company believes that the proceeds from the New Credit Facility and the Notes provide sufficient resources to find the acquisition of the Pending Acquisition. The Company's annual capital expenditures for existing operations have historically been significant. Because existing regulations allow the Company to recover its operating and capital costs, plus a reasonable return on its invested capital in regulated telephone assets, capital expenditures constitute an attractive use of the Company's cash flow. The Company has historically generated sufficient cash flow from operations to meet all of its capital expenditure requirements for existing operations. In 1996 and 1997, the Company spent approximately $8.4 million and $8.2 million on capital expenditures, respectively. The Company expects capital expenditures in 1998 for all existing operations and the Pending Acquisition to be approximately $15.0 million. The Company may require additional financing for future acquisitions, if any, and there can be no assurance that it will be able to obtain such financing on favorable terms, if at all. Management evaluates potential acquisitions on an ongoing basis and has had, and continues to have, preliminary discussions concerning the purchase of additional RLECs and other telecommunications properties. 38 The Company's plan to enter additional markets as a CLEC is expected to result in the Company's incurring initial operating losses followed by significant capital expenditures. The Company currently estimates that it will invest approximately $5.0 million and $15.0 million in 1998 and 1999, respectively, related to the planned rollout of nine CLEC markets in 1998 and fifteen CLEC markets in 1999. In addition, the Company anticipates that building facilities to migrate CLEC customers to the Company's existing networks will require substantially more capital expenditures in 1999 and 2000. The New Credit Facility limits the funding of such losses and capital expenditures to (i) $5.0 million per year so long as the senior debt leverage ratio exceeds 4.0x and (ii) $15.0 million per year whenever such leverage ratio is under 4.0x. The terms of the Notes also impose certain restrictions on the Company's ability to fund its CLEC expansion. See "Description of the Notes--Certain Covenants--Limitation on Debt" and "--Limitation on Restricted Payments." If the CLEC plan does not prove successful in the next few years, the Company will likely not continue to invest capital in the business. If the CLEC plan proves to be successful, the Company believes it will be able to raise separate financing for future CLEC capital requirements as permitted under the New Credit Facility and the Indenture for the Notes. Net cash provided by operating activities was $9.8 million for each of the years ended December 31, 1997 and 1996. Net cash provided by operating activities was $7.3 million and $4.3 million for the six months ended June 30, 1998 and 1997, respectively. Net cash used in investing activities was $39.0 million and $19.8 million for the years ended December 31, 1997 and 1996, respectively, and $174.3 million and $7.2 million for the six months ended June 30, 1998 and 1997, respectively. These cash flows primarily reflect expenditures relating to acquisitions of telephone properties of $30.8 million and $11.3 million for the years ended December 31, 1997 and 1996, respectively, and $171.3 million and $4.6 million for the six months ended June 30, 1998 and 1997, respectively, and capital expenditures of $8.2 million and $8.4 million for the years ended December 31, 1997 and 1996, respectively, and $3.3 million and $2.9 million for the six months ended June 30, 1998 and 1997, respectively. Net cash provided by financing activities was $31.7 million and $10.6 million for the years ended December 31, 1997 and 1996, respectively. Net cash provided by financing activities was $174.2 million and $3.8 million for the six months ended June 30, 1998 and 1997, respectively. These cash flows primarily represent borrowings, the proceeds of which were $71.1 million in 1997 and $451.0 million in the first six months of 1998 and proceeds from the issuance of common stock of $15.9 million in 1997 and $31.8 million in the first six months of 1998. A majority of the 1997 proceeds were utilized to repay long-term debt of $22.1 million and repurchase preferred stock and warrants for an aggregate amount of $31.5 million. A majority of the 1998 proceeds were utilized to repay long-term debt of $292.6 million and to purchase Taconic, Ellensburg and Chouteau. On July 31, 1997, a recapitalization (the "Recapitalization") of the Company was completed. The Company (i) issued 43,794 shares of the Company's Class A voting common stock for proceeds of $15.0 million in the aggregate to Carousel and Kelso and (ii) issued 440 shares to members of management for proceeds of $150,705. Proceeds from the Recapitalization and related borrowings of $39.2 million from CoBank ACB ("CoBank") were utilized to (i) retire certain subordinated notes issued by STE/NE Acquisition Corp. d/b/a/ Northland Telephone Company of Vermont, a wholly-owned subsidiary of the Company; (ii) repurchase all of the outstanding shares of preferred stock of MJD not owned by management; and (iii) repurchase certain common stock purchase warrants that were owned by Fleet Equity Partners and its affiliates. In October 1997, the Company issued an additional 4,379 shares of common stock to Kelso and Carousel for an aggregate of approximately $1.5 million. The proceeds of this stock issuance were utilized to finance the acquisition of C-R Communications, Inc. Adjusted EBITDA is not a measure of performance under generally accepted accounting principles and should not be construed as a substitute for consolidated net earnings (loss) as a measure of performance, or as a substitute for cash flow as a measure of liquidity. Adjusted EBITDA presented herein differs from the definition of EBITDA in the Indenture applicable to the covenants for the Notes. The definition of EBITDA in the Indenture is designed to determine EBITDA for the purposes of contractually limiting the amount of debt which the Company may incur. Adjusted EBITDA as calculated by the Company is not necessarily comparable to similarly captioned amounts of other companies. Adjusted EBITDA increased 77.4% to $17.6 million for the six months ended June 30, 1998 from $9.9 million for the six months ended June 30, 1997. Adjusted EBITDA increased 28.5% from $17.6 million in the year ended December 31, 1996 to $22.7 million in the year ended December 31, 1997. Adjusted EBITDA 39 increased 25.5% from $14.1 million in the year ended December 31, 1995 to $17.6 million in the year ended December 31, 1996. Adjusted EBITDA is presented because management believes it provides useful information regarding a company's ability to incur and/or service debt. Increases or decreases in Adjusted EBITDA may indicate improvements or decreases, respectively, in the Company's free cash flows available to incur and/or service debt and cover fixed charges. Management expects that, because Adjusted EBITDA is commonly used in the telecommunications industry as a measure of performance, investors may use this data to analyze and compare other telecommunications companies with the Company in terms of operating performance, leverage and liquidity. As of December 31, 1997, the four individuals who founded the Company in 1991 (the "Co-Founders") (through their partnership interests in MJD Partners, L.P.) and management, Kelso, and Carousel owned 47%, 26% and 26% of the Company, respectively, on a fully diluted basis. The Equity Investors invested an additional $16.3 million on March 30, 1998 to finance the acquisition of Taconic and an additional $15.0 million on April 30, 1998 to finance the acquisition of Ellensburg, resulting in a total of $47.8 million of equity capital invested in MJD through April 30, 1998. As of May 31, 1998, the Co- Founders and management, Kelso and Carousel owned approximately 24%, 38% and 38% of the Company, respectively, on a fully-diluted basis. As of December 31, 1997, in connection with the implementation of its business plan, the Company had incurred an aggregate of approximately $128.0 million of long term debt from CoBank and the Rural Telephone Finance Cooperative ("RTFC"). Such debt typically had a term of 14 years and an interest rate fixed at a spread of 200 basis points above the commensurate Treasury rate, resulting in an average rate approximating 8.12%. On March 30, 1998, the Company closed a $315.0 million senior secured credit facility (the "New Credit Facility") which included (i) $75.0 million of term debt (Tranche C) amortized over nine years, (ii) $155.0 million of term debt (Tranche B) amortized over eight years and (iii) an $85.0 million reducing revolving credit facility (the "Revolver") with a term of six and one-half years. The borrower under the New Credit Facility is the same entity in the corporate structure as the Issuer of the Notes. All obligations of the Company under the New Credit Facility are guaranteed by four of the intermediary subsidiaries of the Company; STE, MJD Holdings Corp., MJD Services Corp. and MJD Ventures, Inc. The ability of such subsidiaries to guarantee the obligations of the Company under certain circumstances may be restricted. See "Risk Factors--Subordination; Holding Company Structure." The Company is obligated to comply with certain financial ratios and tests, including the following (which ratios tighten over time subject to loosening upon the Company achieving a ratio of senior debt to annualized EBITDA ratio of 4.0 to 1.0 or less): (i) maintain a ratio of annualized EBITDA to interest expense of 1.5 to 1.0; (ii) maintain a ratio of debt to annualized EBITDA of not more than 6.5 to 1.0; and (iii) maintain a ratio of senior debt to annualized EBITDA of not more than 6.4 to 1.0. The Company is currently in compliance with all covenants under the New Credit Facility. The Company believes that the New Credit Facility, when combined with the proceeds of the Offering, provides sufficient resources to fund the Pending Acquisition. See "Description of New Credit Facility." The Company may secure additional funding through the sale of public or private debt and equity securities or enter into another bank credit facility to fund future acquisitions. If the Company's growth occurs more rapidly than is currently anticipated or if its operating results are below expectations, there can be no assurance that the Company will be successful in raising sufficient additional capital on terms that it will consider acceptable, or that the Company's operations will produce positive cash flow in sufficient amounts to meet its debt obligations. The Company's failure to raise and generate sufficient funds may require it to delay or abandon some of its planned future growth or expenditures, which could have a material adverse effect on the Company's growth and its ability to compete in the telecommunications industry. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way 40 that public business enterprises report information regarding their operating segments in annual financial statements and requires that those enterprises report selected information regarding their operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures regarding products and services, geographic areas, and major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997. The Company believes that adopting this accounting pronouncement in 1998 will not have a significant effect on the level of disclosures in its consolidated financial statements. In February 1998, the Financial Accounting Standards Board issued Statement No. 132, "Employers' Disclosures about Pensions and other Postretirement Benefits" ("SFAS 132"), which is effective for fiscal years beginning after December 15, 1997. SFAS 132 revises disclosure requirements for pension and other postretirement benefits plans. The Company believes that adopting this accounting pronouncement in 1998 will not have a significant effect on the level of disclosures in its consolidated financial statements. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company anticipates adopting this accounting pronouncement in 2000; however, management believes it will not have a significant impact on the Company's annual consolidated financial statements. INFLATION The Company does not believe that inflation has a significant effect on its operations. YEAR 2000 The year 2000 issue involves the risk that computer systems using two-digit date fields will fail to recognize properly the year 2000, resulting in computer failures for businesses, government agencies, service providers, vendors and customers. The Company has assessed its systems and believes them to be year 2000 compliant. In addition, the Company has received assurance from its major software vendors that the products used by the Company are or will be compliant by early 1999. If the systems of other companies on whose services the Company depends or with whom the Company's systems interface are not year 2000 compliant, it could have a material adverse effect on the Company. The Company has budgeted $100,000 to review the year 2000 issue during 1998 and will continue its year 2000 issue assessment and, if it comes to the attention of management that any of its systems, or the systems of those on whom the Company relies, are not year 2000 compliant, the Company expects to develop an action plan and devote the resources to address such problem. There can be no assurance that devoting further resources of the Company to the year 2000 issue, if the need should arise, would not have a material adverse effect on the Company. 41 BUSINESS COMPANY OVERVIEW MJD is a growing provider of local telecommunications services to customers in rural communities in the United States. The Company also provides complementary services such as long distance service, enhanced calling services and wireless telephony. Upon completion of the Pending Acquisition, the Company believes that it will be the eighteenth largest telephone company in the United States, and the largest telephone company in the United States that focuses primarily on acquiring and operating rural telecommunications service companies. For the year ended December 31, 1997, the Company had revenue and Adjusted EBITDA of $43.0 million and $22.7 million, respectively. The Company provided net cash of $9.8 million from operating activities, used net cash of $39.0 million in investing activities and provided net cash of $31.7 million from financing activities for the year ended December 31, 1997. On a pro forma basis after giving effect to the Acquisitions, the Company would have had revenue and Adjusted EBITDA of $104.6 million and $53.2 million, respectively, for the year ended December 31, 1997. On a pro forma basis after giving effect to the Acquisitions, the Company provided net cash of $16.7 million from operating activities, used net cash of $269.6 million in investing activities, and provided net cash of $239.1 million from financing activities for the year ending December 31, 1997. For the six months ended June 30, 1998, the Company had revenue and Adjusted EBITDA of $35.3 million and $17.6 million, respectively. The Company provided net cash of $7.3 million from operating activities, used net cash of $174.3 million in investing activities and provided net cash of $174.2 million from financing activities during the six months ended June 30, 1998. On a pro forma basis after giving effect to the Acquisitions, the Company would have had revenue and Adjusted EBITDA of $56.0 million and $24.9 million, respectively, for the six months ended June 30, 1998. On a pro forma basis after giving effect to the Acquisitions, the Company provided net cash of $8.1 million from operating activities, used net cash of $220.1 million in investing activities and provided net cash of $215.2 million from financing activities for the six months ended June 30, 1998. The Company believes that the rural telecommunications market is particularly attractive due to limited competition and a favorable regulatory environment; in particular, pursuant to existing state and federal regulations, the Company is able to charge rates which enable it to recover its operating and capital costs, plus a reasonable (as determined by the relevant regulatory authority) rate of return on its invested capital. RLECs which serve this market are characterized by stable operating results and strong cash flow margins. The Company has successfully completed acquisitions of fourteen RLECs in ten states (Colorado, Illinois, Kansas, Maine, New Hampshire, New York, South Dakota, Washington, Oklahoma and Vermont (the "Current States")) and, pro forma for the Ellensburg acquisition and the Pending Acquisition, the Company will serve over 123,000 access lines and provide local telephone service to customers in rural locations in ten states. MJD has been successful in improving operating margins and reducing trailing acquisition multiples by centralizing many of the acquired companies' operations and increasing revenues through introducing innovative marketing strategies for enhanced and ancillary services. The Company believes that the attractive operating characteristics of rural markets and the Company's ability to draw on its existing corporate resources creates the opportunity to achieve and maintain substantial operating efficiencies. The local telephone industry is comprised of a few large, well-known companies such as the RBOCs and a large number of small independent telephone companies. According to USTA, there are over 1,300 independent telephone companies with fewer than 25,000 access lines in the United States. The majority of these small telephone companies operate in thinly populated, rural areas with limited competition due to the unfavorable economics of constructing and operating a competing network in such areas. Many of these RLECs are owned by families or small groups of individuals and were founded shortly after World War I. The Company believes that the owners of some of these RLECs are increasingly interested in selling their companies, thereby creating significant future opportunities to acquire additional properties. The Company also believes that the RBOCs are increasingly likely to dispose of rural access lines in certain markets in order to focus more attention and resources on their urban markets. 42 The Company was formed in 1991 to capitalize on consolidation opportunities in the RLEC market. The Company has assembled a senior management team with significant industry experience and a strong track record of acquiring and integrating RLECs. The seven most senior managers of the Company have an average of approximately 20 years of experience in the telecommunications industry with companies such as C&P Telephone (now a subsidiary of Bell Atlantic Corporation), Sprint Corporation, Frontier Corporation and C-TEC Corporation. As of May 31, 1998, senior management owned 24.0% of the common stock of the Company on a fully diluted basis. MJD also benefits from the financial and management expertise of its two primary equity investors, which are Kelso and Carousel, each of which owned 38.0% of the common stock of the Company on a fully diluted basis as of May 31, 1998. The Equity Investors have invested a total of $47.8 million of equity capital in MJD through May 31, 1998. Kelso is one of the oldest and most established firms specializing in leveraged investing, both as a principal and as a financial advisor, since 1971, and has significant experience with other media and communications properties. Carousel, founded in 1996, is a merchant bank with over $160.0 million in equity commitments, focused on investing in middle market companies located in the southeastern United States. BUSINESS STRATEGY The Company's objective is to become the leading provider of telecommunications services to rural communities and the preferred acquirer of RLECs in the United States. Key strategies in the development and fulfillment of the Company's objectives are discussed below. CONTINUED GROWTH THROUGH ACQUISITIONS. The Company expects to continue growing primarily by acquiring independent RLECs and by purchasing rural telephone operations from large telephone companies such as the RBOCs, GTE Corporation and others. The Company focuses its acquisition efforts on rural telephone companies that exhibit: (i) significant opportunities to realize management and operating synergies and economies of scale; (ii) positive economic and demographic characteristics; (iii) a positive regulatory and operating environment; (iv) deployment of advanced technology; and (v) strong mid-level management capabilities. Cellular, cable television, long distance resale, paging and wireless operations may also be acquired, but primarily as ancillary business segments of acquired RLECs. IMPROVE OPERATING EFFICIENCY OF ACQUIRED RLECS. By consolidating RLECs under a single corporate organization, the Company has successfully achieved significant operating efficiencies that the Company believes the independent RLECs could not have individually attained. For example, the Company has consolidated the regulatory, accounting and billing functions of its acquired companies and has reduced the overhead costs associated with executive management of such companies. The Company's acquisition strategy is to acquire inherently sound operating RLECs which do not require dramatic changes to core operations. Upon acquiring such companies, the Company applies its operating, regulatory, marketing, technical and management expertise and its financial resources to improve the operations and profitability of the acquired RLECs. INCREASE REVENUE THROUGH ENHANCED SERVICE OFFERINGS. The Company believes that its local community presence and its brand recognition will allow it to grow its revenues by offering enhanced and ancillary telecommunications services to its existing customers. Unlike the RBOCs, MJD is not subject to regulatory restrictions that prohibit it from marketing other services such as long distance services in its existing franchise territories or elsewhere. The Company intends to pursue incremental revenue growth through: (i) traditional ancillary telephony service offerings such as enhanced calling services, including voice mail and conference calling; (ii) long distance resale services, including related products such as "800" service and long distance calling cards; (iii) multimedia services such as Internet access, cable television and other entertainment services; and (iv) various wireless services, including cellular, PCS and paging. For example, during the year ended December 31, 1997, ST Long Distance (the Company's long distance subsidiary) introduced its long distance service program in selected markets and realized an average first year penetration rate of approximately 57% in these markets. 43 EXPAND EXISTING MARKET PRESENCE BY LAUNCHING CLEC SERVICES. The Company is currently initiating a plan to introduce CLEC services in targeted rural and small urban markets that are within 200 miles of certain of its existing RLECs. The plan contemplates the Company entering nine such markets in 1998 and fifteen such markets in 1999. In the first phase of this strategy, the Company plans to enter markets as a reseller of local exchange services and attempt to capture market share without owning facilities in the targeted market. If the Company succeeds in capturing a meaningful portion of the market, the Company then plans to migrate its customers to its own facilities- based service that incorporates unbundled elements from the ILEC connected back to the Company's RLEC network and switching facilities. This second phase contemplates significant capital expenditures that the Company believes would be required to make such a venture profitable. Once these facilities have been installed, all new CLEC customers would be serviced from the Company's network. The Company believes that this strategy will permit an efficient use of the Company's capital resources and rapid deployment of service. The Company also believes that its target markets are likely to sustain only one or two competitors in addition to the ILEC. For this reason, the Company intends to enter its target markets as quickly as is possible. The targeted markets are small urban markets with residential populations between 25,000 and 75,000. The Company plans to target its CLEC services initially to small and medium businesses, which management believes to be a lucrative and underserved customer segment. The Company has identified more than 500 small urban markets throughout the United States that could be served by MJD as a CLEC. The Company's customer acquisition strategy is expected to emphasize local, personal sales and customer service. Under its CLEC plan, the Company expects to establish an office in each of its markets, staffed with locally-hired salespeople and customer service personnel who will be trained to provide a high level of customer service. The Company plans to utilize the technical and administrative personnel of its RLECs, thereby reducing the expenses required to operate the CLEC business. The implementation of the Company's CLEC strategy is in the early stages, and there can be no assurance that the Company will be able to implement its CLEC strategy successfully. See "Risk Factors--Future Capital Requirements; Expected CLEC Losses" and "-- Competition--Risk of Inability to Compete as a CLEC." The New Hampshire and New York markets are the Company's initial markets in which the Company's CLEC strategy is being evaluated. The Company plans to continue providing service in these markets for the foreseeable future. Entry into new markets will be based on a qualitative and quantitative assessment of the Company's performance in these two test markets. There is no set schedule for the Company to perform such an assessment; rather, the testing and evaluation by the Company is ongoing. For purposes of the Indenture relating to the Notes, the Company will conduct its CLEC business through Unrestricted Subsidiaries, which will limit the amount the Company can invest in the CLEC business and exempt the CLEC subsidiaries from most of the covenants applicable to the Notes. See "Description of Notes." RECENT AND PENDING ACQUISITIONS The Company has recently completed, or plans to complete, the following RLEC acquisitions: TACONIC TELEPHONE CORP. On March 30, 1998, the Company acquired Taconic. Taconic, located in the Hudson Valley area of eastern New York, 30 miles southeast of Albany, operates approximately 24,800 access lines (approximately 83% residential). The Company purchased the common stock of Taconic for $67.5 million and assumed $9.2 million of debt of Taconic. In the year ended December 31, 1997, Taconic had revenues of $20.4 million. ELLENSBURG TELEPHONE COMPANY. On April 30, 1998, the Company acquired Ellensburg. Ellensburg, located in Ellensburg, Washington, 100 miles southeast of Seattle, operates approximately 23,900 access lines (approximately 76% residential). The Company will purchase the common stock of Ellensburg for $91.0 million. In the year ended December 31, 1997, Ellensburg had revenues of $14.7 million. 44 CHOUTEAU TELEPHONE COMPANY. On June 1, 1998, the Company acquired Chouteau. Chouteau, located in Chouteau, Oklahoma, 30 miles east of Tulsa, operates approximately 3,400 access lines (approximately 84% residential). The Company purchased the common stock of Chouteau for $18.6 million and assumed $3.0 million of debt of Chouteau. In the year ended December 31, 1997, Chouteau had revenues of $4.3 million. UTILITIES, INC. On April 3, 1998, the Company entered into an agreement to acquire Utilities, which is expected to close in the third or fourth quarter of 1998. Utilities is headquartered in Standish, Maine, approximately 15 miles west of Portland. Utilities operates approximately 22,200 access lines in central and southern Maine, most of which are located in exchanges adjacent to exchanges operated by subsidiaries of the Company. In the year ended December 31, 1997, Utilities had revenues of $16.2 million (which excludes the revenues of certain cellular businesses of Utilities which are not being acquired by MJD). The Pending Acquisition is subject to certain closing conditions. See "Risk Factors--Risk that Pending Acquisition Will Not Be Consummated" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." ACQUISITION HISTORY The following summarizes each RLEC the Company has acquired to date and the Pending Acquisition.
ACCESS LINES LOCATION OF AS OF DATE PURCHASE RLEC ACQUIRED OPERATIONS DECEMBER 31, 1997 ACQUIRED PRICE - ------------------------ ------------------- ----------------- ------------- --------------- Sunflower Telephone Kansas/Colorado 4,675 May 1993 $19.7 million Company, Inc. Northland Telephone Maine/New Hampshire 20,493 August 1994 $39.7 million Company of Maine, Inc. STE/NE Acquisition Corp. Vermont 5,510 August 1994 $12.0 million d/b/a Northland Telephone Company of Vermont Sidney Telephone Company Maine 1,359 January 1996 $ 3.0 million Big Sandy Telecom, Inc. Colorado 893 June 1996 $ 3.1 million Bluestem Telephone Kansas 992 August 1996 $ 3.9 million Company Odin Telephone Exchange, Illinois 1,164 August 1996 $ 5.0 million Inc. Kadoka Telephone Co. South Dakota 580 January 1997 $ 2.9 million Columbine Telephone Colorado 1,085 April 1997 $ 4.6 million Company, Inc. Chautauqua & Erie New York 11,070 July 1997 $22.0 million Telephone Corporation C-R Communications, Inc. Illinois 910 October 1997 $ 4.0 million Taconic Telephone Corp. New York 24,832 March 1998 $67.5 million Ellensburg Telephone Washington 23,910 April 1998 $91.0 million Company Chouteau Telephone Oklahoma 3,394 June 1998 $18.6 million Company ------- Subtotal: 100,867 Utilities, Inc. Maine 22,239 Third/Fourth Not consummated Quarter 1998 (expected) ------- Total: 123,106 =======
INDUSTRY OVERVIEW The LEC industry is composed of a small number of large, well-known companies such as the RBOCs and GTE, and a very large number of relatively small independent companies. These small, independent telephone companies provide telephone service to more than five million residences and businesses in secondary and rural marketplaces. 45 According to USTA, there are over 1,300 independent telephone companies with less than 25,000 access lines in the U.S., many of which could be potential acquisition candidates for the Company. A majority of these small telephone companies operate in sparsely populated rural areas where competition from bypass companies including CAPs, CATV operators or wireless telecommunications companies (such as cellular or PCS providers) is limited due to the generally unfavorable economics of constructing and operating such competitive systems. Most RLECs are owned by families or small groups of individuals, and were founded soon after World War I. The Company believes that the owners of these small companies are increasingly interested in selling such companies as the growing technical, administrative and regulatory complexities of the local telephone business challenge the capabilities of the existing management. In addition, certain large telephone companies are selling many of their small rural exchanges to focus their attention on their major metropolitan operations that generate the bulk of their consolidated revenue and which are increasingly threatened by competition. The Company believes that these companies cannot continue to invest time and capital in rural operations that make up a relatively insignificant portion of their consolidated operations. As a result of these circumstances, the Company believes that it has, and in the future will have, numerous opportunities to acquire RLECs and rural telephone operations currently owned by the large telephone companies. The FCC has taken steps to limit the ability of companies to gain regulatory subsidies when large telephone companies sell individual telephone exchanges to small companies. A smaller company can be entitled to significant increases in universal service subsidies relating to the same exchange because of specific rules that favor small companies and because small companies do not have to average their costs over wide geographic areas, which could include low cost areas, as do larger carriers. In the past, on a case by case basis, the FCC has only approved the sale of individual exchanges if such sale did not increase the amount of universal service subsidy going to the acquiring company. The FCC has proposed to make this policy a permanent rule. Several LECs and industry organizations have requested the FCC not to adopt this policy. However, the acquiring company can request a waiver to increase the amount of universal service support based on its own cost characteristics, demographics and particular situation. If the FCC continues to enforce this policy or adopts it as a final rule, it could adversely affect the Company's ability to acquire additional individual exchanges from large telephone companies. RURAL TELEPHONE INDUSTRY. RLECs typically exhibit the stable economic and demographic characteristics often associated with rural America. All of the Company's telephone company subsidiaries qualify as "RLECs" under the Telecommunications Act, and are therefore entitled to benefit from a number of cost recovery mechanisms associated with the "rural carrier" designation. See "Regulation." Because RLECs serve primarily rural areas and small towns, they tend to have unique characteristics that differentiate them from larger LECs. For instance, the per minute cost of operating both telephone switches and interoffice facilities is higher in rural areas as RLECs typically have fewer, more geographically dispersed customers and lower calling volumes. Also, the distance from the telephone switch to the customer is typically longer in rural areas, which results in increased distribution facilities costs. These relatively high costs tend to discourage competitors from entering territories served by RLECs. As a result, RLECs are rarely faced with the threat of competition, as compared to the RBOCs which often serve densely populated areas that contain a high concentration of profitable business accounts. As a result of legislative and regulatory initiatives, however, it is possible that RLECs, including the Company, may become subject to competition. See "Risk Factors--Competition," "Risk Factors--Regulation" and "Business--Competition." HIGH RURAL SWITCHING COSTS DUE TO LACK OF ECONOMIES OF SCALE. RLECs typically lack the economies of scale in switching associated with high call traffic volume and inherently have considerably higher costs per access line and per minute for switching than do larger LECs. Also, RLECs typically serve much smaller communities and therefore typically have smaller central offices than the RBOCs; however, this often does not translate into lower costs for RLECs because software costs, which can account for most of the cost of a switch, are similar regardless of the size of the office. Additionally, RLECs typically own only a few central offices and do not have the negotiating power to demand the discounts enjoyed by larger LECs, which purchase a significant number of switches each year. 46 REVENUE COMPONENTS. RLECs typically receive the majority of their revenue from access charges (the rates IXCs pay to a LEC for use of the LEC's network to originate and terminate toll calls), as compared to the RBOCs which receive a greater percentage of their revenues from basic local service charges. In addition, RLECs on average receive greater USSF revenue to support local telephone service rates in high cost locations than do RBOCs. Although RLECs' residential customers may have lower local service bills than their urban counterparts, they typically have higher long distance bills, which makes the total amount of a typical telephone bill for rural and urban residential customers about the same. The higher long distance bills are the result of smaller local calling areas for rural customers, which requires many of the calls placed for routine daily activities to be toll calls. Unlike urban customers, rural customers often must pay toll rates to make calls considered "local" in the urban settings, including calls to schools, stores, doctors and government agencies. CAPITAL EXPENDITURES. In most years, RLECs' capital expenditures are for (i) capital expenditures for maintenance and (ii) expenditures for any expansions required for growth within the RLEC's service area. Occasionally, however, RLECs are required to make significant capital investments in a particular year to replace a central switch, or to rebuild or upgrade elements or components of the RLEC's local loop. Due to the relatively high cost associated with serving rural telephone properties, universal telephone service could not be provided without the support mechanisms historically made available to RLECs. The government has preserved these support mechanisms in the Telecommunications Act with an established system of cost recovery mechanisms that ensure a minimum rate of return on capital investment in rural telephone assets. As a result, RLECs are entitled to recover a minimum rate of return on all capital invested in regulated telephone assets. See "Regulation." SERVICES The Company offers a broad portfolio of high-quality telecommunications services for residential, business, government and carrier customers in each of the markets in which it operates. The Company's service offerings are locally managed to better serve the needs of each community. The Company believes it is able to efficiently and reliably provide, by using local personnel, all of the telecommunications services required by its customers, thereby allowing the Company to establish and maintain a recognized and respected brand identity within each of its service areas. These include services traditionally associated with local telephone companies, as well as other services such as long distance, multimedia and wireless, and Internet services. Based on its understanding of its local customers' needs, the Company has attempted to be proactive by offering bundled services designed to simplify the customer's purchasing and management process. GENERATION OF REVENUE The Company primarily generates revenue through: (i) the provision of basic local telephone service to customers within its service areas; (ii) the provision of network access to IXCs for origination and termination of interstate and intrastate long distance phone calls; (iii) USSF payments; and (iv) the provision of ancillary services such as billing and collection, long distance resale, enhanced services, wireless services, cable television services, Internet services and customer premises equipment sales. 47 The following chart summarizes each component of the Company's revenue sources for the year ended December 31, 1997:
% 1995 % 1996 % 1997 REVENUE SOURCE REVENUE REVENUE REVENUE DESCRIPTION -------------- ------- ------- ------- ---------------------------------- Basic Local Service 16.8% 18.5% 17.8% Enables the local customer to originate and receive an unlimited number of calls within a defined "exchange" area. The customer is charged a flat monthly fee which is regulated by state agencies. Intrastate Access 35.4% 32.0% 32.8% Enables an IXC to utilize the Company's local network to originate or terminate an intrastate call. The access charge is paid by the IXC to the Company and is regulated by state regulatory agencies. Interstate Access 31.8% 31.1% 30.8% Enables an IXC to utilize the Company's local network to originate or terminate an interstate call. The access charge is paid by the IXC to the Company and is regulated by the FCC. USSF Revenue 8.0% 10.5% 10.0% The Company receives funds to subsidize the cost of providing high cost local telephone service in rural locations. The funds are allocated and distributed to the Company from pools of funds generated by IXCs and LECs. Other Services 8.0% 7.9% 8.6% The Company generates revenues from billing and collection, long distance resale, enhanced services, wireless services, cable services, Internet services and customer premises equipment sales.
BASIC LOCAL SERVICE Basic local service includes basic local lines, ISDN, Centrex, foreign exchange, private lines and switched data services. The Company provides basic local services to residential, business and government customers, generally for a fixed monthly charge. In the RLECs' territories, the amount that the Company can charge a customer for local service is determined by rate proceedings involving the appropriate state regulatory authorities. NETWORK ACCESS CHARGES Network access charges relate to long distance, or toll calls, that typically involve more than one company in the provision of telephone service. Since toll calls are generally billed to the customer originating the call, a mechanism is required to compensate each company providing services relating to the call. The Company bills access charges to the IXC for the use of the Company's facilities to access the customer, as described below: INTRASTATE ACCESS CHARGES. The Company generates intrastate access revenue when an intrastate long distance call (which involves an IXC) is originated by a customer within the same state but in another local access and transport area ("LATA," i.e., the calling area controlled by a LEC). The IXC pays the Company an intrastate access payment for either terminating or originating the call. The Company records the details of the call through its carrier access billing system ("CABS") and receives the access payment from the IXC. When a customer of the Company originates the call, the Company typically provides billing and collecting for the IXC through a billing and collection agreement. The access charge for the Company's intrastate service is regulated and approved by the state regulatory authority. INTERSTATE ACCESS CHARGES. The Company generates interstate access revenue when an interstate long distance call is originated by a customer calling from a LATA in one state to a LATA in another state. The Company bills interstate access charges in the same manner as it bills intrastate access charges; however, the interstate access charge is regulated and approved by the FCC instead of the state regulatory authority. 48 USSF REVENUE The USSF supplements the amount of local service revenue received by the Company to ensure that basic local service rates for customers in high cost rural areas are consistent with rates charged in lower cost urban and suburban areas. The USSF is funded by monthly customer fees charged to IXCs and administered by the USAC which then distributes funds to the Company on a monthly basis based upon the Company's costs for providing local service. See "Regulation." OTHER SERVICES The Company seeks to capitalize on its local presence and network infrastructure by offering services to customers such as long distance, enhanced services, wireless services, cable services, Internet services, billing and collection for IXCs and customer premises equipment sales. LONG DISTANCE RESALE. In 1997, the Company began offering long distance services to its customers in select markets. The Company offers switched and dedicated long distance services throughout its service areas through resale agreements with national IXCs. In addition, in late 1997, the Company began to offer wholesale long distance services to other independent telephone companies. Currently, the Company provides long distance services to four other independent telephone companies, principally in the northeastern United States. As of June 30, 1998, the Company's wholesale customers had subscribed to approximately 8,200 access lines of the Company's long distance service. The Company plans to increase its wholesale marketing effort, with a continuing emphasis on independent telephone companies. No formal budget or schedule has been prepared for expanding the wholesale marketing effort since management is still in the planning stages of such effort including: (1) concluding negotiations with a nationwide, facilities-based carrier; and (2) building relationships from which prospective companies, or consortiums of companies, are identified. Management is attempting to formulate strategies and gather the data which it believes necessary to successfully grow this business segment. ENHANCED SERVICES. The Company's advanced digital switch platform allows it to offer enhanced services such as call waiting, call forwarding, call return, continuous redial, caller ID, voice mail, teleconferencing, video conferencing, store-and-forward fax and follow-me numbers. As of June 30, 1998, approximately 36% of the Company's customers subscribed to one or more enhanced services. WIRELESS SERVICES. The Company owns interests in various RSA or MSA properties and also operates a paging subsidiary in western Kansas. The Company resells cellular services in western New York State and may expand this wireless reseller strategy to other markets. The Company owns a PCS license in the Yakima Valley region. CABLE AND DIRECT BROADCAST SATELLITE ("DBS") SERVICES. The Company currently offers cable television services to customers in its New York and Colorado telephone markets. The Company continually evaluates opportunities to expand these markets or add DBS resale to its existing markets where appropriate. INTERNET SERVICES. The Company offers dedicated and dial-up Internet access services in certain of its service areas. The Company operates and manages its own servers and is also an agent for a third-party Internet service provider. The Company currently provides Internet services to over 3,460 customers in select markets, representing an average penetration rate in such markets of 9.2%. BILLING AND COLLECTION. Many IXCs provide long distance services to the Company's RLEC customers and elect to use the Company's billing and collection services. The Company charges IXCs a billing and collection fee for each call record generated by the IXC's customer. CUSTOMER PREMISES EQUIPMENT SALES. In its New York markets, the Company sells and services equipment on its customers' premises. This equipment includes private branch exchanges, key systems, telephone sets and accessories. In addition, the Company offers inside wire maintenance plans to most of its customers. 49 SALES AND MARKETING The Company's marketing approach emphasizes locally-managed, customer- oriented sales, marketing and service. The Company believes most telecommunications companies devote their resources and attention primarily toward customers in more densely populated markets. The Company seeks to differentiate itself from its competitors by providing a superior level of service to each of the customers in the rural market it serves. Each of the Company's RLECs has a long history in the communities it serves. It is the Company's policy to maintain and enhance the strong brand identity and reputation that it enjoys in its markets, as it believes this is a significant competitive advantage. As the Company markets new services, or reaches out from its franchised territories to serve other markets as a CLEC, it will seek to continue to utilize its brand identity in order to attain higher recognition with potential customers. To demonstrate its commitment to the markets it serves, the Company maintains local offices in most of the population centers within its service territories. These offices are typically staffed by local residents and provide sales and customer support services in the community. The Company believes that local offices facilitate a direct connection to the community, which improves customer satisfaction and loyalty. The Company intends to open additional offices in its larger markets as it expands its CLEC operations. Many of the RLECs acquired by the Company have not traditionally devoted a substantial amount of their operating budget to sales and marketing activities. After acquiring the RLECs, the Company typically changes this practice to provide additional support for existing products and services as well as to support the introduction of one or more new services. The Company expects to substantially increase its sales and marketing staff over the coming years, particularly to support expansion of its CLEC activities. As of May 31, 1998, the Company had 107 employees engaged in sales, marketing and customer service. The Company has two basic tiers of customers: (i) local customers located in the Company's LATAs who pay for local phone service and (ii) the IXCs which pay the Company for access to customers located within the Company's LATAs. In general, the vast majority of the Company's local customers are residential, as opposed to business, which is typical for rural telephone companies. In addition, no single customer within any of the Company's RLECs represents more than one half of one percent of such RLEC's total revenue. Compensation for interstate access services is based on reimbursement of costs and an allowed rate of return. This compensation is received from the National Exchange Carrier Association in the form of monthly settlements. Such compensation amounted to 31.8%, 30.8% and 30.0% of revenues in 1995, 1996 and 1997, respectively. The Company also derives significant revenues from Nynex, principally from network access and billing and collecting service. Such compensation amounted to 27.5%, 20.1% and 16.3% of revenues in 1995, 1996 and 1997, respectively. COMPETITION The Company believes that the Telecommunications Act of 1996 (the "Telecommunications Act") as well as other recent actions by the FCC and state regulatory authorities promote competition in the provision of telecommunications services; however, many of the competitive threats now confronting the large telephone companies do not currently exist in the RLEC marketplace. Since the enactment of the Communications Act of 1934 and its reaffirmation in the Telecommunications Act, regulations promoting "universal service" have allowed RLECs to maintain advanced technology while keeping prices affordable for rural customers. In light of the high cost per access line of installing lines and switches and providing telephone service in sparsely-populated rural areas, a system of cost recovery mechanisms has been established to, among other things, keep rural customer telephone charges at a "reasonable" level and yet allow owners of rural telephone companies to earn a fair return on their investment. These cost recovery mechanisms, which are generally unavailable to an RLEC's competitors, have resulted in robust RLEC telecommunications networks and an economic barrier to entry for potential competitors. All of the Company's telephone operating subsidiaries currently qualify as RLECs as defined under the Telecommunications Act. See "Regulation." 50 In markets where the Company implements its CLEC strategy, the Company will be subject to competition from ILECs in those markets, and possibly other CLECs. In addition, the Company may compete against other CLECs for customer business. The ongoing consolidation in the CLEC industry could change the nature of the Company's competitive environment. The Company will be subject to competition for suitable acquisition candidates from other competitors engaged in the acquisition of RLECs. There is a pool of over 1,300 small independent companies from which the Company has historically chosen its acquisition candidates; however, a continuing trend toward business combinations and alliances in the telecommunications industry may increase competition for such acquisition candidates. The Company believes it has a proven track record of identifying suitable acquisition candidates, negotiating acceptable terms for their acquisition and successfully completing acquisitions, which gives it a competitive advantage in identifying and completing future acquisitions. NETWORK FACILITIES As of December 31, 1997, (i) the Company's RLEC franchise areas included 60 exchanges serving 48,731 access lines that were located across approximately 9,400 square miles and (ii) the Company maintained over 6,700 miles of copper plant and 600 miles of fiber optic plant that interconnects the Company's remote central offices with IXCs serving the Company's subscribers. Upon completion of the Taconic acquisition, Chouteau acquisition, Ellensburg acquisition and the Pending Acquisition, as of December 31, 1997, the Company on a pro forma basis would have operated 92 exchanges serving over 123,000 access lines that were located across approximately 12,000 square miles served by over 12,500 miles of copper and 900 miles of fiber optic plant. All of the Company's host and central office sites have advanced digital switches manufactured by Nortel or Siemens and up to date software which allows the Company to provide advanced calling features, products and services to its rural subscribers. The outside plant consists of transport and distribution delivery networks connecting the Company's host central office with remote central offices and ultimately to the Company's customers. Fiber optic technology is being deployed throughout the Company's network and is the primary transport technology between the Company's host and remote central offices and interconnection points with the RBOCs, GTE, long distance carriers or other RLECs. Where topography and geography permit, cable is generally buried reducing the risk of service interruption from adverse weather. The Company believes that its facilities exceed generally accepted industry standards and are maintained to provide high quality customer service. The Company's fiber optic transport systems are primarily synchronous optical networks ("SONET"), allows the Company to build and design more durable networks, while utilizing the less durable asynchronous optical systems for limited local or specialized applications. The Company's fiber optic transport system is capable of supporting increasing customer demand for high bandwidth transport services and applications. For example, the Company has deployed 100Mb/sec transport systems for high speed data and fiber optic based Interactive Video Distance Learning Systems to serve certain area schools and education consortia. In addition, the Company is considering the deployment of asynchronous digital subscriber line ("ADSL") technologies, which allow for improved technical performance on rural copper plant. The Company believes that the addition of ADSL technology on rural copper plant combined with the Company's advanced fiber optic facilities will significantly enhance the Company's competitive position and ability to deploy higher revenue services throughout its entire network. The Company has integrated numerous elements of its network to offer a variety of services and applications that it believes are required to serve increasingly sophisticated rural communications customers. These network elements include SS7 signaling networks, voice messaging platforms, switch based large Meet-Me Conference Bridges, switched 56Kb/sec digital data and ISDN lines, and numerous customer located key and PBX systems. Since the telecommunications industry is subject to rapid and significant changes in technology, the Company consistently endeavors to introduce additional elements of functionality to its network, including Frame Relay and ATM switches, Local Number Portability, Advanced Intelligent Network (AIN) services, and Voice over I/P (Internet) opportunities. 51 The Company has been segmenting its predominantly rural copper plant network into Carrier Serving Areas ("CSA's"), effectively multiplying embedded copper plant capacity and enabling unencumbered service deployment throughout the Company's service areas. The Company's strategy is to push all of the intelligence and unencumbered capabilities of the host digital central office switch and transport closer to its increasingly sophisticated rural communications customers by deploying remote switches throughout the Company's service areas. The Company believes that this strategy will enable it to build a high bandwidth, fully digital, data capable and ready communications infrastructure. The Company maintains numerous communications vendor relationships that the Company believes have resulted in favorable equipment prices for the Company due to its increased aggregate purchase volumes. Although Nortel and Siemens currently supply the Company with most of its digital central office equipment, the Company believes that vendor competition will result in additional unit costs reductions which will be made available to the Company. The Company plans to prudently invest capital to maintain, replace and upgrade its entire telecommunications infrastructure. The Company continually reviews expenditures to ensure they are economically justifiable and result from an integrated network planning process that considers age, maintenance history, market requirements, customer growth and acceptable returns on capital. For the year ending December 31, 1998, the Company has budgeted annual capital expenditures of approximately 22% for normal growth and maintenance, 15% for general support facilities, 37% for central office, and 26% for outside plant requirements. INTERSTATE BILLING AND SETTLEMENT Most of the Company's billing is administered by Mid America Computer Corporation ("MACC"), a billing company located in Blair, Nebraska, as follows: LOCAL SERVICE. On a monthly basis, the Company provides MACC with local service billing information from the Company's accounting center located in Dodge City, Kansas. Both local service and long distance charges are printed on the local customer's bill. Although a few of the Company's customers mail their payments to a lock box, most of its customers mail payments, or deliver payments personally, to the Company's local offices. LONG DISTANCE. All information necessary to bill the local customers for long distance calls on behalf of IXCs is stored in the memory of the Company's central office switches. MACC polls these switches on a scheduled basis, downloads the billing data, calculates the charges and includes them on the local customer's bill. MACC then mails the bills to the local customers and simultaneously credits the IXCs with the same amount of long distance revenue. MACC also determines and bills the IXCs a per message billing and collection charge to cover the Company's cost for handling the IXCs' long distance billing functions. From time to time, various IXCs consider assuming responsibilities for their own billing. If one or more IXCs decide to perform their own billing, revenues that the Company receives for performing such billing and collection services could decline. CARRIER ACCESS BILLING SYSTEM. During the process of calculating long distance charges to bill the local customers, MACC also calculates access charges and bills the IXCs through CABS. The IXCs then remit these access charges to the Company which in turn returns such charges to the National Exchange Carrier Association ("NECA"). The monthly settlement payment the Company receives from NECA is an amount based upon the invested capital and operating expenses of the Company allocated to the interstate jurisdiction. See "Regulation." 52 EMPLOYEES As of May 31, 1998, the Company employed a total of 427 full-time employees, of whom 86 were represented by unions. The Company has collective bargaining agreements with (i) Local 23-26 of the International Brotherhood of Electrical Workers (AFL-CIO) 107 covering 7 employees employed by its Northland Telephone Company of Vermont subsidiary; (ii) Local 1115 of the Communications Workers of America, covering 15 employees employed by its Chautauqua & Erie Telephone Corp. subsidiary in New York; and (iii) Local 166 of the International Brotherhood Electrical Workers (AFL-CIO), covering 64 employees employed by its Taconic Telephone Corp. subsidiary in New York. The contracts expire in February 1999, January 2000 and March 2000, respectively. The Company believes that its relations with its employees are good. Following the Pending Acquisition, the Company expects to employ approximately 522 employees. PROPERTIES The Company owns most of its administrative and maintenance facilities, rolling stock, central office and remote switching platforms and outside plant. Administrative and maintenance facilities are generally located in or near community centers. Central offices are often within the administrative building and outlying customer service centers. Auxiliary battery or other non-utility power sources are at each central office to provide uninterrupted service in the event of an electrical power failure. Transport and distribution network facilities (outside plant) include fiber optic backbone and copper wire distribution facilities which connect customers to remote switch locations or to the central office and to points of presence or interconnection with the IXCs. These facilities are located on land pursuant to permits, easements or other agreements. Rolling stock includes service vehicles, construction equipment and other required maintenance equipment. The Company believes that all facilities are well maintained and generally meet or exceed industry standards. LEGAL PROCEEDINGS The Company currently and from time to time is involved in litigation and regulatory proceedings incidental to the conduct of its business, but the Company is not a party to any lawsuit or proceeding which, in the opinion of the Company, is likely to have a material adverse effect on the Company. On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A. Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May ("May"), who is a former officer of S T Long Distance (a subsidiary of STE), Siesta Telecom, Inc. ("Siesta"), which is a company controlled by May, and S T Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota County, Florida. From March 1997 through early 1998, S T Long Distance provided long distance services to Plaintiffs in connection with Plaintiffs' prepaid telephone card distribution business. Plaintiffs have alleged, among other things, that May, Siesta and S T Long Distance have engaged in fraud, misappropriation of trade secrets, unfair competition, deceptive trade practices and trade slander; and that May, Siesta and S T Long Distance have breached various contractual obligations to the Plaintiffs and received certain overpayments from the Plaintiffs. Plaintiffs seek approximately $1 million in damages relating to such alleged overpayments, and unspecified monetary damages and injunctive relief relating to certain other matters. The Company intends to vigorously contest all of the Plaintiffs' allegations, and believes that it has no liability to the Plaintiffs. While the outcome of such litigation cannot be predicted, the Company does not believe that such litigation, even if determined adversely to the Company, would have a material adverse effect on its financial condition or results of operations. 53 REGULATION INTRODUCTION The following summary of regulatory developments and legislation does not purport to describe all present and proposed federal, state, and local regulations and legislation affecting the telecommunications industry. Other existing federal and state laws and regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals that could change, in varying degrees, the manner in which this industry operates. Neither the outcome of these proceedings, nor their impact upon the telecommunications industry or the Company, can be predicted at this time. This section also sets forth a brief description of regulatory and tariff issues pertaining to the operation of the Company. OVERVIEW. The Company's services are subject to varying degrees of federal, state and local regulation. The FCC exercises jurisdiction over all telecommunications common carriers, including the Company, that provide, originate or terminate interstate or international communications. State regulatory commissions retain jurisdiction over most of the same companies to the extent they originate or terminate intrastate communications. FEDERAL REGULATION. The Company must comply with the Communications Act of 1934, as amended (the "Communications Act"). The Telecommunications Act of 1996 (the "Telecommunications Act") brought about comprehensive changes to the Communications Act, effecting plenary changes in regulation at both the federal and state levels that affect virtually every segment of the telecommunications industry. The Telecommunications Act is intended to promote competition in all areas of telecommunications and to reduce regulation. While the Company believes that it will take years for the industry to experience the full impact of the Telecommunications Act, it is already clear that the legislation provides the Company with both opportunities and challenges. Although the Telecommunications Act substantially revised the Communications Act and was intended, among other things, to eliminate certain regulatory burdens, telecommunications carriers such as the Company continue to be subject to ongoing regulatory requirements. Among other regulatory mandates, the FCC requires common carriers to file periodic reports concerning interstate circuits and deployment of network facilities. The FCC also requires carriers providing access services to file tariffs with the FCC reflecting the rates, terms and conditions of those services. These tariffs are subject to review and potential objection by the FCC or third parties. The FCC also requires prior approval of transfers of control and assignments of operating authorizations by FCC-regulated entities. The FCC generally has the authority to condition, modify, cancel, terminate or revoke operating authority for failure to comply with applicable federal laws or rules, regulations and policies of the FCC. Fines or other penalties also may be imposed for such violations. The FCC has required that telephone operating companies, like the Company, that provide interstate or international long distance services originating from their local exchange service territories, must do so in accordance with structural separation rules. These rules require that the Company's long distance affiliate (1) maintain separate books of account, (2) not own transmission or switching facilities jointly with the local exchange affiliate, and (3) acquire any services from its affiliated local exchange telephone company at tariffed rates, terms and conditions. This ruling is currently being challenged on reconsideration before the FCC. If the ruling is upheld, the Company could face increased costs related to the operation of its long distance business. STATE REGULATION. Local service rates generally are regulated by state regulatory agencies, which usually are called public service commissions or public utility commissions ("PUCs"). Many PUCs have traditionally regulated pricing through "rate of return" regulation that focuses on authorized levels of earnings by LECs. As part of the movement toward deregulation, several states are moving away from traditional rate of return regulation towards "price cap" regulation and incentive regulation. Currently, however, in most states the Company continues to be regulated under rate of return regulation. Many PUCs also regulate the purchase and sale of LECs, prescribe certain accounting procedures, and regulate various other matters, including service standards and operating procedures. PUCs, like the FCC, can 54 sanction a carrier, order fines and penalties, or revoke authorizations for violations of applicable state laws and PUC regulations. In most states, the Company is required to file tariffs setting forth the terms, conditions, and prices for services that are classified as intrastate. While state procedures with respect to tariffs vary, these tariffs generally are subject to review and potential objection by PUCs or third parties. LOCAL REGULATION. The Company is also subject to numerous local regulations, such as building code requirements. These regulations may vary greatly from state to state and from city to city. TELECOMMUNICATIONS ACT As discussed in greater detail below, passage of the Telecommunications Act, coupled with certain state legislative and regulatory initiatives and technological changes, has fundamentally altered the telecommunications industry by permitting additional competition and reducing some regulations. Although the Company anticipates that these trends towards reduced regulation and increased competition will continue, the Company cannot predict the form or degree of future regulation and competition which will exist in the Company's service areas. As a result of the passage of the Telecommunications Act, LECs, including RLECs, face the prospect of being subject to competition for the first time in the provision of traditional local telephone and intrastate toll services. However, the Telecommunications Act also provides for the codification of the principles of "universal service" and establishes safeguards to foster the provision of telecommunications services in the areas served by RLECs by adopting an explicit federal USSF. See "--Promotion of Universal Service." The implementation of the Telecommunications Act has included the establishment of new rules for interconnection between competing carriers and the development of new universal service fund programs. The Telecommunications Act provides that LECs are entitled to recover their costs and may receive a reasonable profit for providing interconnection to competitors. In addition, the Telecommunications Act requires that the FCC and states ensure that affordable service is provided to consumers in rural, insular and high cost areas of the country (i.e., universal service). Nevertheless, the ability to recover adequately costs of interconnection and to ensure universal service are dependent on the decisions of the FCC and state regulatory bodies, which could in the future take actions that affect the Company's ability to continue to operate at a profit. The Telecommunications Act makes competitive entry into the telecommunications industry more attractive to other carriers by, among other things, removing most state and local barriers to competition, and may increase the level of competition the Company faces. In particular, after notice and an opportunity for comment, the FCC may preempt a state requirement that prohibits or has the effect of prohibiting a carrier from providing intrastate or interstate telecommunications services. THE PROMOTION OF LOCAL SERVICE COMPETITION AND RURAL TELEPHONE COMPANIES As discussed above, the Telecommunications Act provides, in general, for the removal of barriers to entry into the telecommunications industry in order to promote local service competition. Congress, however, recognized that states should not be prohibited from taking actions necessary to preserve and advance universal service, and further recognized that special consideration should be given to the appropriate conditions for competitive entry in areas served by RLECs. Pursuant to the Telecommunications Act, LECs, including both ILECs and new competitive carriers, are required to: (i) allow others to resell their services at retail rates; (ii) ensure that customers can keep their telephone numbers when changing carriers; (iii) ensure that competitors' customers can use the same number of digits when dialing and receive nondiscriminatory access to telephone numbers, operator service, directory assistance and directory listings; (iv) ensure access to telephone poles, ducts, conduits and rights of way; and (v) compensate competitors for the competitors' costs of completing calls to competitors' customers. Competitors are required to compensate the ILEC for the cost of providing these interconnection services. 55 Under the Telecommunications Act, the Company, as a rural carrier, is eligible to request exemption, suspension or modification of any or all of the requirements described above from state PUCs. A PUC may grant such a petition to the extent that it determines that such suspension or modification is necessary to avoid a significant adverse economic impact on telecommunications users generally, to avoid imposing a requirement that is technically unfeasible or unduly economically burdensome, and that such suspension or modification is consistent with the public interest. It is not known at this time how state regulators will respond to such a request. If the regulators deny some or all of a request and if the regulators do not allow the Company adequate compensation for the costs of providing interconnection, the Company's costs could increase. In addition, with such a denial, competitors could enjoy benefits that would make their services more attractive than if they did not receive such interconnection rights. Pursuant to the Telecommunications Act, with certain exceptions, ILECs are required to: (i) interconnect their facilities and equipment with any requesting telecommunications carrier at any technically feasible point; (ii) unbundle and provide nondiscriminatory access to network elements (such as local loops, switches and transport facilities) at nondiscriminatory rates and on nondiscriminatory terms and conditions; (iii) offer their retail services for resale at wholesale rates; (iv) provide reasonable notice of changes in the information necessary for transmission and routing of services over the ILEC's facilities or in the information necessary for interoperability; and (v) provide, at rates, terms and conditions that are just, reasonable and nondiscriminatory, for the physical co-location of equipment necessary for interconnection or access to unbundled network elements at the premises of the ILEC. Competitors are required to compensate the ILEC for the cost of providing these interconnection services. However, pursuant to the Telecommunications Act, the Company, as a rural telephone carrier, is also automatically exempt from these additional ILEC requirements. This exemption can be lifted or modified by a state PUC if a competing carrier files a bona fide request for such interconnection, services, or network elements. If such a request is filed by a potential competitor with respect to one of the Company's operating territories, the Company is likely to ask a state PUC to retain the exemption. A PUC may grant such a potential competitor's petition to the extent that it determines such interconnection request is not unduly economically burdensome, is technically feasible and is consistent with universal service obligations. If a state PUC lifts such exemption in whole or in part and if the state PUC does not allow the Company adequate compensation for the costs of providing the interconnection, the Company's costs would significantly increase and it could suffer a significant loss of customers to competition. Finally, the FCC issued an order in May 1997 that directed that ILECs could not impose access charges on long distance and other carriers that purchase unbundled network elements from the ILECs. This decision could serve to reduce access revenues for the Company and other ILECs. Several parties have appealed this and other aspects of the FCC's May 1997 order, but the Company is unable to predict the outcome of such appeals at this time. The risk to the Company from competitive entrants into its local telephone markets must be weighed against any new opportunities the Company could take advantage of in terms of new services offerings, such as interstate service, Internet access, PCS or other wireless service, cable TV or international services. The Company believes that competition in its telephone service areas will ultimately increase as a result of the Telecommunications Act, although the form and degree of competition cannot be ascertained until such time as the FCC (and, in certain instances, state regulatory bodies), adopts final regulations. PROMOTION OF UNIVERSAL SERVICE Newly codified universal service principles are being implemented by both the FCC and the state PUCs. One of the initial changes that has been implemented is that USSF funds are distributed only to carriers that are designated as eligible telecommunications carriers ("ETCs") by a state PUC. All of the Company's telephone operating companies have been designated as ETCs pursuant to the Telecommunications Act. In order to promote competition in areas served by incumbents that are not RLECs, the Telecommunications Act requires the designation of two or more ETCs. In areas served by RLECs, however, the Telecommunications 56 Act provides that a state PUC may designate more than one ETC only after determining that the designation of an additional ETC will serve the public interest. As a result, an incumbent RLEC has an opportunity to maintain its status as the sole recipient of USSF payments in its service area even if it is subsequently subjected to competition. All of the Company's telephone operating companies have been designated as RLECs pursuant to the Telecommunications Act. RLECs temporarily will receive USSF payments pursuant to existing mechanisms for determining the amounts of such payments with some limitations, such as on the amount of corporate operating expense that can be recovered from the USSF. In 2001, after a transition period, RLECs will secure USSF payments based upon forward-looking economic costs. The FCC is expected to initiate a proceeding in October 1998 to develop "cost proxy models" to establish the forward- looking costs of RLECs, and the Federal-State Joint Board on Universal Service is establishing a working group to assist in that process. The FCC is engaged in a proceeding to revise the methodology for determining universal service support. It is uncertain whether the proxy model will allow for an accurate cost assessment for rural telephone companies. Also, even if the model accurately predicts the forward looking economic costs of an RLEC, if that number is significantly less than its embedded costs, full cost recovery will not be assured. Several parties have expressed objections to the size of the fund and the services eligible for subsidization. In addition, the FCC also decided that it would fund only 25% of the nationwide universal service costs, leaving to the states the responsibility to fund the remaining 75% of the costs. Parties, including state PUCs, also have objected to the recovery of only 25% of costs in the federal USSF, arguing that the remaining burden on states will result in increased rates for local services. In addition, there are a number of petitions for reconsideration challenging several aspects of the Commission's universal service rules. Legislation has been introduced that would require the FCC to modify the rules. It is not possible to predict at this time whether the FCC or Congress will order modification to the fund, or the ultimate impact from any such modification on the Company. COST RECOVERY OF REGULATED SERVICES; SOURCES OF REGULATED REVENUES INTRODUCTION As regulated common carriers, RLECs are entitled by law to an opportunity to recover the reasonable costs they incur in the provision of regulated telecommunications services and to earn a reasonable rate of return on the investment required to provide the regulated services. The costs of providing regulated services are recovered through rates established by the appropriate regulatory authority (i.e., the FCC for interstate services and generally the state PUC for intrastate services). For RLECs, the cost recovery process may also be achieved through the application of "pooling" and distributions from the USSF. In general, the rate regulated services provided by RLECs include basic local exchange services and interexchange access service that entails originating and terminating connections of the local telephone network to long distance networks. The rate making process for LEC rate regulated services is complicated by the fact that the costs incurred by LECs in the provision of rate regulated services are utilized for both local exchange services and interexchange access services. Moreover, the provision of interexchange access service is required for the origination and termination of both interstate and intrastate long distance calls. The fact that a cost incurred by a carrier may be simultaneously associated with the provision of both interstate and intrastate services results in the need to allocate the costs between the jurisdictions for rate making purposes. This process is referred to as "separations" and is governed by the FCC's rules and regulations. The underlying legal purpose of the separations rules is to define how a carrier's expenses are to be allocated between the federal and state jurisdiction--i.e., how much of the company's costs are recovered from the interstate jurisdiction and how much from the intrastate jurisdiction. Because government regulators generally recognize that such an allocation could have a significant impact on RLECs' abilities to provide needed services to their customers, such regulators typically allow RLECs to 57 recover a reasonable level of expenses and return on investment while concurrently charging acceptable service rates regardless of the demographics and economic market conditions of their rural service areas. INTERSTATE REGULATION Although the network of a RLEC may be confined to its facilities within a state, the RLEC is subject to FCC regulation of the rates it charges for interstate access service. ESTABLISHMENT OF INDIVIDUAL ACCESS SERVICE COSTS. To the extent that a telecommunications carrier engages in the provision of any nonregulated services, interstate or otherwise, the applicable law requires that the provision of any such services can not be subsidized by the provision of regulated services. Accordingly, when a carrier incurs an expense that is utilized for the provision of both regulated and nonregulated service, the FCC requires the carrier to engage in a process similar to the separations process described above in order to first allocate expenses between regulated and nonregulated services. After identifying the LEC's regulated costs, the carrier applies a separation analysis to identify the company's interstate costs or revenue requirements including its authorized rate of return. The rates for interstate access services are established to allow LECs to recover their identified interstate costs. One of the most significant of such costs are those associated with deployment of the local loop. As a general rule, the FCC has determined that, with certain limited exceptions, 25% of the cost of a local loop will be allocated to the interstate jurisdiction. The FCC has established a rate structure that provides for the recovery of these costs (up to an established level per month) directly from the end user customer through the assessment of a subscriber line charge. Generally, the remaining interstate portion of the loop costs are recovered from access charges, assessed in accordance with FCC rules, to the long distance carriers for the utilization of the local loop to originate and terminate interstate long distance calls. As a result of the market and geographic conditions in rural areas, the costs of providing local loop and switching services are often higher for RLECs than for other LECs. In the absence of an accommodation in the FCC rules to address this fact, a substantial portion of an RLEC's costs would remain unrecovered, and it would have little alternative other than to charge very high rates for intrastate services. Accordingly, the FCC provides for additional interstate recovery by eligible RLECs through the USSF, which is available to those companies whose loop costs are significantly above the national average as calculated pursuant to the FCC rules. In addition, the FCC rules also provide for additional interstate cost recovery of switching costs for smaller companies serving fewer than 50,000 access lines. INDIVIDUAL COMPANY ACCESS TARIFFS OR THE NECA TARIFF. The purpose of applying the FCC's separations and access rules is to identify the interstate allocation of costs to be recovered from each of the various access rate elements. Individual LEC interstate access service rates are developed on the basis of the individual LEC's determination of its access costs divided by its projected demand for each service. The resulting individual company rates are published in a company's interstate access tariff and filed with the FCC, where they are subject to challenge by third parties and FCC review. The FCC recognized that this individual company rate making and tariff filing process may be administratively and economically burdensome for small LECs. In order to address this concern, the FCC established the National Exchange Carrier Association ("NECA") in 1983. Among the duties and responsibilities assigned to NECA is the development of interstate access service tariff rates, terms, and conditions in which LECs may concur. NECA develops interstate access rates on the basis of data that is provided individually by each LEC that participates in the various portions of its tariff and that is aggregated for presentation to the FCC. The result yields blended rates based upon averaged costs of all of the participating LECs that reflect a level intended to generate revenue equal to the aggregate costs and a return on the investment of all of the participants. As a result of this process, individual participating LECs are likely to have costs of providing service that are either higher 58 or lower than the revenues generated by applying the NECA tariff rate. In order to rectify this result, the revenues generated by applying the NECA rates are pooled by all of the participating companies and redistributed on the basis of each individual company's costs. The result of this process not only eliminates the burden of individual tariff filing, it also produces a system whereby small companies can share and spread risk. For example, if an RLEC filed its own tariff and subsequently suffered the loss of major customers that utilize interstate access service, the RLEC could suffer significant under-recovery of its costs. In the NECA pool environment, the impact of the loss of access usage and associated revenues is reduced because it is spread over all of the pool participants and may be offset by increases in usage and associated revenues realized through service provided by another pool member. Many of the NECA pool participants derive their interstate revenues from the NECA pool on the basis of "average schedule" settlements as an alternative to reporting their individual company specific costs. By participating in this process, a LEC avoids the requirement of applying the procedures otherwise necessary to separate regulated and nonregulated costs and interstate and intrastate regulated costs. In order to be an average schedule company, a LEC must have been utilizing the average schedules since December 1, 1983, or have been permitted to convert to average schedule status pursuant to an FCC waiver. All average schedule companies must participate in the NECA tariff and, as with all other NECA tariff pool participants, average schedule companies charge for interstate access services on the basis of the rates, terms and conditions set forth in the NECA tariff, and they report their interstate access revenues to NECA. Instead of recovering their company specific identified interstate revenue requirement, however, a company that utilizes average schedules receives payments based on formulas developed by NECA and submitted for approval to the FCC. The average schedule formulas are applied to each average schedule company and produce average schedule settlements for each company that are based in part on the number of access lines served by each company and in part on the number of interstate access messages handled by each company. The average schedule formulas are developed in a manner intended to yield results that would approximate the results derived from the utilization of actual costs based on individual company costs and jurisdictional separations. In practice, an average schedule company will typically receive either more or less revenues than its individual company interstate costs. If the company experiences significant growth in messages without a proportionate increase in costs the formulas provide, to an extent, for growth in revenue. A company that is not currently receiving settlements on an average schedule basis cannot convert to average schedule status without a waiver from the FCC, which has clearly made known its intent that it is not likely to grant any such waiver requests. If a company that utilizes average schedules experiences a decline in usage, or if its growth does not generate revenues that keep pace with increased costs, the company may not recover its actual costs from the average schedules. The FCC rules do permit a LEC to address this concern by converting from average schedule status to an actual cost basis for the determination of its interstate access costs. The FCC rules, however, do not permit a LEC to convert back to average schedules subsequent to its election to convert to a cost based settlement. However, the Company is not an average schedule company. In May 1997, the FCC issued a decision modifying its rules and policies governing interstate exchange access services of ILECs. This decision applied, with limited exceptions, solely to ILECs that are governed by the FCC's price cap system of regulation. As for ILECs that are subject to federal rate-of- return regulation, the FCC stated that it plans to initiate a separate proceeding in 1998. The FCC has also proposed modification of its existing separations procedures, which allocate the costs of facilities providing intrastate and interstate services between the federal and state jurisdictions. The outcome of each of these proceedings, and their ultimate impact on the Company, cannot be predicted at this time. INTRASTATE JURISDICTION Intrastate Revenue Requirement and Rate Regulation. A LEC incurs expenses that are utilized for the provision of both interstate and intrastate services. The FCC rules establish the separations process that identifies 59 the LEC's interstate costs. The remainder of the costs represent the LEC's intrastate costs. Generally, the LEC's intrastate regulated revenue requirement is recovered by the revenues the rates for which are established by the LEC generates from its intrastate regulated services, in accordance with the applicable rules of each state. Although the rules and processes vary from state to state, general principles emerge that are useful in understanding intrastate regulated cost recovery. The following discussion is limited to those general principles and does not address specific states or the development of intrastate incentive regulation mechanisms. As with federal incentive regulation programs, however, these alternative regulatory systems are generally useful only for RLECs that have lower than average costs and serve areas with a likelihood of continued high growth. INTRASTATE INTRALATA TOLL AND INTRASTATE ACCESS CHARGES. Intrastate regulated services are generally subject to traditional "rate of return" regulation. The intrastate regulated services provided by RLECs can typically be divided into three categories: intrastate interLATA access service; intrastate intraLATA access and long distance service; and local services. The term LATA is a remnant from the break-up of the Bell system. In connection with the divestiture of the local operating companies from AT&T, the RBOCs were limited to providing service within a LATA or a group of LATAs; AT&T and other long distance carriers handled traffic between LATAs. As a result, the shorter haul long distance calls within a LATA were generally handled by an RBOC together with any other LECs providing service within the LATA. The rules regarding the provision of intraLATA toll service are changing to provide for competitive choice in the same way interLATA toll service is offered. In addition, the Telecommunications Act permits RBOCs to provide intraLATA services outside of their regions, and within their region conditioned upon a demonstration that the RBOC had opened its local markets to competition. To date, no RBOC has been deemed by the FCC to have made this demonstration. The amount of competition to which the Company is subject may also be affected by a recent decision of the U.S. District Court in Texas invalidating those portions of the Telecommunications Act that prohibit RBOCs from providing certain services, including in-region intraLATA services. The decision has been stayed, and an appeal is currently pending. While all states have established an access charge environment for LECs to charge long distance carriers for originating and terminating intrastate long distance calls, variations exist among the states with respect to the treatment of the role of the RLECs in the provision of intrastate intraLATA toll service. The development of service specific costs and rates for the establishment of intrastate regulated services also varies among the states. Some states require the utilization of the FCC separations rules with state specific modifications to specifically identify an intrastate toll and access revenue requirement. In other states, intrastate access rates are adopted that mirror interstate access rates as an alternative to the development of LEC specific intrastate access costs and rates. Another variation that has developed is a process that has resulted in the establishment of intrastate access charges and subsequent modifications through industry negotiation and consensus. LOCAL SERVICE RATES. Regardless of the variation of the process utilized to establish the intrastate access rates, the local service revenue requirement is residually derived as the remaining costs. Local services include basic service rates, custom calling features, installation and repair services, and any other services that are not designated interexchange (including extended area service, measured usage, area calling plans and other variations of services that are not subject to long distance charges). PENDING REGULATORY CHANGE AND CONCLUSION. Although there is no single model for state regulatory change, many states have initiated proceedings to review the level of intrastate access charges and to consider changes in the provision of intraLATA toll services. Concurrent consideration is often given to issues regarding whether decreased revenue resulting from reduced access charges should be offset by increases in local service rates; or support from a state universal service funding mechanism. 60 MANAGEMENT The directors and executive officers of the Company are listed below. Executive officers are generally elected annually by the Board of Directors to serve, subject to the discretion of the Board of Directors, until their successors are appointed. There are currently eight members of the Board of Directors.
NAME AGE POSITION - ------------------------ --- ----------------------------------------------------------------------- Daniel G. Bergstein..... 54 Co-Founder, Director Meyer Haberman.......... 56 Co-Founder, Director Jack H. Thomas.......... 56 Co-Founder, Chairman of the Board of Directors, Chief Executive Officer Eugene B. Johnson....... 51 Co-Founder, Vice Chairman of the Board of Directors, Executive Vice President, Assistant Secretary Walter E. Leach, Jr..... 46 Senior Vice President, Chief Financial Officer and Secretary John P. Duda............ 51 President and Chief Executive Officer--Local Telecom Group Timothy W. Henry........ 42 Vice President of Finance and Treasurer George E. Matelich...... 41 Director Reid G. Leggett......... 42 Director Nelson Schwab III....... 53 Director Frank K. Bynum, Jr. .... 35 Director
DANIEL G. BERGSTEIN. Mr. Bergstein is a founder and has been a director of the Company since 1991. Since 1988, Mr. Bergstein has been a senior partner in the New York office of the national law firm Paul, Hastings, Janofsky & Walker LLP, where he is the Chairman of the Firm's Corporate Department as well as its National Telecommunications Practice. Mr. Bergstein is a corporate and securities lawyer, specializing in mergers and acquisitions and corporate finance transactions. MEYER HABERMAN. Mr. Haberman is a founder and has been a director of the Company since 1991. Since 1973, Mr. Haberman has been the principal shareholder, President and Chief Executive Officer of Interquest Incorporated, an international management consulting and executive search firm which he founded. JACK H. THOMAS. Mr. Thomas is a founder and has been a director of the Company since 1991 and has acted as President and Chief Executive Officer since 1993. Mr. Thomas has served as Chairman of the Board of Directors of the Company since August 1998. From 1985 to 1993, Mr. Thomas was Chief Operating Officer of C-TEC Corporation, a diversified telecommunications concern which at the time owned Commonwealth Telephone Company, a 240,000 access line LEC. From 1982 to 1985, Mr. Thomas served as Vice President, Operations of United Telephone Company of Ohio and was a member of its board of directors. Prior to his service with United Telephone Company of Ohio, Mr. Thomas worked for nearly twenty years at C&P Telephone (now a Bell System company) in various positions including division manager from 1976-1982. EUGENE B. JOHNSON. Mr. Johnson is a founder and has been a director of the Company since 1991. Mr. Johnson has served as Senior Vice President of the Company since 1993 and Executive Vice President since February 1998. Mr. Johnson has served as Vice Chairman of the Company since August 1998. From 1987 to 1993, Mr. Johnson served as President and principal shareholder of JC&A, Inc., an investment banking and brokerage firm providing services to the cable television, telephone and related industries. From 1985 to 1987, Mr. Johnson served as the director of the mergers and acquisitions department of Cable Investments, Inc., an investment banking firm. From 1980 to 1985, Mr. Johnson served as President of a cable television construction and engineering company. Mr. Johnson currently is director of OPASTCO, the primary industry organization for small independent telephone companies and serves on its membership education and finance committees. WALTER E. LEACH, JR. Mr. Leach has served as Chief Financial Officer and Secretary of the Company since October 1994 and Senior Vice President since February of 1998. From 1984 through September 1994, Mr. Leach served as Executive Vice President of Independent Hydro Developers, where he had responsibility for all project acquisition, financing and development activities. From 1980 to 1984, Mr. Leach served as Vice President, Investor Relations for The Pillsbury Company and served as Treasurer, Assistant Treasurer and Controller for Burger King Corporation. Mr. Leach's career also includes various finance-related positions at Sambo's Restaurants, Inc. and First Union National Bank where he was the Manager of their New York City office. He is currently a member of the finance committee of the National Telephone Cooperative Association ("NTCA"). 61 JOHN P. DUDA. Mr. Duda has served as Chief Operating Officer of the Company since January 1994 and President and Chief Executive Officer of the Company's Local Telecom Group since August 1998. From 1993 to 1994, Mr. Duda served as Vice President, Operations and Engineering of Rochester Tel Mobile Communications. From 1985 to 1993, Mr. Duda served as State Vice President-- Minnesota, Nebraska and Wyoming and Director of Network Planning and Operations for Pennsylvania and New Jersey for Sprint and from 1970 to 1985 he served in various management positions with C&P Telephone and Bell Atlantic including District Manager--Planning and New Technology for Bell Atlantic Corporation. Mr. Duda is currently on the United States Telephone Association's Board of Directors and serves on its Executive, Regulatory Policy and Small Company committees. He also serves on OPASTCO's Separations and Access Committee. TIMOTHY W. HENRY. Mr. Henry has served as Vice President of Finance and Treasurer of the Company since December 1997. From 1992 to December 1997, Mr. Henry served as Vice President/Portfolio Manager at CoBank, ACB, and managed a $225 million telecommunications loan portfolio which included responsibility for CoBank's relationship with the Company. From 1985 to 1992, he was a Loan Officer/Assistant Vice President for Springfield Bank for Cooperatives. GEORGE E. MATELICH. Mr. Matelich has served as a Director of the Company since July 1997. Mr. Matelich is currently a Managing Director of Kelso & Company ("Kelso"), with which he has been associated since 1985. Mr. Matelich serves on the Boards of Directors of CCA Holdings Corp., CCT Holdings Corp., Charter Communications Long Beach Inc., Harris Specialty Chemicals, Inc. and Humphreys Inc. Mr. Matelich is also a Trustee of the University of Puget Sound. REID G. LEGGETT. Mr. Leggett has served as a Director of the Company since July 1997. Mr. Leggett is currently serving as a Managing Director of Carousel Capital Partners, L.P., with which he has been associated since 1996. From 1988 to 1996, Mr. Leggett served as Managing Director of Bowles Hollowell Conner & Co. From 1993 to 1996, Mr. Leggett served as President and Managing Director of Bowles Hollowell Conner & Co. NELSON SCHWAB III. Mr. Schwab has served as a Director of the Company since July 1997. Mr. Schwab is currently serving as a Managing Director of Carousel Capital Partners, L.P., with which he has been associated since 1996. From 1992 to 1995, Mr. Schwab was Chairman and Chief Executive Officer of Paramount Parks. From 1984 to 1992, Mr. Schwab served as Chairman and Chief Executive Officer of Kings Entertainment Company ("KECO") from which Paramount Parks acquired its regional theme parks in 1992. Mr. Schwab serves on the Boards of Directors of Burlington Industries Inc., First Union National Bank of North Carolina, Summit Properties, Inc., and two privately-held middle market companies. FRANK K. BYNUM, JR. Mr. Bynum has served as a Director of the Company since May 1998. He is also a Managing Director of Kelso. Prior to joining Kelso in 1987, he was an Investment Analyst with The New York Life Insurance Company ("New York Life"). While with New York Life, Mr. Bynum served primarily in the Risk Capital Group, which focused on leveraged buyout and venture capital investments. Mr. Bynum received a B.A. in History from the University of Virginia. Mr. Bynum is a director of Cygnus Publishing, Inc., Hillside Broadcasting of NC, Hosiery Corporation of America, IXL Holdings, Inc. and 21st Century Newspapers, Inc. 62 EXECUTIVE COMPENSATION The following table sets forth the compensation paid or accrued for services rendered to the Company in all capacities, for the year ended December 31, 1997, by the Chief Executive Officer and each of the other executive officers of the Company employed as of December 31, 1997 (the "Named Executive Officers"). The compensation paid to Mr. Thomas and Mr. Johnson was paid by MJD in the form of management fees paid to MJD Partners, L.P. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------------- ------------ OTHER SECURITIES NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION OPTIONS (#) COMPENSATION - ------------------------ ---- -------- ------- ------------ ------------ ------------ Jack H. Thomas.......... 1997 $300,000 $82,500 $69,128 -- -- Chief Executive Officer 1996 260,000 70,000 68,528 -- -- and President 1995 250,000 12,500 99,030 -- -- Eugene B. Johnson....... 1997 240,000 62,000 29,535 -- -- Executive Vice Presi- 1996 182,000 56,000 31,990 -- -- dent and Assistant Secretary 1995 175,000 8,750 29,607 -- -- John P. Duda............ 1997 131,000 31,000 24,018 -- -- President and Chief Ex- 1996 123,000 35,000 22,188 -- -- ecutive Officer--Local Telecom 1995 115,000 30,500 71,337 -- -- Group Walter E. Leach, Jr..... 1997 108,000 32,400 15,598 -- -- Senior Vice President, 1996 100,000 27,000 13,372 -- -- Chief Financial Officer and Secretary 1995 90,000 22,500 15,017 -- -- Patrick Morse........... 1997 86,500 27,850 14,108 -- -- Vice President and Gen- 1996 84,000 16,300 12,970 -- -- eral Manager--STE 1995 84,000 15,500 11,027 -- --
STOCK OPTION PLAN The Company's Stock Option Plan (the "Plan") was adopted on February 22, 1995. The Plan provides for the grant of options to purchase up to an aggregate of 5,684 shares of the Company's common stock (the "Common Stock"). The Plan is administered by the Board of Directors which makes discretionary grants of options to officers or directors and employees of the Company. Options granted under the Plan may be Incentive Stock Options, which qualify for favorable Federal income tax treatment under Section 422A of the Internal Revenue Code of 1986, or Nonstatutory Stock Options. The selection of participants, allotment of shares, determination of price and other conditions of purchase of such options are determined by the Board, in its sole discretion. Each option grant is evidenced by a written Incentive Stock Option Agreement or Nonstatutory Stock Option Agreement dated as of the date of grant and executed by the Company and the optionee. Such agreement also sets forth the number of options granted, the option price, the option term and such other terms and conditions as may be determined by the Board of Directors. As of January 1, 1998, the Board of Directors had granted options to purchase at $50 per share a total of 4,264 shares of the Company's Class A Voting Common Stock to officers, directors and employees. Options granted under the Plan are nontransferable, other than by will or by the laws of descent and distribution. WARRANTS Certain members of management were issued warrants pursuant to their purchases of Series C Preferred Stock of the Company in 1996 and 1997. The Series C Preferred Stock has since been redeemed by the Company. The warrants are exercisable into 83 shares of Common Stock at an exercise price of $0.01 per share. 63 Warrants Issued to Management
ISSUED TO SHARES DATE OF ISSUE EXPIRATION --------- ------ ------------- ---------- Jack Thomas..................................... 3.7 6/7/96 7/16/16 Jack Thomas..................................... 6.63 8/1/96 7/16/16 Eugene Johnson.................................. 7.39 6/7/96 7/16/16 Eugene Johnson.................................. 13.25 8/1/96 7/16/16 John Duda....................................... 5.91 6/7/96 7/16/16 John Duda....................................... 10.6 8/1/96 7/16/16 Walter Leach.................................... 5.31 6/7/96 7/16/16 Walter Leach.................................... 9.51 8/1/96 7/16/16 Daniel Bergstein/Bugger Assoc., Inc............. 7.39 6/7/96 7/16/16 Daniel Bergstein/Bugger Assoc., Inc............. 13.25 8/1/96 7/16/16 ----- Total.......................................... 82.94 =====
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES The following table sets forth the information with respect to the Named Executive Officers concerning the exercise of options during fiscal year 1997, the number of securities underlying options at the 1997 year end and the year end value of all unexercised in-the-money options held by such individuals.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL SHARES ACQUIRED ON YEAR-END (#) EXERCISABLE/ YEAR-END ($) EXERCISABLE/ NAME EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE(1) - ------------------------ ------------------ ------------------ ------------------------- ------------------------- Jack H. Thomas.......... -- -- 1,421 408,537.5 Eugene B. Johnson....... -- -- 1,066 311,805.0 Walter E. Leach......... -- -- 711 207,967.5 John Duda............... -- -- 1,066 311,805.0
- -------- (1) Represents the difference between the exercise price and the fair market value of the Company's common stock at December 31, 1997. EMPLOYEE AGREEMENTS The Company has entered into severance agreements (the "Severance Agreements") with John P. Duda, Jack H. Thomas, Eugene B. Johnson and Walter E. Leach, Jr. (each an "Executive" and, collectively, the "Executives"). Each of the Severance Agreements provides that upon the termination of the Executive's employment due to a Change of Control (as defined below), the Executive is entitled to receive from the Company in a lump sum payment an amount equal to such Executive's base salary as of the date of termination for a period ranging from twelve months to twenty-four months. For purposes of the previous sentence, a "Change of Control" shall be deemed to have occurred if: (a) certain stockholders of the Company no longer own, either directly or indirectly, shares of capital stock of the Company entitling them to 51% in the aggregate of the voting power for the election of the directors of the Company, as a result of a merger or consolidation of the Company, a transfer of capital stock of the Company or otherwise, or (b) the Company sells, assigns, conveys, transfers, leases or otherwise disposes of, in one transaction or a series of related transactions, all or substantially all of its property or assets to any other person or entity. In addition, the Company has agreed to maintain the Executives' long term disability and medical benefits for a similar period. In the event that any Executive's employment with the Company is terminated without cause and not as a result of a Change of Control, such Executive is entitled to receive a lump sum payment from the Company in an amount equal to such Executive's base salary for a period ranging from six months to twelve months and is also entitled to long term disability and medical benefits for a similar period. In the event that any Executive's employment is terminated for cause, such Executive is not entitled to any benefits pursuant to the Severance Agreements. 64 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding beneficial ownership of the Company's common stock ("Common Stock") as of May 31, 1998 for (i) each of the Named Executive Officers and each director of the Company, (ii) all officers and directors of the Company as a group, and (iii) each stockholder of the Company who beneficially owns 5% or more of the Company's Common Stock.
NUMBER OF SHARES PERCENT OF BENEFICIALLY OUTSTANDING OWNED (1) SHARES (1) ------------ ----------- EXECUTIVE OFFICERS AND DIRECTORS: Daniel G. Bergstein (2).............................. 15,258 8.4% Meyer Haberman (3)................................... 9,536 5.3% Jack H. Thomas (4)................................... 11,157 6.1% Eugene B. Johnson (5)................................ 5,501 3.0% John P. Duda (6)..................................... 1,390 0.8% Walter E. Leach, Jr. (7)............................. 916 0.5% Timothy W. Henry..................................... 85 0.05% George E. Matelich (8)............................... 69,779 38.5% Frank K. Bynum, Jr. (8).............................. 69,779 38.5% Reid G. Leggett (9).................................. 69,779 38.5% Nelson Schwab III (9)................................ 69,779 38.5% ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (10 STOCKHOLDERS)................................... 181,015 99.0% 5% STOCKHOLDERS: MJD Partners, L.P. (10).............................. 38,145 21.1% 521 East Morehead Street, Suite 250 Charlotte, North Carolina 28202 Carousel Capital Partners, L.P. (9).................. 69,779 38.5% 201 North Tryon Street, Suite 2450 Charlotte, North Carolina 28202 Kelso Investment Associates V, L.P. and Kelso Equity Partners V, L.P. (8) ............................... 69,779 38.5% 320 Park Avenue, 24th Floor New York, New York 10022
- -------- (1) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares beneficially owned by them, subject to community property laws where applicable. The percentage of beneficial ownership is based on 181,015 shares of common stock outstanding as of May 31, 1998. Vested options granted to purchase 3,766 shares and warrants to purchase 83 shares result in 184,864 fully diluted shares as of May 31, 1998. (2) Includes 15,258 shares owned by MJD Partners, L.P. Mr. Bergstein has an interest of approximately 40% in MJD Partners, L.P. through JED Associates, Inc., a corporation owned 100% by Mr. Bergstein and his immediate family. JED Associates, Inc. beneficially owns 21 warrants to purchase Common Stock. (3) Includes 9,536 shares owned by MJD Partners, L.P. Mr. Haberman has an approximately 25% interest in MJD Partners, L.P. (4) Includes 9,536 shares owned by MJD Partners, L.P. Mr. Thomas has an approximately 25% interest in MJD Partners, L.P. Includes 1,421 shares of Common Stock issuable upon exercise of options that are either currently exercisable or exercisable during the next 60 days; and 200 shares of Common Stock owned by Mr. Thomas individually. Excludes warrants to purchase 10 shares of Common Stock. (5) Includes 3,815 shares owned by MJD Partners, L.P. Mr. Johnson has a 10% interest in MJD Partners, L.P. Includes 1,066 Common Stock issuable upon exercise of options that are either currently exercisable or exercisable during the next 60 days. Excludes warrants to purchase 21 shares of Common Stock and includes 620 shares of Common Stock owned by Mr. Johnson individually. 65 (6) Includes 1,066 shares of Common Stock issuable upon exercise of options that are either currently exercisable or exercisable during the next 60 days. Excludes warrants to purchase 17 shares of Common Stock, and includes 537 shares individually owned. (7) Includes 711 shares of Common Stock issuable upon exercise of options that are either currently exercisable or exercisable during the next 60 days. Excludes warrants to purchase 15 shares of Common Stock, and includes 490 shares individually owned. (8) Includes 63,498 shares owned by Kelso Investment Associates V, L.P. ("KIAV") and 6,280 shares owned by Kelso Equity Partners V, L.P. ("KEPV"). KIAV and KEPV, due to their common control, could be deemed to beneficially own each others' shares, but each disclaims such beneficial ownership. Joseph S. Schuchert, Frank T. Nickell, Thomas R. Wall, IV, George E. Matelich, Michael B. Goldberg, David I. Wahrhaftig and Frank K. Bynum, Jr. may be deemed to share beneficial ownership of shares of Common Stock owned of record by KIAV and KEPV, by virtue of their status as general partners of the general partner of KIAV and as general partners of KEPV. Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum share investment and voting power with respect to securities owned by KIAV and KEPV, but disclaim beneficial ownership of such securities. The business address for each such person and KIAV and KEPV is c/o Kelso & Company, 320 Park Avenue, 24th Floor, New York, New York 10022. (9) Includes 47,882 shares owned by Carousel Capital Partners, L.P. ("Carousel"). Reid Leggett and Nelson Schwab III may be deemed to share beneficial ownership of the shares of Common Stock owned of record by Carousel, by virtue of their status as general partners of Carousel. Messrs. Leggett and Schwab share investment and voting power with respect to securities owned by Carousel, but disclaim beneficial ownership of such securities. The business address for each such person and Carousel is 201 North Tryon Street, Suite 2450, Charlotte, North Carolina 28202. (10) The partnership interests of MJD Partners, L.P. are held as follows: MJD Partners, Inc. holds a 1% interest as a general partner; JED Associates, Inc. holds a 39.6% interest as a limited partner; Jack H. Thomas holds a 24.75% interest as a limited partner; Meyer Haberman holds a 24.75% interest as a limited partner; and Eugene B. Johnson holds a 9.9% interest as a limited partner. JED Associates, Inc., a company wholly owned by Mr. Bergstein, and Messrs. Thomas, Haberman and Johnson own MJD Partners, Inc. in proportions similar to their ownership interests in MJD Partners L.P. 66 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT SERVICES AGREEMENTS On July 31, 1997, the Company entered into Management Services Agreement with MJD Partners, L.P. ("Partners LP") pursuant to which Partners LP provided certain management services to the Company, including, maintaining and supervising the engineering and operations of the Company and its subsidiaries, monitoring the payment of all expenses and capital expenditures, and advising and assisting the Company and its subsidiaries regarding various other matters. The terms of the contract provided that Partners LP receive $75,000 per month from the Company for rendering such services. In 1997, Partners L.P. was paid $1,020,000 under the agreement, a significant portion of which was for compensation paid to Mr. Thomas and Mr. Johnson, whose sole compensation came from Partners, L.P. The Management Services Agreement was terminated on April 1, 1998 and, in lieu thereof, Messrs. Thomas and Johnson will receive compensation directly from the Company. FINANCIAL ADVISORY AGREEMENTS In connection with the Recapitalization, the Company entered into Financial Advisory Agreements, dated July 31, 1997, with each of the Equity Investors, pursuant to which the Equity Investors provide certain consulting and advisory services, related, but not limited to equity financings and strategic planning. Pursuant to these agreements, the Company pays annual advisory fees in an aggregate amount of $400,000 to the Equity Investors, payable on a quarterly basis until December 31, 2007. During 1997, the Company paid $45,833 in such fees to the Equity Investors. The agreements also provide that the Company will reimburse the Equity Investors for travel relating to the Company's Board of Directors meetings. In the event of additional equity investments in the Company by the Equity Investors, the parties have agreed to negotiate in good faith to increase the advisory fee. The Indenture for the Notes provides that the payment of such fees may be increased above the amounts currently stipulated in such Financial Advisory Agreements. See "Description of Notes--Certain Covenants--Limitation on Transactions with Affiliates." CONSULTING AGREEMENT The Company has entered into a consulting agreement dated as of July 31, 1997 with an entity controlled by Daniel G. Bergstein pursuant to which Mr. Bergstein has agreed to provide general consulting and advice to the Company as reasonably requested from time to time. Pursuant to the terms of the agreement, the consulting company is paid an annual fee of $120,000 in monthly installments plus all of Mr. Bergstein's out-of-pocket business expenses up to $30,000. The term of the agreement is one year, subject to automatic renewal for successive periods of one year each thereafter. LEGAL SERVICES Daniel G. Bergstein, a senior partner of Paul, Hastings, Janofsky & Walker LLP ("Paul Hastings"), is a Director of the Company and a significant stockholder. Paul Hastings regularly provides legal services to the Company, including in connection with the Offering, the New Credit Facility and the Acquisitions. In the year ended December 31, 1997, Paul Hastings was paid approximately $1,100,000 by the Company for legal services. CONTRIBUTION OF SHAREHOLDER LOANS Prior to July 31, 1997, the Company was obligated to Messrs. Bergstein, Thomas, Haberman and Johnson ("Founders") pursuant to promissory notes (the "Founders' Notes") in the principal amounts of approximately $373,053, $227,679, $233,158 and $89,610, respectively. In connection with the Recapitalization, the Company paid to each of the Founders all accrued and unpaid interest on their respective Founders' Note and each Founder contributed his respective Founders' Note to Partners, L.P. in exchange for an increased partnership interest in Partners LP. Partners LP subsequently contributed the Founders Notes to the Company and the Founders Notes were cancelled. 67 STOCKHOLDERS AGREEMENT AND REGISTRATION RIGHTS AGREEMENT The Company and its stockholders entered into a Stockholders Agreement dated as of July 31, 1997 (the "Stockholders Agreement") which contains certain provisions, including but limited to: (i) the designation of members to the Board of Directors of the Company (including, initially, two members to be designated by Carousel, one member by Kelso and four members by Partners L.P.), (ii) certain restrictions on transfers of shares by the stockholders of the Company, (iii) the requirement that stockholders take certain actions upon the approval by a majority of the stockholders in connection with an initial public offering or a sale of the Company, (iv) the requirement of the Company to sell shares to the stockholders under certain circumstances upon authorization of an issuance or sale of additional shares, (v) certain of the participation rights of certain stockholders in connection with a sale of shares by other stockholders, and (vi) the right of the Company to purchase all (but not less than all) of the shares of a stockholder in the event of resignation or termination of employment or death or disability. The Stockholders Agreement also provides that the Company must obtain consent from the Equity Investors in order for the Company to incur debt in excess of $5 million. In addition, the Board shall increase to nine members with the two additional members to be designated for nomination and election by Kelso. The Company and its stockholders entered into a Registration Rights Agreement dated as of July 31, 1997 (the "Registration Rights Agreement") pursuant to which the stockholders have the right in certain circumstances and, subject to certain conditions, to require the Company to register shares of Common Stock held by them under the Securities Act. Under the Registration Rights Agreement, except in limited circumstances, the Company is obligated to pay all expenses in connection with such registration. CONTINGENT LIABILITIES Daniel G. Bergstein and Meyer Haberman (collectively, the "Borrowers") intend to enter into certain Time Promissory Notes in an aggregate amount not to exceed $3,000,000 ("Notes") and JED Communications Associates, Inc. ("JED") and Meyer Haberman intend to enter into Pledge Agreements ("Pledge Agreements" and collectively with the Notes, the "Loan Documents"), in October 1998, with Bankers Trust Company ("BT"), pursuant to which Borrowers will be (i) entitled to borrow money from BT and (ii) JED and Meyer Haberman will be required to pledge certain of their shares of common stock of the Company (the "Shares") to BT as collateral for loans extended under the Loan Documents. In conjunction with such transactions, the Company intends to enter into a certain Purchase Agreement and Subordination Agreement in October 1998, with BT, pursuant to which the Company may be required, in the event of a default by the Borrowers of their respective obligations under the Loan Documents, to purchase the Shares and will have the option to purchase, the Notes, Pledge Agreements and other instruments and documents relating thereto from BT. The Company plans to enter into such agreements in order to retain control of the Shares and because such agreements provide for the Company to purchase such Shares at a substantial discount to the Share's current fair market value. PURCHASE OF COMMON STOCK BY MANAGEMENT In conjunction with the New Credit Facility, 1,570 shares of the Company's common stock were purchased by certain members of management for $537,741 as follows.
NAME OF MANAGEMENT PERSONNEL PER SHARE PRICE NUMBER OF SHARES AGGREGATE PURCHASE PRICE - ------------------ --------------- ---------------- ------------------------ John P. Duda............ $342.50 100 $ 34,250.0 Jack. H. Thomas......... $342.50 200 $ 68,500.0 Eugene P. Johnson....... $342.50 400 $137,000.0 Walter E. Leach, Jr. ... $342.50 200 $ 68,500.0 Michael J. Stein........ $342.50 275 $ 94,187.5 Pamela D. Clark......... $342.50 45 $ 15,412.5 Lisa R. Hood............ $342.50 15 $ 5,137.5 Timothy W. Henry........ $342.50 85 $ 29,112.5 Patrick R. Eudy......... $342.50 150 $ 51,375.0 Patrick L. Morse........ $342.50 100 $ 34,250.0
68 DESCRIPTION OF NEW CREDIT FACILITY The Summary of the New Credit Facility set forth below does not purport to be complete and is qualified in its entirety by reference to all the provisions of the definitive Credit Agreement governing the New Credit Facility, a copy of which Credit Agreement may be obtained by contacting the office of the Secretary at the principal executive offices of the Company, 521 East Morehead Street, Suite 250, Charlotte, North Carolina 28202. GENERAL The Company (the "Borrower") has entered into a credit facility (the "New Credit Facility") with various lenders, Bankers Trust Company, as Administrative Agent, and NationsBank of Texas, N.A., as Syndication Agent. The New Credit Facility consists of term loan facilities (the "Term Loan Facilities") in an aggregate principal amount of $230.0 million, a revolving credit facility (the "Revolving Credit Facility") in an aggregate principal amount of up to $85.0 million and an uncommitted acquisition loan facility in an aggregate principal amount of up to $165.0 million (the "Acquisition Facility", together with the Term Loan Facilities and the Revolving Credit Facility (the "Facilities")). The following is a summary description of the principal terms of the New Credit Facility and is subject to, and qualified in its entirety by reference to, the definitive credit agreement. All obligations of the Company under the New Credit Facility are unconditionally and irrevocably guaranteed jointly and severally by four of the intermediary subsidiaries of the Company; STE, MJD Holdings Corp., MJD Services Corp. and MJD Ventures, Inc. ("Loan Guarantors"). Indebtedness under the New Credit Facility is secured by a first priority perfected security interest in all of the capital stock of the Company's subsidiaries (subject to certain exceptions) and in promissory notes evidencing all intercompany advances made by the Company and the Loan Guarantors. TERM LOAN FACILITIES The Term Loan Facilities consist of two tranches of term loans in an aggregate principal amount of $230.0 million. The term loans under the tranche B term loan facility ("B Term Loans") are in an aggregate principal amount of $155.0 million and the term loans under the tranche C term loan facility ("C Term Loans") are in an aggregate principal amount of $75.0 million. The tranche C term loan facility is divided into approximately a $51.5 million subfacility, funded entirely by CoBank, ACB (the "CoBank C Term Subfacility"), and approximately a $23.5 million subfacility, funded by a syndicate of other lenders (the "Other C Term Subfacility"). The B Term Loans will mature on March 31, 2006 and the C Term Loans will mature on March 31, 2007. Installments of the B Term Loans are due in equal quarterly amounts totaling per annum in each of years one through six of $1.55 million, approximately $49.1 million in year seven and approximately $96.6 million in year eight. Installments of the CoBank C Term Subfacility are due in varying quarterly amounts totaling approximately $1.2 million to $2.3 million per annum in each of years one through six and in equal quarterly amounts totaling $19.9 million per annum in each of years eight and nine. Installments of the Other C Term Subfacility are due in equal quarterly amounts totaling approximately $0.2 million per annum in years one through seven and approximately $10.9 million per annum in years eight and nine. REVOLVING CREDIT FACILITY The Revolving Credit Facility is in an aggregate principal amount of $85.0 million. The Company is entitled to draw amounts under the Revolving Credit Facility for ongoing working capital, capital expenditure requirements and general corporate purposes (including to finance acquisitions and permitted acquisitions). The Revolving Credit Facility will be reduced quarterly, commencing on the date 39 months after the Closing Date in equal quarterly amounts until maturity on September 30, 2004. ACQUISITION FACILITY The Acquisition Facility consists of an uncommitted revolving credit facility in an aggregate principal amount of up to $165.0 million. The Company will be entitled to draw amounts under the Acquisition Facility to 69 finance capital expenditure requirements and permitted acquisitions and/or to repay revolving loans under the Revolving Credit Facility to the extent the proceeds of such revolving loans had been used to finance capital expenditure requirements and/or permitted acquisitions. Although the Acquisition Facility was uncommitted at the closing of the New Credit Facility (the "Closing"), the Company intends to obtain commitments under the Acquisition Facility as may be required to achieve its acquisition objectives. The Acquisition Facility will be reduced quarterly, commencing on the date 48 months after the Closing Date in equal quarterly amounts until maturity on September 30, 2004. USE OF PROCEEDS The use of proceeds from the Term Facilities is limited to the following "Specified Purposes": (i) to finance acquisitions, (ii) to refinance the existing indebtedness of the Borrower and its subsidiaries, (iii) to repurchase $130,164 face amount of outstanding shares of preferred stock of the Company for an aggregate price equal to such face amount plus accrued dividends, (iv) retire certain existing warrants and (v) to finance transaction fees and expenses. AVAILABILITY The availability under the New Credit Facility is subject to various conditions precedent typical of bank facilities to this type. The full amount of the C Term Loans were drawn in a single drawing at the Closing. B Term Loans may be drawn pursuant to one or more drawings on and after the Closing Date and prior to nine months from Closing. In addition, upon repayment of B Term Loans with the Offering proceeds, certain Lenders under the tranche B term loan facility have committed to reinstate $90.0 million in tranche B term commitments for a period of up to 9 months from the Closing Date. Loans under the Revolving Credit Facility and the Acquisition Facility (to the extent commitments become available) may be borrowed, repaid and reborrowed after Closing. INTEREST RATE Some or all of the C Term Loans under the CoBank C Term Subfacility shall bear interest at fixed rates as agreed upon. Otherwise, Base Rate loans and Eurodollar loans are available as follows: Interest will accrue quarterly on the loans with reference to the base rate (the "Base Rate") plus the applicable interest margin. In addition, the Company may elect that all or a portion of the loans bear interest at the eurodollar rate (the "Eurodollar Rate") plus the applicable interest margin. The Base Rate is defined as the higher of the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 1/2 of 1%, or the prime rate of the Administrative Agent, as announced from time to time. The Eurodollar Rate is defined as, for interest periods of one, two, three or six months or (if and when available to each of the Lenders under the respective Facility), nine or twelve months (as selected by the Borrower), the offered quotation to first class banks in the interbank eurodollar market by the Administrative Agent for dollar deposits of amounts in same day funds divided by a percentage equal to 100% minus the then stated maximum rate of all reserved requirements applicable to any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D. The applicable interest margin for loans under the Revolving Credit Facility and the Acquisition Facility will be 1.50% for Base Rate loans and 2.50% for Eurodollar Rate loans. The applicable interest margin for Tranche B Term Loans will be 1.75% for Base Rate Loans and 2.75% for Eurodollar Loans. The applicable interest margin for C Term Loans under the Other C Term Subfacility will be 2.00% for Base Rate loans and 3.00% for Eurodollar Rate loans. The interest margins for the loans under the New Credit Facility as provided above will be subject to reduction based on the achievement of specified leverage ratios, so long as no default or event of default exists under the New Credit Facility. 70 COVENANTS The New Credit Facility contains certain customary covenants and other requirements of the Company and its subsidiaries. The affirmative covenants provide for, among other things, mandatory reporting by the Company of financial and other information to the lenders and notice by the Company to the lenders upon the occurrence of certain events. The affirmative covenants also include customary covenants requiring the Company to operate its business in an orderly manner and consistent with past practice and requiring maintenance of interest rate protection. The New Credit Facility also contains certain customary negative covenants and restrictions on action by the Company and its subsidiaries, including, without limitation, restrictions on indebtedness, liens, guarantee obligations, mergers, asset dispositions, investments, loans, advances, acquisitions, dividends and other restricted junior payments, transactions with affiliates, changes in business conducted and prepayments and amendments of subordinated indebtedness. The New Credit Facility also requires the Company to meet certain customary financial covenants. MANDATORY PREPAYMENT/REDUCTIONS Mandatory prepayment or reduction of Term Loan Facilities and, once all Term Loans have been repaid and no unutilized Term Facilities remain, Revolving Credit Facility and Acquisition Facility reductions (pro rata among them), will result from the net proceeds of equity and permitted subordinated debt issuances, including the Offering, until such time as the senior leverage ratio is reduced to 4.0x or below, provided that proceeds of permitted subordinated debt issuances consummated prior to the first anniversary of the Closing that otherwise would be applied as provided in this paragraph will first be applied to repay outstanding Revolving Loans and thereafter to the B Term Loans. Net cash proceeds from asset sales shall be applied as mandatory prepayments of principal on outstanding loans unless such proceeds are used by the Company to finance acquisitions permitted under the New Credit Facility within 180 days of the Company's receipt of such proceeds. Change of control transactions trigger a mandatory prepayment. OPTIONAL PREPAYMENT Voluntary prepayments of loans, including interim prepayments ("Interim Prepayments") of Revolving Loans with proceeds of asset sales that are not used to prepay Term Loans in anticipation of being subsequently applied to fund a Permitted Acquisition or Acquisitions within 180 days of the asset sale may be made at any time without premium or penalty, provided that voluntary prepayments of Eurodollar Loans made on a date other than the last day of an interest period applicable thereto shall be subject to customary breakage costs. Voluntary prepayments of Terms Loans shall be made pro rata between the Term Facilities and applied to reduce future scheduled amortization payments (z) for the 12 month period after any such prepayment, in direct order of maturity and (y) thereafter, on a pro rata basis. EVENTS OF DEFAULT The New Credit Facility specifies certain customary events of default including, without limitation, nonpayment of principal, non-payment of interest or fees (with a customary grace period), violation of covenants, inaccuracy of representations and warranties in any material respect, cross- default to certain other indebtedness, bankruptcy and insolvency events, material judgments, violations of the Employees Retirement Income Security Act of 1974, as amended, failure to maintain security interests, invalidity or asserted invalidity of credit documents, including guarantees and failure of the New Credit Facility and guarantees thereof to be senior in right of payment. 71 DESCRIPTION OF NOTES The Fixed Rate Notes and the Floating Rate Notes will be issued together as a single series under a single indenture (the "Indenture"), to be dated as of May 5, 1998, between the Company and United States Trust Company of New York, as trustee (the "Trustee"). A copy of the Indenture may be obtained by contacting the Office of the Secretary at the principal executive offices of the Company, 521 East Morehead Street, Suite 250, Charlotte, North Carolina 28202. The following summaries of certain provisions of the Indenture do not purport to be complete and are subject, and are qualified in their entirety by reference, to the Trust Indenture Act of 1939 (the "Trust Indenture Act") and to all the provisions of the Notes and the Indenture, including the definitions of certain terms. For purposes of this Section, references to the "Company" shall mean MJD Communications, Inc., excluding its subsidiaries. Capitalized terms used in this Section and not otherwise defined below have the meanings assigned to them in the Indenture. The Indenture provides for the issuance of up to $200.0 million of Offered Notes, of which $125.0 million will be Fixed Rate Notes (the "Offered Fixed Rate Notes") and $75.0 million will be Floating Rate Notes (the "Offered Floating Rate Notes"). The Indenture also provides for the issuance of up to $100.0 million, in the aggregate, of additional Floating Rate Notes and Fixed Rate Notes (as part of the same or an additional series under the Indenture). Any such additional Notes will be identical to the Offered Floating Rate Notes or the Offered Fixed Rate Notes, as the case may be, other than with respect to issue price and issuance date. Except as otherwise set forth below, the terms of the Fixed Rate Notes and the Floating Rate Notes will be identical. The Fixed Rate Notes and the Floating Rate Notes will vote together as a single class on all matters. GENERAL The Notes will mature on May 1, 2008, and will be limited to an aggregate principal amount of $300.0 million. The Offered Notes will be issued in an aggregate principal amount of $200.0 million. The Offered Notes will bear interest at the rates set forth below from May 5, 1998, or from the most recent date to which interest has been paid, payable semiannually on May 1 and November 1 of each year, beginning on November 1, 1998, to the persons who are registered holders of the Offered Notes at the close of business on the preceding April 15 or October 15, as the case may be. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal of, and premium, if any, and interest on, the Notes will be payable in immediately available funds, and the Notes will be exchangeable and transferable, at an office or agency of the Company, one of which will be maintained for such purpose in The City of New York (which initially will be the corporate trust office of the Trustee); provided, however, that payment of interest may be made at the option of the Company by check mailed to the Person entitled thereto as shown on the Security Register. The Notes will be issued only in fully registered form without coupons, in denominations of $1,000 or any integral multiple thereof. No service charge will be made for any registration of transfer or exchange of Notes, except for any tax or other governmental charge that may be imposed. INTEREST The interest rate on the Offered Notes is subject to increase in certain circumstances if the Company does not file a registration statement relating to an exchange offer or a resale shelf registration statement for the Offered Notes, if such registration statement is not declared effective on a timely basis or if certain other conditions are not satisfied, all as further described under "Exchange Offer; Registration Rights". FIXED RATE NOTES. Interest on the Fixed Rate Notes will accrue at the rate of 9 1/2% per annum. FLOATING RATE NOTES. The Floating Rate Notes will bear interest at a rate per annum, reset semiannually, equal to LIBOR plus 418.75 basis points, as determined by the calculation agent (the "Calculation Agent"), which shall initially be the Trustee. 72 "LIBOR", with respect to an Interest Period, means the rate (expressed as a percentage per annum) for deposits in United States dollars for a six-month period beginning on the second London Banking Day after the Determination Date that appears on Telerate Page 3750 as of 11:00 a.m., London time, on the Determination Date. If Telerate Page 3750 does not include such a rate or is unavailable on a Determination Date, LIBOR for the Interest Period shall be the arithmetic mean of the rates (expressed as a percentage per annum) for deposits in a Representative Amount in United States dollars for a six-month period beginning on the second London Banking Day after the Determination Date that appears on Reuters Screen LIBO Page as of 11:00 a.m., London time, on the Determination Date. If Reuters Screen LIBO Page does not include two or more rates or is unavailable on a Determination Date, the Calculation Agent shall request the principal London office of each of four major banks in the London interbank market, as selected by the Calculation Agent, to provide such bank's offered quotation (expressed as a percentage per annum), as of approximately 11:00 a.m., London time, on such Determination Date, to prime banks in the London interbank market for deposits in a Representative Amount in United States dollars for a six-month period beginning on the second London Banking Day after the Determination Date. If at least two such offered quotations are so provided, LIBOR for the Interest Period shall be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, the Calculation Agent shall request each of three major banks in New York City, as selected by the Calculation Agent, to provide such bank's rate (expressed as a percentage per annum), as of approximately 11:00 a.m., New York City time, on such Determination Date, for loans in a Representative Amount in United States dollars to leading European banks for a six-month period beginning on the second London Banking Day after the Determination Date. If at least two such rates are so provided, LIBOR for the Interest Period will be the arithmetic mean of such rates. If fewer than two such rates are so provided, then LIBOR for the Interest Period will be LIBOR in effect with respect to the immediately preceding Interest Period. "Determination Date," with respect to an Interest Period, means the second London Banking Day preceding the first day of the Interest Period. "Interest Period" means the period commencing on and including an interest payment date and ending on and including the day immediately preceding the next succeeding interest payment date, with the exception that the first Interest Period shall commence on and include May 5, 1998. "London Banking Day" means any day in which dealings in United States dollars are transacted or, with respect to any future date, are expected to be transacted in the London interbank market. "Representative Amount" means a principal amount of not less than U.S.$1,000,000 for a single transaction in the relevant market at the relevant time. "Telerate Page 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service). "Reuters Screen LIBO Page" means the display designated as page "LIBO" on The Reuters Monitor Money Rates Service (or such other page as may replace the LIBO page on that service). The amount of interest for each day of a 30-day month that the Floating Rate Notes are outstanding (the "Daily Interest Amount") will be calculated by dividing the interest rate in effect for such day by 360 and multiplying the result by the principal amount of the Floating Rate Notes. The amount of interest to be paid on the Floating Rate Notes for each Interest Period will be calculated by adding the Daily Interest Amounts for each day in the Interest Period. All percentages resulting from any of the above calculations will be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point, with five one-millionths of a percentage point rounded upwards (e.g., 9.876545% being rounded to 9.87655%), and all dollar amounts used in or resulting from such calculations will be rounded to the nearest cent (with one-half cent being rounded upwards). 73 The interest rate on the Floating Rate Notes will in no event be higher than the maximum rate permitted by New York law as the same may be modified by United States law of general application. Under current New York law, the maximum rate of interest is 25.0% per annum on a simple interest basis. This limit may not apply to Floating Rate Notes in which a holder has invested $2.5 million or more. The Calculation Agent will, upon the request of the holder of any Floating Rate Note, provide the interest rate then in effect with respect to the Floating Rate Notes. All calculations made by the Calculation Agent in the absence of manifest error will be conclusive for all purposes and binding on the Company and the holders of the Floating Rate Notes. SUBORDINATION The Notes will be senior subordinated, unsecured obligations of the Company. The payment of the principal of, and premium, if any, and interest on, the Notes, will be subordinated in right of payment to the payment when due of all Senior Debt of the Company. The Fixed Rate Notes and the Floating Rate Notes will rank pari passu in right of payment with each other, and with all future Senior Subordinated Debt, and senior to all future Subordinated Obligations of the Company. As of June 30, after giving pro forma effect to the Pending Acquisition, the Company would have had approximately $146.3 million of Senior Debt. In addition, all existing and future liabilities of the Company's Subsidiaries, including the claims of trade creditors and preferred stockholders, if any, will be effectively senior to the Notes. The total balance sheet liabilities of the Company's Subsidiaries, after giving effect to the Pending Acquisition, as of June 30, 1998, would have been approximately $230.8 million (including guarantees of $146.3 million of Senior Debt of the Company and excluding unused commitments). The Company's Subsidiaries have other liabilities, including contingent liabilities, that may be significant. Although the Indenture contains limitations on the amount of additional Debt that the Company and the Restricted Subsidiaries may Incur, the amounts of such Debt could be substantial and all such Debt may be Senior Debt or Debt of Subsidiaries (which will be effectively senior in right of payment to the Notes). In addition, the definition of "Senior Debt" includes a provision that in certain circumstances subordinates the Notes to the claims of lenders who extend credit in reliance on the Company's calculation of debt capacity under the covenant described under "--Certain Covenants--Limitation on Debt," even if such interpretation is incorrect or is not made in good faith. See "-- Certain Covenants--Limitation on Debt" and "--Certain Definitions." The Notes are obligations exclusively of the Company. Since all the operations of the Company are conducted through Subsidiaries, the Company's ability to service its debt, including the Notes, is dependent upon the earnings of its Subsidiaries and the distribution of those earnings, or upon loans or other payments of funds, by those Subsidiaries to the Company. The payment of dividends and the making of loans and advances to the Company by its Subsidiaries are subject to various restrictions. Existing Debt of certain of the Subsidiaries contains provisions that may under certain circumstances prohibit the payment of dividends or the making of other payments or advances to the Company. In addition, the ability of Subsidiaries of the Company to make such payments or advances to the Company may be limited by the laws of the relevant states in which such Subsidiaries are organized or located, including, in some instances, by minimum capitalization requirements imposed by state regulatory bodies that oversee the telecommunications industry in such states. In certain circumstances, the prior or subsequent approval of such payments or advances by such Subsidiaries to the Company is required from such regulatory bodies or other governmental entities. The Notes also will be effectively subordinated to any secured debt of the Company to the extent of the value of the assets securing such debt. As of June 30, 1998, after giving pro forma effect to the Completed Transactions and the Pending Acquisition, there would have been no outstanding secured debt of the Company that is not Senior Debt. The Company may not pay principal of, or premium, if any, or interest on, the Notes, or make any deposit pursuant to the provisions described under "-- Defeasance," and may not repurchase, redeem or otherwise retire any Notes (collectively, "pay the Notes"), if (a) any principal, premium or interest in respect of any Senior Debt is not paid within any applicable grace period (including at maturity) or (b) any other default on Senior Debt 74 occurs and the maturity of such Senior Debt is accelerated in accordance with its terms unless, in either case, (i) the default has been cured or waived and any such acceleration has been rescinded or (ii) such Senior Debt has been paid in full in cash; provided, however, that the Company may pay the Notes without regard to the foregoing if the Company and the Trustee receive written notice approving such payment from the Representative of such issue of Senior Debt. During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice (except any notice required to effect the acceleration) or the expiration of any applicable grace period, the Company may not pay the Notes for a period (a "Payment Blockage Period") commencing upon the receipt by the Company and the Trustee of written notice of such default from the Representative of the holders of such Designated Senior Debt specifying an election to effect a Payment Blockage Period (a "Payment Blockage Notice") and ending 179 days thereafter (unless such Payment Blockage Period is earlier terminated (a) by written notice to the Trustee and the Company from the Representative that gave such Payment Blockage Notice, (b) because such default is no longer continuing or (c) because such Designated Senior Debt has been repaid in full in cash). Unless the holders of such Designated Senior Debt or the Representative of such holders have accelerated the maturity of such Designated Senior Debt and not rescinded such acceleration, the Company may (unless otherwise prohibited as described in the first sentence of this paragraph) resume payments on the Notes after the end of such Payment Blockage Period. Not more than one Payment Blockage Notice with respect to all issues of Designated Senior Debt may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to one or more issues of Designated Senior Debt during such period. Upon any payment or distribution of the assets of the Company upon a total or partial liquidation, dissolution or winding up of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its Property, the holders of Senior Debt will be entitled to receive payment in full in cash before the holders of the Notes are entitled to receive any payment of principal of or interest on the Notes, except that holders of Notes may receive and retain shares of stock and any debt securities that are subordinated to Senior Debt to at least the same extent as the Notes. Until the Senior Debt is paid in full in cash, any distribution to which holders of the Notes would be entitled but for the subordination provisions of the Indenture will be made to holders of the Senior Debt. If a payment or distribution is made to holders of Notes that, due to the subordination provisions, should not have been made to them, such holders are required to hold it in trust for the holders of Senior Debt and pay it over to them as their interests may appear. If payment of the Notes is accelerated when any Designated Senior Debt is outstanding, the Company may not pay the Notes until three Business Days after the Representatives of all issues of Designated Senior Debt receive notice of such acceleration and, thereafter, may pay the Notes only if the Indenture otherwise permits payment at that time. By reason of the subordination provisions contained in the Indenture, in the event of bankruptcy or similar proceedings relating to the Company, holders of Senior Debt and other creditors (including trade creditors) of the Company may recover more ratably, even if the Notes are pari passu with their claims, than the holders of the Notes. In such event, there may be insufficient assets or no assets remaining to pay the principal of or interest on the Notes. Payment from the money or the proceeds of U.S. Government Obligations held in any defeasance trust pursuant to the provisions described under "-- Defeasance" will not be subject to the subordination provisions described above. See "Risk Factors--Subordination; Holding Company Structure," "--Substantial Leverage; Ability to Service Debt" and "Description of New Credit Facility". OPTIONAL REDEMPTION Except as set forth below, the Fixed Rate Notes will not be redeemable at the option of the Company prior to May 1, 2003. Thereafter, the Fixed Rate Notes will be redeemable, in whole or in part, at any time and 75 from time to time, at the option of the Company upon not less than 30 nor more than 60 days' prior notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on May 1 of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2003.......................................................... 104.750% 2004.......................................................... 103.167% 2005.......................................................... 101.583% 2006 and thereafter........................................... 100.000%
The Floating Rate Notes will be redeemable, in whole or in part, at any time and from time to time, at the option of the Company upon not less than 30 nor more than 60 days' prior notice, at the following redemption prices (expressed as percentages of principal amount), plus accrued and unpaid interest, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on May 1 of the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 1998.......................................................... 105.000% 1999.......................................................... 104.000% 2000.......................................................... 103.000% 2001.......................................................... 102.000% 2002.......................................................... 101.000% 2003 and thereafter........................................... 100.000%
At any time and from time to time, prior to May 1, 2001, the Company may redeem up to a maximum of 35.0% of the aggregate principal amount of the Fixed Rate Notes theretofore issued under the Indenture (including any Fixed Rate Notes issued after completion of the Offering) with the proceeds of an Equity Sale, at a redemption price equal to 109.5% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date); provided, however, that after giving effect to any such redemption, at least 65.0% of the original aggregate principal amount of the Offered Fixed Rate Notes remains outstanding. Any such redemption shall be made within 75 days of such Equity Sale upon not less than 30 nor more than 60 days' prior notice. SINKING FUND There will be no mandatory sinking fund payments for the Notes. REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of Notes shall have the right to require the Company to repurchase all or any part of such holder's Notes pursuant to the offer described below (the "Change of Control Offer") at a purchase price (the "Change of Control Purchase Price") equal to 101.0% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date). Within 30 days following any Change of Control, and within one day following the Cut-off Date, the Company shall (a) cause a notice of the Change of Control Offer to be sent at least once to the Dow Jones News Service or similar business news service in the United States and (b) send, by first- class mail, with a copy to the 76 Trustee, to each holder of Notes, at such holder's address appearing in the Security Register, a notice stating: (i) that a Change of Control Offer is being made pursuant to the covenant entitled "Repurchase at the Option of Holders Upon a Change of Control" and that all Notes timely tendered will be accepted for payment; (ii) the Change of Control Purchase Price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed; (iii) the circumstances and relevant facts regarding the Change of Control (including information with respect to pro forma historical income, cash flow and capitalization after giving effect to the Change of Control); and (iv) the procedures that holders of Notes must follow in order to tender their Notes (or portions thereof) for payment, and the procedures that holders of Notes must follow in order to withdraw an election to tender Notes (or portions thereof) for payment. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described hereunder by virtue of such compliance. The Change of Control repurchase feature is a result of negotiations between the Company and the Initial Purchasers. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. Subject to certain covenants described below, the Company could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of debt outstanding at such time or otherwise affect the Company's capital structure or credit ratings. The definition of Change of Control includes a phrase relating to the sale, transfer, assignment, lease, conveyance or other disposition of "all or substantially all" the Company's assets. Although there is a developing body of case law interpreting the phrase "substantially all", there is no precise established definition of the phrase under applicable law. In the absence of a definitive judicial determination of the definition of such phrase, it will be necessary for a holder of Notes to seek to clarify such interpretation through discussions with the Company or through litigation or other proceedings. Accordingly, the ability of a holder of Notes to require the Company to repurchase such Notes as a result of a sale, transfer, assignment, lease, conveyance or other disposition of less than all the assets of the Company may be uncertain. The New Credit Facility prohibits the Company from voluntarily purchasing any Notes prior to their stated maturity, and also provides that the occurrence of any of the events that would constitute a Change of Control would constitute a change of control under the New Credit Facility, which would result in all debt thereunder becoming due and payable. Other future debt of the Company may contain prohibitions of any events which would constitute a Change of Control or require such debt to be repurchased upon a Change of Control. To the extent other debt of the Company is subject to similar repurchase obligations in the event of a Change of Control and such debt ranks senior in right of payment to the Notes, all available funds will first be expended for the repurchase of such debt. Moreover, the exercise by holders of Notes of their right to require the Company to repurchase such Notes following a Change of Control could cause a default under existing or future debt of the Company, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Furthermore, the Company's ability to pay cash to holders of Notes upon a repurchase following a Change of Control may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The Company's failure to purchase Notes in connection with a Change of Control would result in a default under the Indenture which would, in turn, constitute a default under existing (and may constitute a default under future) debt of the Company. If such debt constitutes Designated Senior Debt, the subordination provisions in the Indenture would likely restrict payment to holders of Notes. The provisions under the Indenture relative to the Company's obligation to make an offer to repurchase the Notes as a result of a Change of Control may be waived or modified 77 (at any time prior to the occurrence of such Change of Control) with the written consent of the holders of a majority in principal amount of each of the Fixed Rate Notes or the Floating Rate Notes, as the case may be. See "-- Amendments and Waivers." CERTAIN COVENANTS LIMITATION ON DEBT. The Company shall not, and shall not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Debt unless, after giving effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (a) after giving effect to the Incurrence of such Debt and the receipt and application of the proceeds thereof, the Leverage Ratio of the Company and the Restricted Subsidiaries (on a consolidated basis) would not exceed 7.0 to 1.0 or (b) such Debt is Permitted Debt. The term "Permitted Debt" is defined to include the following: (a) Debt of the Company evidenced by the Offered Notes; (b) Debt under the Credit Facility, provided that the aggregate principal amount of all such Debt under the Credit Facility at any one time outstanding shall not exceed $315.0 million, which amount shall be permanently reduced by the amount of Net Available Cash used to Repay Debt under the Credit Facility, and not subsequently reinvested in Additional Assets or used to purchase Notes or Repay other Debt, pursuant to the covenant described under "--Limitation on Asset Sales"; (c) Debt of the Company or a Restricted Subsidiary in respect of Capital Lease Obligations and Purchase Money Debt, provided that (i) the aggregate principal amount of such Debt does not exceed the Fair Market Value (on the date of the Incurrence thereof) of the Property acquired, constructed or leased and (ii) the aggregate principal amount of all Debt Incurred and then outstanding pursuant to this clause (c) (together with all Permitted Refinancing Debt Incurred in respect of Debt previously Incurred pursuant to this clause (c)) does not exceed $30.0 million; (d) Debt of the Company owing to and held by any Restricted Subsidiary and Debt of a Restricted Subsidiary owing to and held by the Company or any Restricted Subsidiary; provided, however, that any subsequent issue or transfer of Capital Stock or other event that results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Debt (except to the Company or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Debt by the issuer thereof; (e) Debt under Interest Rate Agreements entered into by the Company or a Restricted Subsidiary for the purpose of limiting interest rate risk in the ordinary course of the financial management of the Company or such Restricted Subsidiary and not for speculative purposes, provided that the obligations under such agreements are directly related to payment obligations on Debt otherwise permitted by the terms of this covenant; (f) Debt in connection with one or more standby letters of credit or performance bonds issued by the Company or a Restricted Subsidiary in the ordinary course of business or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit; (g) Debt outstanding on the Issue Date not otherwise described in clauses (a) through (f) above; (h) Debt in an aggregate principal amount outstanding at any one time not to exceed $10.0 million; (i) if (x) the acquisition of Chouteau is consummated, up to $7.0 million of Debt Incurred by the Company in connection with such consummation and/or (y) the acquisition of Utilities is consummated, up to $12.51 million of Debt of Utilities Incurred in connection with such consummation, less the aggregate amount of all repayments of principal made thereon; and (j) Permitted Refinancing Debt Incurred in respect of Debt Incurred pursuant to clause (a) of the first paragraph of this covenant and clauses (a), (c), (g) and (i) above. The definition of "Senior Debt" includes a provision that in certain circumstances subordinates the Notes to the claims of lenders who extend credit in reliance on the Company's calculation of debt capacity under this 78 covenant, even if such interpretation is incorrect or is not made in good faith. If the claims of such other lenders in fact were Incurred by the Company in violation of this covenant, the holders of the Notes could declare an Event of Default and exercise their remedies against the Company under the Indenture, but the Noteholders would not have any claims against such other lenders (so long as such other lenders had themselves acted in good faith) and the claims of the Noteholders would be subordinated to the prior payment in full of such other lenders. See "--Certain Definitions--Senior Debt." Notwithstanding anything to the contrary contained in this covenant, (a) the Company shall not Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance (i) any Subordinated Obligations unless such Debt shall be subordinated to the Notes to at least the same extent as such Subordinated Obligations or (ii) any Senior Subordinated Debt unless such Debt shall be Senior Subordinated Debt or shall be subordinated to the Notes, and (b) the Company shall not permit any Restricted Subsidiary to Incur any Debt pursuant to this covenant if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations or Senior Subordinated Debt of the Company. For purposes of determining compliance with the foregoing covenant, (i) in the event that an item of Debt (including Debt issued by the Company to the lenders that are party to the Credit Facility) meets the criteria of more than one of the types of Debt described above, the Company, in its sole discretion, will classify such item of Debt and only be required to include the amount and type of such Debt in one of the above clauses and (ii) an item of Debt (including Debt issued by the Company to the lenders that are party to the Credit Facility) may be divided and classified in more than one of the types of Debt described above. LIMITATION ON RESTRICTED PAYMENTS. The Company shall not make, and shall not permit any Restricted Subsidiary to make, directly or indirectly, any Restricted Payment if at the time of, and after giving effect to, such proposed Restricted Payment, (a) a Default or Event of Default shall have occurred and be continuing, (b) the Company could not Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of the covenant described under "--Limitation on Debt" or (c) the aggregate amount of such Restricted Payment and all other Restricted Payments declared or made since the Issue Date (the amount of any Restricted Payment, if made other than in cash, to be based upon Fair Market Value) would exceed an amount equal to the sum of: (i) 50.0% of the aggregate amount of Consolidated Net Income accrued during the period (treated as one accounting period) from the beginning of the fiscal quarter during which the Issue Date occurs to the end of the most recent fiscal quarter ending at least 45 days prior to the date of such Restricted Payment (or if the aggregate amount of Consolidated Net Income for such period shall be a deficit, minus 100.0% of such deficit), (ii) Capital Stock Sale Proceeds, excluding Capital Stock Sale Proceeds from the sale of additional Capital Stock to the Permitted Holders pursuant to contractual obligations in effect on the Issue Date, (iii) the sum of (A) the aggregate net cash proceeds received by the Company or any Restricted Subsidiary from the issuance or sale after the Issue Date of convertible or exchangeable Debt that has been converted into or exchanged for Capital Stock (other than Disqualified Stock) of the Company and (B) the aggregate amount by which Debt (other than Subordinated Obligations) of the Company or any Restricted Subsidiary is reduced on the Company's consolidated balance sheet on or after the Issue Date upon the conversion or exchange of any Debt issued or sold on or prior to the Issue Date that is convertible or exchangeable for Capital Stock (other than Disqualified Stock) of the Company (excluding, in the case of clause (A) or (B), (x) any such Debt issued or sold to the Company or a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees and (y) the aggregate amount of any cash or other Property distributed by the Company or any Restricted Subsidiary upon any such conversion or exchange), 79 (iv) an amount equal to the sum of (A) the net reduction in Investments in any Person other than the Company or a Restricted Subsidiary resulting from dividends, repayments of loans or advances or other transfers of Property, in each case to the Company or any Restricted Subsidiary from such Person, and (B) the portion (proportionate to the Company's equity interest in an Unrestricted Subsidiary) of the Fair Market Value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Person, the amount of Investments previously made (and treated as a Restricted Payment) by the Company or any Restricted Subsidiary in such Person, and (v) $20.0 million. Notwithstanding the foregoing limitation, the Company may: (a) pay dividends on its Capital Stock within 60 days of the declaration thereof if, on said declaration date, such dividends could have been paid in compliance with the Indenture; provided, however, that at the time of such payment of such dividend, no other Default or Event of Default shall have occurred and be continuing (or result therefrom); provided further, however, that such dividend shall be included in the calculation of the amount of Restricted Payments; (b) purchase, repurchase, redeem, legally defease, acquire or retire for value Capital Stock of the Company or Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Capital Stock of the Company (other than Disqualified Stock and other than Capital Stock issued or sold to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees); provided, however, that (i) such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments and (ii) the Capital Stock Sale Proceeds from such exchange or sale shall be excluded from the calculation pursuant to clause (c)(ii) above; (c) purchase, repurchase, redeem, legally defease, acquire or retire for value any Subordinated Obligations in exchange for, or out of the proceeds of the substantially concurrent sale of, Permitted Refinancing Debt; provided, however, that such purchase, repurchase, redemption, legal defeasance, acquisition or retirement shall be excluded in the calculation of the amount of Restricted Payments; (d) repurchase shares of, or options to purchase shares of, common stock of the Company or any of its Subsidiaries from current or former officers, directors or employees of the Company or any of its Subsidiaries (or permitted transferees of such current or former officers, directors or employees), pursuant to the terms of agreements (including employment agreements) or plans (or amendments thereto) approved by the Board of Directors under which such individuals purchase or sell, or are granted the option to purchase or sell, shares of such common stock; provided, however, that (i) the aggregate amount of such repurchases shall not exceed $1.0 million in any fiscal year, (ii) such repurchases shall be excluded in the calculation of the amount of Restricted Payments and (iii) at the time of any such repurchase, no other Default or Event of Default shall have occurred and be continuing (or result therefrom); (e) purchase up to (i) 12,500 shares of ST Enterprises, Ltd. and (ii) 7.69 shares of Sidney Telephone Company (in each case as adjusted for stock splits and other similar events), outstanding on the Issue Date; provided, however, that such purchases or redemptions shall not be made from Affiliates of the Company (other than Persons who are Affiliates solely by virtue of their ownership of such shares) and shall be included in the calculation of the amount of Restricted Payments; provided further, however, that at the time of any such purchase or redemption, no other Default or Event of Default shall have occurred and be continuing (or result therefrom); (f) pay the fees and expenses described in clause (e) in the second paragraph of the covenant described under "--Certain Covenants--Limitation on Transactions with Affiliates", provided, however, that any such fees or expenses paid in excess of $1.0 million per fiscal year shall be included in the calculation of the amount of Restricted Payments; and 80 (g) following the first Public Equity Offering that results in a Public Market, pay dividends on the common stock of the Company of up to 6.0% per annum of the cash proceeds (net of underwriters' fees, discounts or commissions) of such first Public Equity Offering; provided, however, that (i) such dividends shall be (x) paid pro rata to the holders of all classes of common stock of the Company and (y) included in the calculation of the amount of Restricted Payments and (ii) at the time of payment of any such dividend, no other Default or Event of Default shall have occurred and be continuing (or result therefrom). LIMITATION ON LIENS. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or suffer to exist, any Lien (other than Permitted Liens or Liens securing Senior Debt) upon any of its Property (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, or any interest therein or any income or profits therefrom, unless (a) if such Lien secures Senior Subordinated Debt, the Notes are secured on an equal and ratable basis with such Debt and (b) if such Lien secures Subordinated Obligations, such Lien shall be subordinated to a Lien securing the Notes in the same Property as that securing such Subordinated Obligations to the same extent as such Subordinated Obligations are subordinated to the Notes. LIMITATION ON ISSUANCE OR SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The Company shall not (a) sell, pledge, hypothecate or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or (b) permit any Restricted Subsidiary to, directly or indirectly, issue or sell or otherwise dispose of any shares of its Capital Stock, other than (i) directors' qualifying shares, (ii) to the Company or a Wholly Owned Subsidiary, or (iii) if, immediately after giving effect to such disposition, such Restricted Subsidiary would no longer constitute a Restricted Subsidiary; provided, however, that, in the case of this clause (iii), such issuance, sale or disposition is effected in compliance with the covenant described under "-- Limitation on Asset Sales". LIMITATION ON ASSET SALES. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Sale unless (a) the Company or such Restricted Subsidiary receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the Property subject to such Asset Sale; (b) at least 75.0% of the consideration paid to the Company or such Restricted Subsidiary in connection with such Asset Sale is in the form of cash or cash equivalents or the assumption by the purchaser of liabilities of the Company or any Restricted Subsidiary (other than liabilities that are by their terms subordinated to the Notes) as a result of which the Company and the Restricted Subsidiaries are no longer obligated with respect to such liabilities; and (c) the Company delivers an Officers' Certificate to the Trustee certifying that such Asset Sale complies with the foregoing clauses (a) and (b). The Net Available Cash (or any portion thereof) from Asset Sales may be applied by the Company or a Restricted Subsidiary, to the extent the Company or such Restricted Subsidiary elects (or is required by the terms of any Debt): (a) to Repay Senior Debt of the Company or Debt of any Restricted Subsidiary (excluding any Debt owed to the Company or an Affiliate of the Company); or (b) subject to the covenant described under "--Limitation on Restricted Payments", to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Company or another Restricted Subsidiary). Pending such application, and subject in all respects to the procedures set forth below, the Company may, to the extent such use would not constitute a Repayment, use such Net Available Cash to temporarily reduce Debt. Any Net Available Cash from an Asset Sale not applied in accordance with the preceding paragraph within 270 days from the date of the receipt of such Net Available Cash or that is not (to the extent not used to temporarily reduce Debt without reducing related loan commitments) segregated from the general funds of the Company for investment in identified Additional Assets in respect of a project that shall have been commenced, and for which binding contractual commitments have been entered into, prior to the end of such 270-day period and that shall not have been completed or abandoned shall constitute "Excess Proceeds"; provided, however, that the amount of any Net Available Cash that ceases to be so segregated as contemplated above and any Net Available Cash that is segregated in respect of a project that is abandoned or completed shall also constitute "Excess Proceeds" at the time any such Net Available Cash ceases to be so segregated or at the time the relevant 81 project is so abandoned or completed, as applicable. When the aggregate amount of Excess Proceeds exceeds $5.0 million (taking into account income earned on such Excess Proceeds, if any), the Company will be required to make an offer to purchase (the "Prepayment Offer") the Notes which offer shall be in the amount of the Allocable Excess Proceeds, on a pro rata basis according to principal amount, at a purchase price equal to 100.0% of the principal amount thereof, plus accrued and unpaid interest, if any, to the purchase date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. To the extent that any portion of the amount of Net Available Cash remains after compliance with the preceding sentence and provided that all holders of Notes have been given the opportunity to tender their Notes for purchase in accordance with the Indenture, the Company or such Restricted Subsidiary may use such remaining amount for any purpose permitted by the Indenture and the amount of Excess Proceeds will be reset to zero. The term "Allocable Excess Proceeds" will mean the product of (a) the Excess Proceeds and (b) a fraction, the numerator of which is the aggregate principal amount of the Notes outstanding on the date of the Prepayment Offer and the denominator of which is the sum of the aggregate principal amount of the Notes outstanding on the date of the Prepayment Offer and the aggregate principal amount of other Debt of the Company outstanding on the date of the Prepayment Offer that is pari passu in right of payment with the Notes and subject to terms and conditions in respect of Asset Sales similar in all material respects to the covenant described hereunder and requiring the Company to make an offer to purchase such Debt at substantially the same time as the Prepayment Offer. Within five business days after the Company is obligated to make a Prepayment Offer as described in the preceding paragraph, the Company shall send a written notice, by first-class mail, to the holders of Notes, accompanied by such information regarding the Company and its Subsidiaries as the Company in good faith believes will enable such holders to make an informed decision with respect to such Prepayment Offer. Such notice shall state, among other things, the purchase price and the purchase date, which shall be, subject to any contrary requirements of applicable law, a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed. The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Notes pursuant to the covenant described hereunder. To the extent that the provisions of any securities laws or regulations conflict with provisions of the covenant described hereunder, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the covenant described hereunder by virtue thereof. LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist any consensual restriction on the right of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock, or pay any Debt or other obligation owed, to the Company or any other Restricted Subsidiary, (b) make any loans or advances to the Company or any other Restricted Subsidiary or (c) transfer any of its Property to the Company or any other Restricted Subsidiary. The foregoing limitations will not apply (i) with respect to clauses (a), (b) and (c), to restrictions (A) arising under agreements that were in effect on the Issue Date, (B) relating to Debt of a Restricted Subsidiary and existing at the time it became a Restricted Subsidiary if such restriction was not created in connection with or in anticipation of the transaction or series of transactions pursuant to which such Restricted Subsidiary became a Restricted Subsidiary or was acquired by the Company or another Restricted Subsidiary, or (C) that result from the Refinancing of Debt Incurred pursuant to an agreement referred to in clause (i)(A) or (B) above or in clause (ii)(A) or (B) below, provided such restriction is no more restrictive than those under the agreement evidencing the Debt so Refinanced, and (ii) with respect to clause (c) only, to restrictions (A) relating to Debt that is permitted to be Incurred and secured without also securing the Notes pursuant to the covenants described under "--Limitation on Debt" and "--Limitation on Liens" that limit the right of the debtor to dispose of the Property securing such Debt, (B) encumbering Property at the time such Property was acquired by the Company 82 or any Restricted Subsidiary, so long as such restriction relates solely to the Property so acquired and was not created in connection with or in anticipation of such acquisition, (C) resulting from customary provisions restricting subletting or assignment of leases or customary provisions in other agreements that restrict assignment of such agreements or rights thereunder or (D) customary restrictions contained in asset sale agreements limiting the transfer of such Property pending the closing of such sale. LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, conduct any business or enter into or suffer to exist any transaction or series of transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange of any Property or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction"), unless (a) the terms of such Affiliate Transaction are (i) set forth in writing, (ii) in the best interest of the Company or such Restricted Subsidiary, as the case may be, and (iii) no less favorable to the Company or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm's-length transaction with a Person that is not an Affiliate of the Company, (b) if such Affiliate Transaction involves aggregate payments or value in excess of $1.0 million, two Officers of the Company approve such Affiliate Transaction, and in the good faith judgment of such Officers, believe that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by an Officers' Certificate promptly delivered to the Trustee, (c) if such Affiliate Transaction involves aggregate payments or value in excess of $5.0 million, the Board of Directors (including a majority of the disinterested members of the Board of Directors) approves such Affiliate Transaction, and in its good faith judgment, believes that such Affiliate Transaction complies with clauses (a) (ii) and (iii) of this paragraph as evidenced by a Board Resolution promptly delivered to the Trustee and (d) if such Affiliate Transaction involves aggregate payments or value in excess of $10.0 million, the Company obtains a written opinion from an Independent Appraiser to the effect that the consideration to be paid or received in connection with such Affiliate Transaction is fair, from a financial point of view, to the Company or such Restricted Subsidiary, as the case may be. Notwithstanding the foregoing limitation, the Company or any Restricted Subsidiary may enter into or suffer to exist the following: (a) any transaction or series of transactions between the Company and one or more Restricted Subsidiaries or between two or more Restricted Subsidiaries, provided that no more than 5.0% of the total voting power of the Voting Stock (on a fully diluted basis) of any such Restricted Subsidiary is owned by an Affiliate of the Company (other than a Restricted Subsidiary); (b) any Restricted Payment permitted to be made pursuant to the covenant described under "--Limitation on Restricted Payments"; (c) the payment of compensation (including amounts paid pursuant to employee benefit plans) for the personal services of officers, directors and employees of the Company or any of the Restricted Subsidiaries, so long as such payments are pursuant to a policy (i) established by the Board of Directors in good faith and (ii) evidenced by a resolution of the Board of Directors that establishes standards to ensure that the terms of such compensation and the services theretofore or thereafter to be performed for such compensation will be fair consideration therefor; (d) loans and advances to employees made in the ordinary course of business and consistent with the past practices of the Company or such Restricted Subsidiary, as the case may be, provided that such loans and advances do not exceed $1.0 million in the aggregate at any one time outstanding; (e) the payment, in compliance with clause (a) of the first paragraph of this covenant, of fees and expenses to the Equity Investors during any fiscal year not in excess of 1.0% of EBITDA for such year, provided that no Default or Event of Default exists at the time of such payment; (f) the payment of customary legal fees and expenses to Paul, Hastings, Janofsky & Walker LLP; or (g) any transaction or series of transactions, in the ordinary course of business for a Person engaged in the CLEC business, with a CLEC Subsidiary, provided that any such transaction is undertaken pursuant to 83 a policy adopted by the Board of Directors, which policy shall be evidenced by a Board Resolution delivered to the Trustee, that establishes adequate procedures to insure that any such transaction is effected in accordance with clauses (a)(ii) and (a)(iii) of the first paragraph of this covenant. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any Sale and Leaseback Transaction with respect to any Property unless (a) the Company or such Restricted Subsidiary would be entitled to (i) Incur Debt in an amount equal to the Attributable Debt with respect to such Sale and Leaseback Transaction pursuant to the covenant described under "--Limitation on Debt" and (ii) create a Lien on such Property securing such Attributable Debt without also securing the Notes pursuant to the covenant described under "-- Limitation on Liens" and (b) such Sale and Leaseback Transaction is effected in compliance with the covenant described under "--Limitation on Asset Sales". LIMITATION ON LAYERED DEBT. The Company shall not Incur, directly or indirectly, any Debt that is subordinate or junior in right of payment to any Senior Debt unless such Debt is Senior Subordinated Debt or is expressly subordinated in right of payment to Senior Subordinated Debt. DESIGNATION OF RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Board of Directors may designate any Subsidiary of the Company to be an Unrestricted Subsidiary if (a) the Subsidiary to be so designated does not own any Capital Stock or Debt of, or own or hold any Lien on any Property of, the Company or any other Restricted Subsidiary, (b) the Subsidiary to be so designated is not obligated under any Debt, Lien or other obligation that, if in default, would result (with the passage of time or notice or otherwise) in a default on any Debt of the Company or of any Restricted Subsidiary and (c) either (i) the Subsidiary to be so designated has total assets of $1,000 or less or (ii) such designation is effective immediately upon such entity becoming a Subsidiary of the Company. Unless so designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary of the Company will be classified as a Restricted Subsidiary; provided, however, that such Subsidiary shall not be designated a Restricted Subsidiary and shall be automatically classified as an Unrestricted Subsidiary if either of the requirements set forth in clauses (x) and (y) of the immediately following paragraph will not be satisfied after giving pro forma effect to such classification. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary if, immediately after giving pro forma effect to such designation, (x) the Company could Incur at least $1.00 of additional Debt pursuant to clause (a) of the first paragraph of the covenant described under "--Limitation on Debt" and (y) no Default or Event of Default shall have occurred and be continuing or would result therefrom. Any such designation or redesignation by the Board of Directors will be evidenced to the Trustee by filing with the Trustee a Board Resolution giving effect to such designation or redesignation and an Officers' Certificate (a) certifying that such designation or redesignation complies with the foregoing provisions and (b) giving the effective date of such designation or redesignation, such filing with the Trustee to occur within 45 days after the end of the fiscal quarter of the Company in which such designation or redesignation is made (or, in the case of a designation or redesignation made during the last fiscal quarter of the Company's fiscal year, within 90 days after the end of such fiscal year). LIMITATION ON COMPANY'S BUSINESS. The Company shall not, and shall not permit any Restricted Subsidiary, to, directly or indirectly, engage in any business other than the Telecommunications Business. MERGER, CONSOLIDATION AND SALE OF PROPERTY The Company shall not merge, consolidate or amalgamate with or into any other Person (other than a merger of a Wholly Owned Subsidiary into the Company) or sell, transfer, assign, lease, convey or otherwise dispose of all or substantially all its Property in any one transaction or series of transactions unless: (a) the Company shall be the surviving Person (the "Surviving Person") or the Surviving Person (if other than the 84 Company) formed by such merger, consolidation or amalgamation or to which such sale, transfer, assignment, lease, conveyance or disposition is made shall be a corporation organized and existing under the laws of the United States of America, any State thereof or the District of Columbia; (b) the Surviving Person (if other than the Company) expressly assumes, by supplemental indenture in form satisfactory to the Trustee, executed and delivered to the Trustee by such Surviving Person, the due and punctual payment of the principal of, and premium, if any, and interest on, all the Notes, according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of the Indenture to be performed by the Company; (c) in the case of a sale, transfer, assignment, lease, conveyance or other disposition of all or substantially all the Property of the Company, such Property shall have been transferred as an entirety or virtually as an entirety to one Person; (d) immediately before and after giving effect to such transaction or series of transactions on a pro forma basis (and treating, for purposes of this clause (d) and clauses (e) and (f) below, any Debt that becomes, or is anticipated to become, an obligation of the Surviving Person or any Restricted Subsidiary as a result of such transaction or series of transactions as having been Incurred by the Surviving Person or such Restricted Subsidiary at the time of such transaction or series of transactions), no Default or Event of Default shall have occurred and be continuing; (e) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Company or the Surviving Person, as the case may be, would be able to Incur at least $1.00 of additional Debt under clause (a) of the first paragraph of the covenant described under "-- Certain Covenants--Limitation on Debt"; (f) immediately after giving effect to such transaction or series of transactions on a pro forma basis, the Surviving Person shall have a Consolidated Net Worth in an amount that is not less than the Consolidated Net Worth of the Company immediately prior to such transaction or series of transactions; and (g) the Company shall deliver, or cause to be delivered, to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that such transaction and the supplemental indenture, if any, in respect thereto comply with this covenant and that all conditions precedent herein provided for relating to such transaction have been satisfied. The Surviving Person shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, but the predecessor Company in the case of a sale, transfer, assignment, lease, conveyance or other disposition shall not be released from its obligations under the Indenture and the Notes (except the predecessor company shall be so released in the case of the sale, transfer assignment, conveyance or other disposition, but not the lease, of the assets as an entirety or virtually as an entirety). SEC REPORTS Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the Commission and provide the Trustee and holders of Notes with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and reports to be so filed and provided at the times specified for the filing of such information, documents and reports under such Sections; provided, however, that the Company shall not be so obligated to file such information, documents and reports with the Commission if the Commission does not permit such filings. EVENTS OF DEFAULT Events of Default in respect of the Notes as set forth in the Indenture include: (a) failure to make the payment of any interest on the Notes when the same becomes due and payable, and such failure continues for a period of 30 days; (b) failure to make the payment of any principal of, or premium, if any, on, any of the Notes when the same becomes due and payable at its Stated Maturity, upon acceleration, redemption, optional redemption, required repurchase or otherwise; (c) failure to comply with the covenant described under "--Merger, Consolidation and Sale of Property"; (d) failure to comply with any other covenant or agreement in the Notes or in the Indenture (other than a failure that is the subject of the foregoing clause (a), (b) or (c)) and such failure continues for 30 days after written notice is given to the Company as provided below; (e) a default under 85 any Debt by the Company or any Restricted Subsidiary that results in acceleration of the maturity of such Debt, or failure to pay any such Debt at maturity, in an aggregate amount greater than $5.0 million or its foreign currency equivalent at the time (the "cross acceleration provisions"); (f) any judgment or judgments for the payment of money in an aggregate amount in excess of $5.0 million (or its foreign currency equivalent at the time) shall be rendered against the Company or any Restricted Subsidiary and shall not be waived, satisfied or discharged for any period of 60 consecutive days during which a stay of enforcement shall not be in effect (the "judgment default provisions"); and (g) certain events involving bankruptcy, insolvency or reorganization of the Company or any Significant Subsidiary (the "bankruptcy provisions"). A Default under clause (d) is not an Event of Default until the Trustee or the holders of not less than 25.0% in aggregate principal amount of the Notes then outstanding notify the Company of the Default and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default." The Company shall deliver to the Trustee, within 30 days after the occurrence thereof, written notice in the form of an Officers' Certificate of any event that with the giving of notice and the lapse of time would become an Event of Default, its status and what action the Company is taking or proposes to take with respect thereto. The Indenture provides that if an Event of Default with respect to the Notes (other than an Event of Default resulting from certain events involving bankruptcy, insolvency or reorganization with respect to the Company) shall have occurred and be continuing, the Trustee or the registered holders of not less than 25.0% in aggregate principal amount of the Notes then outstanding may declare to be immediately due and payable the principal amount of all the Notes then outstanding, plus accrued but unpaid interest to the date of acceleration. In case an Event of Default resulting from certain events of bankruptcy, insolvency or reorganization with respect to the Company shall occur, such amount with respect to all the Notes shall be due and payable immediately without any declaration or other act on the part of the Trustee or the holders of the Notes. After any such acceleration, but before a judgment or decree based on acceleration is obtained by the Trustee, the registered holders of a majority in aggregate principal amount of the Notes then outstanding may, under certain circumstances, rescind and annul such acceleration if all Events of Default, other than the nonpayment of accelerated principal, premium or interest, have been cured or waived as provided in the Indenture. Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders of the Notes, unless such holders shall have offered to the Trustee reasonable indemnity. Subject to such provisions for the indemnification of the Trustee, the holders of a majority in aggregate principal amount of the Notes then outstanding will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Notes. No holder of Notes will have any right to institute any proceeding with respect to the Indenture, or for the appointment of a receiver or trustee, or for any remedy thereunder, unless (a) such holder has previously given to the Trustee written notice of a continuing Event of Default, (b) the registered holders of at least 25.0% in aggregate principal amount of the Notes then outstanding have made written request and offered reasonable indemnity to the Trustee to institute such proceeding as trustee and (c) the Trustee shall not have received from the registered holders of a majority in aggregate principal amount of the Notes then outstanding a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days. However, such limitations do not apply to a suit instituted by a holder of any Note for enforcement of payment of the principal of, and premium, if any, or interest on, such Note on or after the respective due dates expressed in such Note. AMENDMENTS AND WAIVERS Subject to certain exceptions, the Indenture may be amended with the consent of the registered holders of a majority in aggregate principal amount of the Notes then outstanding (including consents obtained in connection 86 with a tender offer or exchange offer for the Notes) and any past default or compliance with any provisions may also be waived (except a default in the payment of principal, premium or interest and certain covenants and provisions of the Indenture that cannot be amended without the consent of each holder of an outstanding Note) with the consent of the registered holders of at least a majority in aggregate principal amount of the Notes then outstanding. However, without the consent of each holder of an outstanding Note, no amendment may, among other things, (a) reduce the amount of Notes whose holders must consent to an amendment or waiver, (b) reduce the rate of or extend the time for payment of interest on any Note, (c) reduce the principal of or extend the Stated Maturity of any Note, (d) make any Note payable in money other than that stated in the Note, (e) impair the right of any holder of the Notes to receive payment of principal of and interest on such holder's Notes on or after the due dates therefor or to institute suit for the enforcement of any payment on or with respect to such holder's Notes, (f) release any security interest that may have been granted in favor of the holders of the Notes, (g) reduce the premium payable upon the redemption of any Note nor change the time at which any Note may be redeemed, as described under "--Optional Redemption," (h) reduce the premium payable upon a Change of Control or, at any time after a Change of Control has occurred, change the time at which the Change of Control Offer relating thereto must be made or at which the Notes must be repurchased pursuant to such Change of Control Offer, (i) at any time after the Company is obligated to make a Prepayment Offer with the Excess Proceeds from Asset Sales, change the time at which such Prepayment Offer must be made or at which the Notes must be repurchased pursuant thereto or (j) make any change to the subordination provisions of the Indenture that would adversely affect the holders of the Notes. Without the consent of any holder of the Notes, the Company and the Trustee may amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to provide for the assumption by a successor corporation of the obligations of the Company under the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes (provided that the uncertificated Notes are issued in registered form for purposes of Section 163(f) of the Code, or in a manner such that the uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to add Guarantees with respect to the Notes, to secure the Notes, to add to the covenants of the Company for the benefit of the holders of the Notes or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any holder of the Notes, to make any change to the subordination provisions of the Indenture that would limit or terminate the benefits available to any holder of Senior Debt under such provisions or to comply with any requirement of the Commission in connection with the qualification of the Indenture under the Trust Indenture Act. No amendment may be made to the subordination provisions of the Indenture that adversely affects the rights of any holder of Senior Debt then outstanding unless the holders of such Senior Debt (or their Representative) consent to such change. The consent of the holders of the Notes is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the Indenture becomes effective, the Company is required to mail to each registered holder of the Notes at such holder's address appearing in the Security Register a notice briefly describing such amendment. However, the failure to give such notice to all holders of the Notes, or any defect therein, will not impair or affect the validity of the amendment. DEFEASANCE The Company at any time may terminate all its obligations under the Notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes and to maintain a registrar and paying agent in respect of the Notes. The Company at any time may terminate its obligations under the covenants described under "--Repurchase at the Option of Holders Upon a Change of Control" and "--Certain Covenants," the operation of the cross acceleration provisions, the judgment default provisions and the bankruptcy provisions with respect to Significant Subsidiaries, described under "--Events of Default" above and the limitations contained in clauses (e) and (f) under the first paragraph of "--Merger, Consolidation and 87 Sale of Property" above ("covenant defeasance"). The Company may exercise its legal defeasance option notwithstanding its prior exercise of its covenant defeasance option. If the Company exercises its legal defeasance option, payment of the Notes may not be accelerated because of an Event of Default with respect thereto. If the Company exercises its covenant defeasance option, payment of the Notes may not be accelerated because of an Event of Default specified in clause (d) (with respect to the covenants described under "--Certain Covenants"), (e), (f) or (g) (with respect only to Significant Subsidiaries) under "--Events of Default" above or because of the failure of the Company to comply with clauses (e) and (f) under the first paragraph of "--Merger, Consolidation and Sale of Property" above. The legal defeasance option or the covenant defeasance option may be exercised only if: (a) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations for the payment of principal of and interest on the Notes to maturity or redemption, as the case may be; (b) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent certified public accountants expressing their opinion that the payments of principal and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay principal and interest when due on all the Notes to maturity or redemption, as the case may be; (c) 123 days pass after the deposit is made and during the 123-day period no Default described in clause (g) under "-- Events of Default" occurs with respect to the Company or any other Person making such deposit which is continuing at the end of the period; (d) no Default or Event of Default has occurred and is continuing on the date of such deposit and after giving effect thereto; (e) such deposit does not constitute a default under any other agreement or instrument binding on the Company; (f) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940; (g) in the case of the legal defeasance option, the Company delivers to the Trustee an Opinion of Counsel stating that (i) the Company has received from the Internal Revenue Service a ruling, or (ii) since the date of the Indenture there has been a change in the applicable Federal income tax law, to the effect, in either case, that, and based thereon such Opinion of Counsel shall confirm that, the holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same time as would have been the case if such defeasance had not occurred; (h) in the case of the covenant defeasance option, the Company delivers to the Trustee an Opinion of Counsel to the effect that the holders of the Notes will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (i) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance and discharge of the Notes have been complied with as required by the Indenture. GOVERNING LAW The Indenture and the Notes are governed by the internal laws of the State of New York without reference to principles of conflicts of law. THE TRUSTEE United States Trust Company of New York is the Trustee under the Indenture. The Indenture provides that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of Default, the Trustee will exercise such of the rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. 88 CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. "Additional Assets" means (a) any Property (other than cash, cash equivalents and securities) to be owned by the Company or any Restricted Subsidiary and used in a Telecommunications Business; or (b) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Company or another Restricted Subsidiary from any Person other than an Affiliate of the Company; provided, however, that, in the case of clause (b), such Restricted Subsidiary is primarily engaged in a Telecommunications Business. "Affiliate" of any specified Person means (a) any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person or (b) any other Person who is a director or officer of (i) such specified Person, (ii) any Subsidiary of such specified Person or (iii) any Person described in clause (a) above. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. For purposes of the covenant described under "-- Certain Covenants--Limitation on Transactions with Affiliates," "--Limitation on Asset Sales" and the definition of "Additional Assets" only, "Affiliate" shall also mean any beneficial owner of shares representing 10.0% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Voting Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof. "Asset Sale" means any sale, lease, transfer, issuance or other disposition (or series of related sales, leases, transfers, issuances or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of (a) any shares of Capital Stock of a Restricted Subsidiary (other than directors' qualifying shares) or (b) any other assets of the Company or any Restricted Subsidiary outside of the ordinary course of business of the Company or such Restricted Subsidiary (other than, in the case of clauses (a) and (b) above, (i) any disposition by a Restricted Subsidiary to the Company or by the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (ii) for purposes of the covenant described under "--Certain Covenants--Limitation on Asset Sales" only, (x) any disposition that constitutes a Permitted Investment or Restricted Payment permitted by the covenant described under "--Certain Covenants--Limitation on Restricted Payments" and (y) contemporaneous exchanges by the Company or any Restricted Subsidiary of Telecommunications Assets for other Telecommunications Assets in the ordinary course of business; provided that the applicable Telecommunications Assets received by the Company or such Restricted Subsidiary have at least substantially equal Fair Market Value to the Company or such Restricted Subsidiary (as evidenced by a Resolution of the Board of Directors of the Company) and (iii) any disposition effected in compliance with the first paragraph of the covenant described under "--Merger, Consolidation and Sale of Property"). "Attributable Debt" in respect of a Sale and Leaseback Transaction means, at any date of determination, (a) if such Sale and Leaseback Transaction is a Capital Lease Obligation, the amount of Debt represented thereby according to the definition of "Capital Lease Obligation" and (b) in all other instances, the greater of (i) the Fair Market Value of the Property subject to such Sale and Leaseback Transaction and (ii) the present value (discounted at the interest rate borne by the Fixed Rate Notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended). "Average Life" means, as of any date of determination, with respect to any Debt or Preferred Stock, the quotient obtained by dividing (a) the sum of the product of the numbers of years (rounded to the nearest one- 89 twelfth of one year) from the date of determination to the dates of each successive scheduled principal payment of such Debt or redemption or similar payment with respect to such Preferred Stock multiplied by the amount of such payment by (b) the sum of all such payments. "Capital Lease Obligations" means any obligation under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP; and the amount of Debt represented by such obligation shall be the capitalized amount of such obligations determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. For purposes of "--Certain Covenants--Limitation on Liens," a Capital Lease Obligation shall be deemed secured by a Lien on the Property being leased. "Capital Stock" means, with respect to any Person, any shares or other equivalents (however designated) of any class of corporate stock or partnership interests or any other participations, rights, warrants, options or other interests in the nature of an equity interest in such Person, including Preferred Stock, but excluding any debt security convertible or exchangeable into such equity interest. "Capital Stock Sale Proceeds" means the aggregate cash proceeds received by the Company from the issuance or sale (other than to a Subsidiary of the Company or an employee stock ownership plan or trust established by the Company or any such Subsidiary for the benefit of their employees) by the Company of its Capital Stock (other than Disqualified Stock) after the Issue Date, net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof. "Change of Control" means the occurrence of any of the following events: (a) prior to the first Public Equity Offering that results in a Public Market, the Permitted Holders cease to be the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a majority of the total voting power of the Voting Stock of the Company, whether as a result of the issuance of securities of the Company, any merger, consolidation, liquidation or dissolution of the Company, any direct or indirect transfer of securities by the Permitted Holders or otherwise (for purposes of this clause (a), the Permitted Holders will be deemed to beneficially own any Voting Stock of a specified corporation held by a parent corporation so long as the Permitted Holders beneficially own, directly or indirectly, in the aggregate a majority of the total voting power of the Voting Stock of such parent corporation); or (b) on or after the first Public Equity Offering that results in a Public Market, if any "Person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act or any successor provisions to either of the foregoing), including any group acting for the purpose of acquiring, holding, voting or disposing of securities within the meaning of Rule 13d- 5(b)(1) under the Exchange Act, other than any one or more of the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 35.0% or more of the total voting power of the Voting Stock of the Company; provided, however, that the Permitted Holders are the "beneficial owners" (as defined in Rule 13d-3 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all shares that any such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, in the aggregate of a lesser percentage of the total voting power of the Voting Stock of the Company than such other Person or group (for purposes of this clause (b), such Person or group shall be deemed to beneficially own any Voting Stock of a corporation (the "specified corporation") held by any other corporation (the "parent corporation") so long as such Person or group beneficially owns, directly or indirectly, in the aggregate a majority of the total voting power of the Voting Stock of such parent corporation); or 90 (c) the sale, transfer, assignment, lease, conveyance or other disposition, directly or indirectly, of all or substantially all the assets of the Company and the Restricted Subsidiaries, considered as a whole (other than a disposition of such assets as an entirety or virtually as an entirety to a Wholly Owned Subsidiary or one or more Permitted Holders) shall have occurred, or the Company merges, consolidates or amalgamates with or into any other Person (other than one or more Permitted Holders) or any other Person (other than one or more Permitted Holders) merges, consolidates or amalgamates with or into the Company, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is reclassified into or exchanged for cash, securities or other Property, other than any such transaction where (i) the outstanding Voting Stock of the Company is reclassified into or exchanged for Voting Stock of the surviving corporation and (ii) the holders of the Voting Stock of the Company immediately prior to such transaction own, directly or indirectly, not less than a majority of the Voting Stock of the surviving corporation immediately after such transaction and in substantially the same proportions as before the transaction; or (d) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (together with any new directors whose election or appointment or whose nomination for election by the shareholders of the Company (i) was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved or (ii) was pursuant to agreements among shareholders in effect on the Issue Date) cease for any reason to constitute a majority of the Board of Directors then in office; or (e) the shareholders of the Company shall have approved any plan of liquidation or dissolution of the Company. "CLEC Subsidiary" means (i) an Unrestricted Subsidiary engaged primarily in providing telecommunications services as a competitive local exchange carrier in areas within the United States where neither the Company nor any of its other Subsidiaries provides such services as the incumbent local exchange carrier and (ii) MJD TeleChoice Corp. to the extent it engages in no business other than the business described in clause (i) and the ownership of Capital Stock of Unrestricted Subsidiaries described in clause (i). "Code" means the Internal Revenue Code of 1986, as amended. "Commodity Price Protection Agreement" means, in respect of a Person, any forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement designed to protect such Person against fluctuations in commodity prices. "Consolidated Current Liabilities" means, as of any date of determination, the aggregate amount of liabilities of the Company and its consolidated Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), after eliminating (a) all intercompany items between the Company and any Restricted Subsidiary or between Restricted Subsidiaries and (b) all current maturities of long-term Debt. "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Company or its Restricted Subsidiaries, without duplication, (a) interest expense attributable to leases constituting part of a Sale and Leaseback Transaction and to capital leases, (b) amortization of debt discount and debt issuance cost, including commitment fees, (c) capitalized interest, (d) non-cash interest expenses, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) Disqualified Stock Dividends, (h) Preferred Stock Dividends, (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Debt of any other Person to the extent such Debt is Guaranteed by the Company or any Restricted Subsidiary and (k) the lesser of (i) cash contributions to any employee stock ownership plan or similar trust and (ii) the interest or fees paid by such plan or trust to any Person (other than the Company) in connection with Debt Incurred by such plan or trust. 91 "Consolidated Net Income" means, for any period, the net income (loss) of the Company and its consolidated Subsidiaries; provided, however, that there shall not be included in such Consolidated Net Income (a) any net income (loss) of any Person (other than the Company) if such Person is not a Restricted Subsidiary, except that (i) subject to the exclusion contained in clause (d) below, there shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Person during such period to the Company or a Restricted Subsidiary as a dividend or other distribution, whether or not reflected on the Company's income statement (subject, in the case of a dividend or other distribution to a Restricted Subsidiary, to the limitations contained in clause (c) below and excluding any such cash dividends or other distributions made by Financing Cooperatives that are reinvested in such Financing Cooperatives) and (ii) the Company's equity in a net loss of any such Person other than an Unrestricted Subsidiary for such period shall be included in determining such Consolidated Net Income, (b) for purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments" only, any net income (loss) of any Person acquired by the Company or any of its consolidated Subsidiaries in a pooling of interests transaction for any period prior to the date of such acquisition, (c) any net income (but not loss) of any Restricted Subsidiary, if such Restricted Subsidiary is subject to restrictions, directly or indirectly, on the payment of dividends or the making of distributions, directly or indirectly, to the Company, except that, subject to the exclusion contained in clause (d) below, the Company's equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash distributed by such Restricted Subsidiary during such period to the Company or another Restricted Subsidiary as a dividend or other distribution, plus the amount of income accrued during such period in excess of such distributed cash to the extent such excess income could be distributed on the date of determination (subject, in the case of a dividend or other distribution to another Restricted Subsidiary, to the limitation contained in this clause), (d) any gain (but not loss) realized upon the sale or other disposition of any Property of the Company or any of its consolidated Subsidiaries (including pursuant to any Sale and Leaseback Transaction) that is not sold or otherwise disposed of in the ordinary course of business, provided that, in the event of such a sale or other disposition of all or a portion of the Capital Stock of a Financing Cooperative, any gain therefrom shall be included in Consolidated Net Income in an amount not to exceed the amount of dividends or other distributions from such Financing Cooperative previously excluded from Consolidated Net Income pursuant to the parenthetical in clause (a)(i) above, (e) any extraordinary gain or loss, (f) the cumulative effect of a change in accounting principles and (g) any non-cash compensation expense realized for grants of performance shares, stock options or other stock awards to officers, directors and employees of the Company or any Restricted Subsidiary. Notwithstanding the foregoing, for purposes of the covenant described under "--Certain Covenants--Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any dividends, repayments of loans or advances or other transfers of assets from Unrestricted Subsidiaries to the Company or a Restricted Subsidiary to the extent such dividends, repayments or transfers increase the amount of Restricted Payments permitted under such covenant pursuant to clause (c)(iv) thereof. "Consolidated Net Tangible Assets" means, as of any date of determination, the sum of the amounts that would appear on a consolidated balance sheet of the Company and its consolidated Restricted Subsidiaries as the total assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) of the Company and its Restricted Subsidiaries, after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of (without duplication): (a) the excess of cost over fair market value of assets or businesses acquired; (b) any revaluation or other write-up in book value of assets subsequent to the last day of the fiscal quarter of the Company immediately preceding the Issue Date as a result of a change in the method of valuation in accordance with GAAP; (c) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items; (d) minority interests in consolidated Subsidiaries held by Persons other than the Company or any Restricted Subsidiary; (e) treasury stock; (f) cash or securities set aside and held in a sinking or other analogous fund established for the purpose of redemption or other retirement of Capital Stock to the extent such obligation is not reflected in Consolidated Current Liabilities; and (g) Investments in and assets of Unrestricted Subsidiaries. 92 "Consolidated Net Worth" means the total of the amounts shown on the consolidated balance sheet of the Company and its Restricted Subsidiaries as of the end of the most recent fiscal quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as (a) the par or stated value of all outstanding Capital Stock of the Company plus (b) paid-in capital or capital surplus relating to such Capital Stock plus (c) any retained earnings or earned surplus less (i) any accumulated deficit and (ii) any amounts attributable to Disqualified Stock. "Credit Facility" means, the credit agreement, dated as of March 30, 1998, among the Company, the lenders party thereto in their capacities as lenders thereunder, NationsBank of Texas, N.A., as syndication agent and Bankers Trust Company, as administrative agent, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended, restated, supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring (including increasing the amount of available borrowings thereunder, provided that such increase in borrowings is permitted by clause (b) of the second paragraph of the covenant described under "--Certain Covenants--Limitation on Debt," or adding Restricted Subsidiaries of the Company as additional borrowers or guarantors thereunder) all or any portion of the debt under such agreement or any successor or replacement agreement and whether by the same or any other agent, lender or group of lenders. "Currency Exchange Protection Agreement" means, in respect of a Person, any foreign exchange contract, currency swap agreement, currency option or other similar agreement or arrangement designed to protect such Person against fluctuations in currency exchange rates. "Debt" means, with respect to any Person on any date of determination (without duplication), (a) the principal of and premium (if any) in respect of (i) debt of such Person for money borrowed and (ii) debt evidenced by notes, debentures, bonds or other similar instruments for the payment of which such Person is responsible or liable; (b) all Capital Lease Obligations of such Person and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by such Person; (c) all obligations of such Person issued or assumed as the deferred purchase price of Property, all conditional sale obligations of such Person and all obligations of such Person under any title retention agreement (but excluding trade accounts payable arising in the ordinary course of business); (d) all obligations of such Person for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in (a) through (c) above) entered into in the ordinary course of business of such Person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the third Business Day following receipt by such Person of a demand for reimbursement following payment on the letter of credit); (e) the amount of all obligations of such Person with respect to the Repayment of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends); (f) all obligations of the type referred to in clauses (a) through (e) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee; (g) all obligations of the type referred to in clauses (a) through (f) of other Persons secured by any Lien on any Property of such Person (whether or not such obligation is assumed by such Person), the amount of such obligation being deemed to be the lesser of the value of such Property or the amount of the obligation so secured; and (h) to the extent not otherwise included in this definition, Hedging Obligations of such Person. The amount of Debt of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. The amount of Debt represented by a Hedging Obligation shall be equal to (i) zero if such Hedging Obligation has been Incurred pursuant to clause (e) of the second paragraph of the covenant described under "--Certain Covenants--Limitation on Debt" or (ii) the notional amount of such Hedging Obligation if not Incurred pursuant to such clause. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. 93 "Designated Senior Debt" means (a) any Senior Debt that has, at the time of determination, an aggregate principal amount outstanding of at least $25.0 million (including the amount of all undrawn commitments and matured and contingent reimbursement obligations pursuant to letters of credit thereunder) that is specifically designated in the instrument evidencing such Senior Debt and is designated in a notice delivered by the Company to the holders or a Representative of the holders of such Senior Debt and in an Officers' Certificate delivered to the Trustee as "Designated Senior Debt" of the Company for purposes of the Indenture and (b) the Credit Facility. "Disqualified Stock" means, with respect to any Person, any Capital Stock that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable, in either case at the option of the holder thereof) or otherwise (a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise, (b) is or may become redeemable or repurchaseable at the option of the holder thereof, in whole or in part, or (c) is convertible or exchangeable at the option of the holder thereof for Debt or Disqualified Stock, on or prior to, in the case of clause (a), (b) or (c), the first anniversary of the Stated Maturity of the Notes. "Disqualified Stock Dividends" means all dividends with respect to Disqualified Stock of the Company held by Persons other than a Wholly Owned Subsidiary. The amount of any such dividend shall be equal to the quotient of such dividend divided by the difference between one and the maximum statutory federal income tax rate (expressed as a decimal number between 1 and 0) then applicable to the Company. "EBITDA" means, for any period, an amount equal to, for the Company and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization of intangibles and (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period) minus (b) all non-cash items increasing Consolidated Net Income for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its shareholders. "Equity Investors" means Carousel Capital Partners, L.P., Kelso Investment Associates V., L.P. and Kelso Equity Partners V, L.P. "Equity Sale" means (i) a Public Equity Offering following which a Public Market exists or (ii) a Strategic Equity Investment. "Event of Default" has the meaning set forth under "--Events of Default". "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fair Market Value" means, with respect to any Property, the price that could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value shall be determined, except as otherwise provided, (a) if such Property has a Fair Market Value equal to or less than $5.0 million, by any Officer of the Company or (b) if such Property has a Fair Market Value in excess of $5.0 million, by a majority of the Board of Directors and evidenced by a Board Resolution, dated within 30 days of the relevant transaction, delivered to the Trustee. "Financing Cooperative" means CoBank ACB and Rural Telephone Finance Cooperative. 94 "GAAP" means United States generally accepted accounting principles as in effect on the Issue Date, including those set forth (a) in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants, (b) in the statements and pronouncements of the Financial Accounting Standards Board, (c) in such other statements by such other entity as approved by a significant segment of the accounting profession and (d) in the rules and regulations of the Commission governing the inclusion of financial statements (including pro forma financial statements) in periodic reports required to be filed pursuant to Section 13 of the Exchange Act, including opinions and pronouncements in staff accounting bulletins and similar written statements from the accounting staff of the Commission. "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Debt of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt of such other Person (whether arising by virtue of partnership arrangements, or by agreements to keep-well, to purchase assets, goods, securities or services, to take-or-pay or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee against loss in respect thereof (in whole or in part); provided, however, that the term "Guarantee" shall not include (i) endorsements for collection or deposit in the ordinary course of business or (ii) a contractual commitment by one Person to invest in another Person for so long as such Investment is reasonably expected to constitute a Permitted Investment under clause (c) of the definition of Permitted Investments. The term "Guarantee" used as a verb has a corresponding meaning. The term "Guarantor" shall mean any Person Guaranteeing any obligation. "Hedging Obligation" of any Person means any obligation of such Person pursuant to any Interest Rate Agreement, Currency Exchange Protection Agreement, Commodity Price Protection Agreement or any other similar agreement or arrangement. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by merger, conversion, exchange or otherwise), extend, assume, Guarantee or become liable in respect of such Debt or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Debt or obligation on the balance sheet of such Person (and "Incurrence" and "Incurred" shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time, and is not theretofore classified as Debt, becoming Debt shall not be deemed an Incurrence of such Debt; provided further, however, that solely for purposes of determining compliance with "--Certain Covenants--Limitation on Debt", amortization of debt discount shall not be deemed to be the Incurrence of Debt, provided that in the case of Debt sold at a discount, the amount of such Debt Incurred shall at all times be the accreted value of such Debt. "Independent Appraiser" means an investment banking firm of national standing or any third party appraiser of national standing, provided that such firm or appraiser is not an Affiliate of the Company. "Interest Rate Agreement" means, for any Person, any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement designed to protect against fluctuations in interest rates. "Investment" by any Person means any direct or indirect loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of such Person), advance or other extension of credit or capital contribution (by means of transfers of cash or other Property to others or payments for Property or services for the account or use of others, or otherwise) to, or Incurrence of a Guarantee of any obligation of, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. For purposes of the covenants described under "--Certain Covenants-- Limitation on Restricted Payments" and "--Designation of Restricted and Unrestricted Subsidiaries" and the definitions of "Restricted Payment," and "Investment" shall include the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Company at the time that such Subsidiary is designated an Unrestricted Subsidiary; 95 provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall be deemed to continue to have a permanent "Investment" in an Unrestricted Subsidiary of an amount (if positive) equal to (a) the Company's "Investment" in such Subsidiary at the time of such redesignation less (b) the portion (proportionate to the Company's equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation. In determining the amount of any Investment made by transfer of any Property other than cash, such Property shall be valued at its Fair Market Value at the time of such Investment. "Issue Date" means the date on which the Offered Notes are initially issued. "Leverage Ratio" means the ratio of (a) the outstanding Debt of the Company and the Restricted Subsidiaries on a consolidated basis to (b) the Pro Forma EBITDA for the last four full fiscal quarters preceding the date on which such calculation is made. "Lien" means, with respect to any Property of any Person, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including any Capital Lease Obligation, conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing or any Sale and Leaseback Transaction). "Moody's" means Moody's Investors Service, Inc. or any successor to the rating agency business thereof. "Net Available Cash" from any Asset Sale means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Debt or other obligations relating to the Property that is the subject of such Asset Sale or received in any other non-cash form), in each case net of (a) all legal, title and recording tax expenses, commissions and other fees and expenses incurred, and all Federal, state, provincial, foreign and local taxes required to be accrued as a liability under GAAP, as a consequence of such Asset Sale, (b) all payments made on any Debt that is secured by any Property subject to such Asset Sale, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such Property, or which must by its terms, or in order to obtain a necessary consent to such Asset Sale, or by applicable law, be repaid out of the proceeds from such Asset Sale, (c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Sale and (d) the deduction of appropriate amounts provided by the seller as a reserve, in accordance with GAAP, against any liabilities associated with the Property disposed in such Asset Sale and retained by the Company or any Restricted Subsidiary after such Asset Sale. "Officer" means the Chief Executive Officer, the President, the Chief Financial Officer or any Executive Vice President of the Company. "Officers' Certificate" means a certificate signed by two Officers of the Company, at least one of whom shall be the principal executive officer or principal financial officer of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Holders" means Daniel G. Bergstein, JED Associates, Inc., Meyer Haberman, Jack H. Thomas, Eugene B. Johnson, Walter E. Leach, Jr., John P. Duda, Carousel Capital Partners, L.P., Kelso Investment Associates V, L.P. and Kelso Equity Partners V, L.P. (or any successor entity of the Equity Investors controlled by the current principals of the Equity Investors or any entity controlled by, or under common control with, the Equity Investors) and their respective estates, spouses, ancestors and lineal descendants, the legal representatives of any of the foregoing and the trustees of any bona fide trusts of which the foregoing are the sole beneficiaries 96 or the grantors, or any Person of which the foregoing "beneficially owns" (as defined in Rule 13d-3 under the Exchange Act), individually or collectively with any of the foregoing, at least a majority of the total voting power of the Voting Stock of such Person. "Permitted Investment" means any Investment by the Company or a Restricted Subsidiary in (a) any Restricted Subsidiary or any Person that will, upon the making of such Investment, become a Restricted Subsidiary, provided that the primary business of such Restricted Subsidiary is a Telecommunications Business; (b) a CLEC Subsidiary in an aggregate amount, together with the aggregate amount of all other such Investments made in CLEC Subsidiaries pursuant to this clause (b), not to exceed $65.0 million; provided, however, that (i) in the first year following the Issue Date, the aggregate amount of such Investments made during such year shall not exceed $5.0 million and (ii) in each of the second, third, fourth and fifth years following the Issue Date, the aggregate amount of such Investments made during such year shall not exceed $15.0 million (each such Investment a "Permitted CLEC Investment," and each such amount set forth in clauses (i) and (ii) a "Permitted CLEC Investment Amount"); provided further, however, that any excess Permitted CLEC Investment Amount over the total Permitted CLEC Investments made in any given year may be added to the Permitted CLEC Investment Amount for any subsequent year; (c) any Person if as a result of such Investment such Person is merged or consolidated with or into, or transfers or conveys all or substantially all its Property to, the Company or a Restricted Subsidiary, provided that such Person's primary business is a Telecommunications Business; (d) Temporary Cash Investments; (e) receivables owing to the Company or a Restricted Subsidiary, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms; provided, however, that such trade terms may include such concessionary trade terms as the Company or such Restricted Subsidiary deems reasonable under the circumstances; (f) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses for accounting purposes and that are made in the ordinary course of business; (g) loans and advances to employees made in the ordinary course of business consistent with past practices of the Company or a Restricted Subsidiary, as the case may be, provided that such loans and advances do not exceed $1.0 million at any one time outstanding; (h) stock, obligations or other securities received in settlement of debts created in the ordinary course of business and owing to the Company or a Restricted Subsidiary or in satisfaction of judgments; (i) Capital Stock of a Financing Cooperative made through the reinvestment of dividends or other distributions received from such Financing Cooperative; (j) any Person to the extent such Investment represents the non-cash portion of the consideration received in connection with an Asset Sale consummated in compliance with the covenant described under "--Certain Covenants--Limitation on Asset Sales"; and (k) other Investments made for Fair Market Value that do not exceed $5.0 million outstanding at any one time in the aggregate. "Permitted Liens" means: (a) Liens to secure Debt permitted to be Incurred under clause (b) of the second paragraph of the covenant described under "--Certain Covenants-- Limitation on Debt"; (b) Liens to secure Debt permitted to be Incurred under clause (c) of the second paragraph of the covenant described under "--Certain Covenants-- Limitation on Debt", provided that any such Lien may not extend to any Property of the Company or any Restricted Subsidiary, other than the Property acquired, constructed or leased with the proceeds of such Debt and any improvements or accessions to such Property; (c) Liens for taxes, assessments or governmental charges or levies on the Property of the Company or any Restricted Subsidiary if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings promptly instituted and diligently concluded, provided that any reserve or other appropriate provision that shall be required in conformity with GAAP shall have been made therefor; (d) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens, on the Property of the Company or any Restricted Subsidiary arising in the ordinary course of business and securing payment of obligations that are not more than 60 days past due or are being contested in good faith and by appropriate proceedings; 97 (e) Liens on the Property of the Company or any Restricted Subsidiary Incurred in the ordinary course of business to secure performance of obligations with respect to statutory or regulatory requirements, performance or return-of-money bonds, surety bonds or other obligations of a like nature and Incurred in a manner consistent with industry practice, in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair in any material respect the use of Property in the operation of the business of the Company and the Restricted Subsidiaries taken as a whole; (f) Liens on Property at the time the Company or any Restricted Subsidiary acquired such Property, including any acquisition by means of a merger or consolidation with or into the Company or any Restricted Subsidiary; provided, however, that any such Lien may not extend to any other Property of the Company or any Restricted Subsidiary; provided further, however, that such Liens shall not have been Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Property was acquired by the Company or any Restricted Subsidiary; (g) Liens on the Property of a Person at the time such Person becomes a Restricted Subsidiary; provided, however, that any such Lien may not extend to any other Property of the Company or any other Restricted Subsidiary that is not a direct Subsidiary of such Person; provided further, however, that any such Lien was not Incurred in anticipation of or in connection with the transaction or series of transactions pursuant to which such Person became a Restricted Subsidiary; (h) pledges or deposits by the Company or any Restricted Subsidiary under workmen's compensation laws, unemployment insurance laws or similar legislation, or good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which the Company or any Restricted Subsidiary is party, or deposits to secure public or statutory obligations of the Company, or deposits for the payment of rent, in each case Incurred in the ordinary course of business; (i) utility easements, building restrictions and such other encumbrances or charges against real Property as are of a nature generally existing with respect to properties of a similar character; (j) Liens existing on the Issue Date not otherwise described in clauses (a) through (i) above; (k) Liens on the Property of the Company or any Restricted Subsidiary to secure any Refinancing, in whole or in part, of any Debt secured by Liens referred to in clause (b), (f), (g) or (j) above; provided, however, that any such Lien shall be limited to all or part of the same Property that secured the original Lien (together with improvements and accessions to such Property) and the aggregate principal amount of Debt that is secured by such Lien shall not be increased to an amount greater than the sum of (i) the outstanding principal amount, or, if greater, the committed amount, of the Debt secured by Liens described under clause (b), (f), (g) or (j) above, as the case may be, at the time the original Lien became a Permitted Lien under the Indenture and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, incurred by the Company or such Restricted Subsidiary in connection with such Refinancing; and (l) Liens not otherwise permitted by clauses (a) through (k) above encumbering assets having an aggregate Fair Market Value not in excess of 5.0% of Consolidated Net Tangible Assets, as determined based on the consolidated balance sheet of the Company as of the end of the most recent fiscal quarter ending at least 45 days prior to the date any such Lien shall be Incurred. "Permitted Refinancing Debt" means any Debt that Refinances any other Debt, including any successive Refinancings, so long as (a) such Debt is in an aggregate principal amount (or if Incurred with original issue discount, an aggregate issue price) not in excess of the sum of (i) the aggregate principal amount (or if Incurred with original issue discount, the aggregate accreted value) then outstanding of the Debt being Refinanced and (ii) an amount necessary to pay any fees and expenses, including premiums and defeasance costs, related to such Refinancing, (b) the Average Life of such Debt is equal to or greater than the Average Life of the Debt being Refinanced, (c) the Stated Maturity of such Debt is no earlier than the Stated Maturity of the Debt being 98 Refinanced and (d) the new Debt shall not be senior in right of payment to the Debt that is being Refinanced; provided, however, that Permitted Refinancing Debt shall not include (x) Debt of a Subsidiary that Refinances Debt of the Company or (y) Debt of the Company or a Restricted Subsidiary that Refinances Debt of an Unrestricted Subsidiary. "Person" means any individual, corporation, company (including any limited liability company), association, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock" means any Capital Stock of a Person, however designated, which entitles the holder thereof to a preference with respect to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of any other class of Capital Stock issued by such Person. "Preferred Stock Dividends" means all dividends with respect to Preferred Stock of Restricted Subsidiaries held by Persons other than the Company or a Wholly Owned Subsidiary. The amount of any such dividend shall be equal to the quotient of such dividend divided by the difference between one and the maximum statutory federal income rate (expressed as a decimal number between 1 and 0) then applicable to the issuer of such Preferred Stock. "pro forma" means, with respect to any calculation made or required to be made pursuant to the terms hereof, a calculation performed in accordance with Article 11 of Regulation S-X promulgated under the Securities Act, as interpreted in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, or otherwise a calculation made in good faith by the Board of Directors after consultation with the independent certified public accountants of the Company, as the case may be. "Pro Forma EBITDA" means, for any period, the EBITDA of the Company and its consolidated Restricted Subsidiaries, after giving effect to the following: if (a) since the beginning of such period, the Company or any Restricted Subsidiary shall have made any Asset Sale, Investment (by merger or otherwise) in any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary) or an acquisition of Property, (b) the transaction giving rise to the need to calculate Pro Forma EBITDA is such an Asset Sale, Investment or acquisition or (c) since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Company or any Restricted Subsidiary since the beginning of such period) shall have made such an Asset Sale, Investment or acquisition, EBITDA for such period shall be calculated after giving pro forma effect to such Asset Sale, Investment or acquisition as if such Asset Sale, Investment or acquisition occurred on the first day of such period. For purposes of this definition, notwithstanding the definition of "pro forma," EBITDA shall be calculated on a pro forma basis after giving effect to cost savings resulting from employee terminations, facilities consolidations and closings, standardization of employee benefits and compensation practices, consolidation of property, casualty and other insurance coverage and policies, standardization of sales representation commissions and other contract rates, and reductions in taxes other than income taxes (collectively, "Cost Savings Measures"), which cost savings the Company reasonably believes in good faith would have been achieved during the period for which such calculation is being made as a result of acquisitions of Property (regardless of whether such Cost Savings Measures could then be reflected in pro forma financial statements under GAAP, Regulation S-X promulgated by the Commission or any other regulation or policy of the Commission), provided that both (i) such cost savings and Cost Savings Measures were identified and such cost savings were quantified in an Officers' Certificate delivered to the Trustee at the time of the consummation of an acquisition of Property and such Officers' Certificate states that such officers believe in good faith that actions will be commenced or initiated within 90 days of such acquisition of Property to effect such Cost Savings Measures and (ii) with respect to each acquisition of Property completed prior to the 90th day preceding such date of determination, actions were commenced or initiated by the Company or any of its Restricted Subsidiaries within 90 days of such 99 acquisition of Property to effect the Cost Savings Measures identified in such Officers' Certificate (regardless, however, of whether the corresponding cost savings have been achieved). "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including Capital Stock in, and other securities of, any other Person. For purposes of any calculation required pursuant to the Indenture, the value of any Property shall be its Fair Market Value. "Public Equity Offering" means an underwritten public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act. "Public Market" means any time after (a) a Public Equity Offering has been consummated and (b) at least 15.0% of the total issued and outstanding common stock of the Company has been distributed by means of an effective registration statement under the Securities Act or sales pursuant to Rule 144 under the Securities Act. "Purchase Money Debt" means Debt (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of industrial revenue bonds, in each case where the maturity of such Debt does not exceed the anticipated useful life of the Property being financed, and (b) Incurred to finance the acquisition, construction or lease by the Company or a Restricted Subsidiary of such Property, including additions and improvements thereto; provided, however, that such Debt is Incurred within 180 days after the acquisition, construction or lease of such Property by the Company or such Restricted Subsidiary. "Refinance" means, in respect of any Debt, to refinance, extend, renew, refund, repay, prepay, repurchase, redeem, defease or retire, or to issue other Debt, in exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall have correlative meanings. "Repay" means, in respect of any Debt, to repay, prepay, repurchase, redeem, legally defease or otherwise retire such Debt. "Repayment" and "Repaid" shall have correlative meanings. For purposes of the covenant described under "-- Certain Covenants--Limitation on Asset Sales" and clause (b) of the covenant described under "--Certain Covenants--Limitation on Debt", Debt shall be considered to have been Repaid only to the extent the related loan commitment, if any, shall have been permanently reduced in connection therewith, without the right on the part of the Company or any of its Subsidiaries, pursuant to an agreement in effect at the time of such Repayment, to cause such commitment to be reinstated or replaced with a substantially similar commitment. "Representative" means the trustee, agent or representative expressly authorized to act in such capacity, if any, for an issue of Senior Debt. "Restricted Payment" means (a) any dividend or distribution (whether made in cash, securities or other Property) declared or paid on or with respect to any shares of Capital Stock of the Company or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Company or any Restricted Subsidiary), except for any dividend or distribution that is made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other shareholders of such Restricted Subsidiary on a pro rata basis or on a basis that results in the receipt by the Company or a Restricted Subsidiary of dividends or distributions of greater value than it would receive on a pro rata basis) or any dividend or distribution payable solely in shares of Capital Stock (other than Disqualified Stock) of the Company; (b) the purchase, repurchase, redemption, acquisition or retirement for value of any Capital Stock of the Company or any Affiliate of the Company (other than from the Company or a Restricted Subsidiary) or any securities exchangeable for or convertible into any such Capital Stock, including the exercise of any option to exchange any Capital Stock (other than for or into Capital Stock of the Company that is not Disqualified Stock); (c) the purchase, repurchase, redemption, acquisition or retirement for value, prior to the date for any scheduled maturity, sinking fund or amortization or other installment payment, of any Subordinated Obligation (other than the purchase, repurchase or other acquisition of any Subordinated Obligation purchased in 100 anticipation of satisfying a scheduled maturity, sinking fund or amortization or other installment obligation, in each case due within one year of the date of acquisition); (d) any Investment (other than Permitted Investments) in any Person; or (e) the issuance, sale or other disposition of Capital Stock of any Restricted Subsidiary to a Person other than the Company or another Restricted Subsidiary if the result thereof is that such Restricted Subsidiary shall cease to be a Restricted Subsidiary, in which event the amount of such "Restricted Payment" shall be the Fair Market Value of the remaining interest, if any, in such former Restricted Subsidiary held by the Company and the other Restricted Subsidiaries. "Restricted Subsidiary" means (a) any Subsidiary of the Company unless such Subsidiary shall have been designated an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under "--Certain Covenants--Designation of Restricted and Unrestricted Subsidiaries" and (b) an Unrestricted Subsidiary that is redesignated as a Restricted Subsidiary as permitted pursuant to such covenant. "S&P" means Standard & Poor's Ratings Service or any successor to the rating agency business thereof. "Sale and Leaseback Transaction" means any arrangement relating to Property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such Property to another Person and the Company or a Restricted Subsidiary, within two years of such transfer, leases it from such Person. "Securities Act" means the Securities Act of 1933. "Senior Debt" means (a) all obligations consisting of the principal, premium, if any, and accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company whether or not post-filing interest is allowed in such proceeding) in respect of (i) Debt of the Company for borrowed money (including all monetary obligations of the Company under the Credit Facility) and (ii) Debt of the Company evidenced by notes, debentures, bonds or other similar instruments permitted under the Indenture for the payment of which the Company is responsible or liable; (b) all Capital Lease Obligations of the Company and all Attributable Debt in respect of Sale and Leaseback Transactions entered into by the Company; (c) all obligations of the Company (i) for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction, (ii) under Hedging Obligations or (iii) issued or assumed as the deferred purchase price of Property and all conditional sale obligations of the Company and all obligations under any title retention agreement permitted under the Indenture; and (d) all obligations of other Persons of the type referred to in clauses (a), (b) and (c) for the payment of which the Company is responsible or liable as Guarantor; provided, however, that Senior Debt shall not include (A) Debt of the Company that is by its terms expressly subordinate or pari passu in right of payment to the Notes, including any Senior Subordinated Debt or any Subordinated Obligations; (B) any Debt Incurred in violation of the provisions of the Indenture (but, as to any such obligation, no such violation shall be deemed to exist for purposes of this clause (B) if the holders of such obligation or their Representative and the Trustee shall have received an Officers' Certificate of the Company to the effect that the Incurrence of such Debt does not (or, in the case of revolving credit indebtedness (including revolving credit indebtedness under the Acquisition Facility), that the Incurrence of the entire committed amount thereof at the date on which the initial borrowing thereunder is made would not) violate such provisions of the Indenture); (C) accounts payable or any other obligations of the Company to trade creditors created or assumed by the Company in the ordinary course of business in connection with the obtaining of materials or services (including Guarantees thereof or instruments evidencing such liabilities); (D) any liability for federal, state, local or other taxes owed or owing by the Company; (E) any obligation of the Company to any Subsidiary; or (F) any obligations with respect to any Capital Stock of the Company. "Senior Subordinated Debt" means the Notes and any other subordinated Debt of the Company that specifically provides that such Debt is to rank pari passu with the Notes and is not subordinated by its terms to any other subordinated Debt or other obligation of the Company which is not Senior Debt. "Significant Subsidiary" means any Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S- X promulgated by the Commission. 101 "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Strategic Equity Investment" means an equity investment made by a Strategic Investor in the Company in an aggregate amount of at least $25.0 million and that results in such Strategic Investor becoming the owner of at least 15.0% of the total issued and outstanding common stock of the Company. "Strategic Investor" means a corporation, partnership or other entity engaged in one or more Telecommunications Businesses that has, or 80.0% or more of the Voting Stock of which is owned by a Person that has, an equity market capitalization, at the time of its initial investment in the Company, in excess of $2.0 billion. "Subordinated Obligation" means any Debt of the Company (whether outstanding on the Issue Date or thereafter Incurred) that is subordinate or junior in right of payment to the Notes pursuant to a written agreement to that effect (which shall include the subordination section of any document governing such Debt). "Subsidiary" means, in respect of any Person, any corporation, company (including any limited liability company), association, partnership, joint venture or other business entity of which a majority of the total voting power of the Voting Stock is at the time owned or controlled, directly or indirectly, by (a) such Person, (b) such Person and one or more Subsidiaries of such Person or (c) one or more Subsidiaries of such Person. "Telecommunications Assets" means any Property, including licenses and applications, bids and agreements to acquire licenses, or other authority to provide telecommunications services, previously granted, or to be granted, by the Federal Communications Commission, used or intended for use primarily in connection with a Telecommunications Business. "Telecommunications Business" means any business substantially all the revenues of which are derived from (a) transmitting, or providing services relating to the transmission of, voice, video or data through owned or leased wireline or wireless facilities, (b) the sale or provision of phone cards, "800" services, voice mail, switching, enhanced telecommunications services, telephone directory or telephone number information services or telecommunications network intelligence or (c) any business ancillary or directly related to the businesses referred to in clause (a) or (b), provided that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors. "Temporary Cash Investments" means any of the following: (a) Investments in U.S. Government Obligations maturing within one year of such Investment; (b) Investments in time deposit accounts, certificates of deposit and money market deposits maturing within 180 days of the date of acquisition thereof issued by a bank or trust company organized under the laws of the United States of America or any state thereof having capital, surplus and undivided profits aggregating in excess of $500.0 million and whose long-term debt is rated "A- 3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); (c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clause (a) entered into with a bank meeting the qualifications described in clause (b) above; (d) Investments in commercial paper, maturing not more than 90 days after the date of acquisition, issued by a corporation (other than an Affiliate of the Company) organized and in existence under the laws of the United States of America with a rating at the time as of which any Investment therein is made of "P-1" (or higher) according to Moody's or "A-1" (or higher) according to S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)); and (e) direct obligations (or certificates representing an ownership interest in such obligations) of any state of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of such state 102 is pledged and which are not callable or redeemable at the issuer's option, provided that (i) the long-term debt of such state is rated "A-3" or "A-" or higher according to Moody's or S&P (or such similar equivalent rating by at least one "nationally recognized statistical rating organization" (as defined in Rule 436 under the Securities Act)) and (ii) such obligations mature within 180 days of the date of acquisition thereof. "Unrestricted Subsidiary" means (a) MJD TeleChoice Corp.; (b) any Subsidiary of an Unrestricted Subsidiary; and (c) any Subsidiary of the Company that is designated after the Issue Date as an Unrestricted Subsidiary as permitted or required pursuant to the covenant described under "--Certain Covenants-- Designation of Restricted and Unrestricted Subsidiaries" and not thereafter redesignated as a Restricted Subsidiary as permitted pursuant thereto. "U.S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable or redeemable at the issuer's option. "Voting Stock" of any Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof. "Wholly Owned Subsidiary" means, at any time, a Restricted Subsidiary all the Voting Stock of which (except directors' qualifying shares) is at such time owned, directly or indirectly, by the Company and its other Wholly Owned Subsidiaries. 103 CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes the material United States federal income tax consequences of the Exchange Offer to a holder of Old Notes that is an individual citizen or resident of the United States or a United States corporation that purchased the Old Notes pursuant to their original issue (a "U.S. Holder"). It is based on the Internal Revenue Code of 1986, as amended to the date hereof (the "Code") existing and proposed Treasury regulations, and judicial and administrative determinations, all of which are subject to change at any time, possibly on a retroactive basis. The following relates only to the Old Notes, and the Exchange Notes received therefor, that are held as "capital assets" within the meaning of Section 1221 of the Code by U.S. Holders. It does not discuss state, local, or foreign tax consequences, nor does it discuss tax consequences to subsequent purchasers (persons who did not purchase the Old Notes pursuant to their original issue), or to categories of holders that are subject to special rules, such as foreign persons, tax-exempt organizations, insurance companies, banks, and dealers in stocks and securities. Tax consequences may vary depending on the particular status of an investor. No rulings will be sought from the Internal Revenue Service (the "IRS") with respect to the federal income tax consequences of the Exchange Offer. THIS SECTION DOES NOT PURPORT TO DEAL WITH ALL ASPECTS OF FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO AN INVESTOR'S DECISION TO EXCHANGE OLD NOTES FOR EXCHANGE NOTES. EACH INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISOR CONCERNING THE APPLICATION OF THE FEDERAL INCOME TAX LAWS AND OTHER TAX LAWS TO ITS PARTICULAR SITUATION BEFORE DETERMINING WHETHER TO EXCHANGE OLD NOTES FOR EXCHANGE NOTES. THE EXCHANGE OFFER The Company believes that the exchange of Exchange Notes pursuant to the Exchange Offer will be treated as a continuation of the corresponding Old Notes because the terms of the Exchange Notes are not materially different from the terms of the Old Notes, and accordingly (i) such exchange will not constitute a taxable event to a U.S. Holder, (ii) no gain or loss will be realized by a U.S. Holder upon receipt of an Exchange Note, (iii) the holding period of the Exchange Note will include the holding period of the Old Note exchanged therefor and (iv) the adjusted tax basis of the Exchange Note will be the same as the adjusted tax basis of the Old Notes exchanged therefor immediately before the exchange. STATED INTEREST Stated interest of a Note will be taxable to a U.S. Holder as ordinary interest income at the time that such interest accrues or is received, in accordance with the U.S. Holder's regular method of accounting for federal income tax purposes. The Notes are not considered to have been issued with original issue discount for federal income tax purposes. SALE, EXCHANGE OR RETIREMENT OF THE NOTES A U.S. Holder's tax basis in a Note generally will be its cost. A U.S. Holder generally will recognize gain or loss on the sale, exchange or retirement of a Note in an amount equal to the difference between the amount realized on the sale, exchange or retirement and the tax basis of the Note. Gain or loss recognized on the sale, exchange or retirement of a Note (excluding amount received in respect of accrued interest, which will be taxable as ordinary interest income) generally will be capital gain or loss. The maximum rate of tax on long term capital gains on most capital assets held by an individual, trust or estate for more than 18 months is 20%, and for most capital assets held for more than one year and up to 18 months is 28%. BACKUP WITHHOLDING Under certain circumstances, a U.S. Holder of a Note may be subject to "backup withholding" at a 31% rate with respect to payments of interest thereon or the gross proceeds from the disposition thereof. This 104 withholding generally applies if the U.S. Holder fails to furnish his or her social security number or other taxpayer identification number in the specified manner and in certain other circumstances. Any amount withheld from a payment to a U.S. Holder under the backup withholding rules is allowable as a credit against such U.S. Holder's federal income tax liability provided that the required information is furnished to the IRS. Corporations and certain other entities described in the Code and Treasury regulations are exempt from backup withholding if their exempt status is properly established. PLAN OF DISTRIBUTION A broker-dealer that is the holder of Old Notes that were acquired for the account of such broker-dealer as a result of market-making or other trading activities (other than Old Notes acquired directly from the Company or any affiliate of the Company) may exchange such Old Notes for Exchange Notes pursuant to the Exchange Offer; provided, that each broker-dealer that receives Exchange Notes for its own account in exchange for Old Notes, where such Old notes were acquired by such broker-dealer as a result of market- making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Company has agreed that for a period of 180 days after consummation of the Exchange Offer, it will make this Prospectus, as it may be amended or supplemented from time to time, available to any broker-dealer for use in connection with any such resale. In addition, until , 1998, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of Exchange Notes by broker-dealers or any other holder of Exchange Notes. Exchange Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after consummation of the Exchange Offer, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer and to the Company's performance of, or compliance with, the Registration Agreement (other than commissions or concessions of any brokers or dealers) and will indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters relating to the Exchange Notes offered hereby will be passed upon on behalf of the Company by Paul, Hastings, Janofsky & Walker LLP, New York, New York. 105 EXPERTS The consolidated balance sheets of MJD Communications, Inc. and its subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1997 have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report, and are incorporated herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated balance sheets of Taconic Telephone Corp. and its subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three year period ended December 31, 1997 have been audited by KPMG Peat Marwick LLP, independent auditors, as stated in their report, and are incorporated herein, in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated balance sheets of Ellensburg Telephone Company and its subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997 have been audited by Moss Adams LLP, independent auditors, as stated in their report, and are incorporated herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated balance sheets of Utilities, Inc. and its subsidiaries as of December 31, 1996 and 1997 and the related consolidated statements of income and retained earnings, changes in stockholder's equity, and cash flows for each of the years in the three year period ended December 31, 1997 have been audited by Berry, Dunn, McNeil & Parker, independent auditors, as stated in their report, and are incorporated herein, in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated balance sheets of Chautauqua & Erie Telephone Corporation as of December 31, 1996, and the related consolidated statements of income and retained earnings, and cash flows for the year then ended have been audited by Ernst & Young LLP, independent auditors, as stated in their report, and are incorporated herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The balance sheets of Big Sandy Telecommunications, Inc. as of December 31, 1995 and 1994 and the related statements of income, changes in stockholder's equity, and cash flows for each of the years then ended have been audited by Kiesling Associates, independent auditors, as stated in their report, and are incorporated herein, in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 106 GLOSSARY CABS--Carrier Access Billing System. CAP (competitive access provider)--A company that provides its customers with an alternative to the local exchange company for local transport or private line and special access telecommunications services. CATV--Cable Television. Central offices--The switching centers or central switching facilities of the local exchange companies. Centrex--Business local service that gives the customer control of user features. CLEC--Competitive Local Exchange Carrier. CSA--Carrier Serving Areas. DBS--Direct Broadcast Satellite. Dedicated--Telecommunications lines reserved for use by particular customers. Dialing Parity--The ability of a competing local or toll service provider to provide telecommunications services in such a manner that customers have the ability to route automatically, without the use of any access code, their telecommunications to the service provider of the customer's designation and the ability of customers to dial the same number of digits on a competitor's network as on the LEC's network. Digital--A method of storing, processing and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits of 0 and 1. Digital transmission and switching technologies employ a sequence of these pulses to represent information as opposed to the continuously viable analog signal. The precise digital numbers minimize distortion in the case of audio transmission. ILEC--Incumbent Local Exchange Carrier. Interconnection--Interconnection of facilities between or among local exchange carriers, including potential physical colocation of one carrier's equipment in the other carrier's premises to facilitate such interconnection. InterLATA--Telecommunications services originating in a LATA and terminating outside of that LATA. IntraLATA--Telecommunications services originating and terminating within the same LATA. ISDN--Integrated Services Digital Network--High speed high capacity voice and data communications. ISP--Internet Service Provider. IXC--Inter-exchange (or long distance) carrier. LATA (local access and transport area)--A geographic area composed of contiguous local exchanges, usually but not always, within a single state. Local exchange--A geographic area determined by the appropriate state regulatory authority in which calls generally are transmitted without toll charges to the calling or called party. LEC (local exchange carrier)--A company providing local telephone services. Long distance carriers (interexchange carriers)--Long distance carriers provide services between local exchanges on an interstate or intrastate basis. A long distance carrier may offer services over its own or another carrier's facilities. 107 MACC--Mid America Computer Corporation. MSA--Metropolitan Statistical Area. NECA--National Exchange Carrier Association. NGDLC--Next Generation Digital Line Concentrators. NTCA--National Telephone Cooperative Association. OPASTCO--Organization for the Protection and Advancement of Small Telecommunications Companies. pari passu--at an equal rate or level. PCS (personal communication service)--A telephone service with respect to which a telephone number or numbers are assigned to a person rather than to a fixed location thereby allowing that person to receive and make calls from any location within the area serviced by the personal communication service. POP--The estimates of the 1995 population of a Metropolitan Statistics Area for which the FCC licensed communications systems or a Rural Service Area for which the FCC licensed communications systems, as derived from the 1995 population estimates prepared by Strategic Mapping, Inc. RBOC--Regional Bell Operating Company. RLEC--Rural Local Exchange Carrier. RSA--Rural Statistical Area. RFTC--Rural Telephone Finance Cooperative. SS7--Signal System 7--Digital signaling network for high speed processing of toll calls. Switch--A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is a process of interconnecting circuits to form a transmission path between users. Unbundled Access--Access to unbundled elements of a telecommunications services provider's network, including network facilities, equipment, features, functions and capabilities, at any technically feasible point within such network. USAC--Universal Service Administration Corporation--FCC appointed administrator of universal service support funds. USSF--Universal Service Support Fund. USTA--United States Telephone Association. 108 INDEX TO FINANCIAL STATEMENTS
PAGE ---- MJD COMMUNICATIONS, INC. AND SUBSIDIARIES: Independent Auditors' Report........................................... F-3 Consolidated Balance Sheets as of December 31, 1996 and 1997........... F-4 Consolidated Statements of Operations for the Years ended December 31, 1995, 1996 and 1997................................................... F-5 Consolidated Statements of Stockholders' Equity (Deficit) for the Years ended December 31, 1995, 1996 and 1997................................ F-6 Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997................................................... F-7 Notes to Consolidated Financial Statements............................. F-8 Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998 (Unaudited)........................................................... F-23 Consolidated Statements of Operations for the six months ended June 30, 1997 and 1998 (Unaudited)............................................. F-24 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1998 (Unaudited)............................................. F-25 Notes to Consolidated Financial Statements............................. F-26 TACONIC TELEPHONE CORP. AND SUBSIDIARIES: Independent Auditors' Report........................................... F-29 Consolidated Balance Sheets as of December 31, 1996 and 1997........... F-30 Consolidated Statements of Operations for the Years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (Unaudited)........................................................... F-31 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1995, 1996 and 1997...................................... F-32 Consolidated Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (Unaudited) .......................................................... F-33 Notes to Consolidated Financial Statements............................. F-34 ELLENSBURG TELEPHONE COMPANY: Independent Auditor's Report........................................... F-44 Consolidated Balance Sheet as of December 31, 1996 and 1997 and March 31, 1998 (Unaudited).................................................. F-45 Consolidated Statement of Income for the Years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (Unaudited)........................................................... F-46 Consolidated Statement of Shareholders' Equity for the Years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998 (Unaudited)...................................................... F-47 Consolidated Statement of Cash Flows for the Years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998 (Unaudited)........................................................... F-48 Notes to Consolidated Financial Statements............................. F-49 UTILITIES, INC. AND SUBSIDIARIES: Independent Auditors' Report........................................... F-54 Consolidated Balance Sheets as of December 31, 1997 and 1996 and March 31, 1998 (Unaudited) and June 30, 1998 (Unaudited).................... F-55 Liabilities and Stockholders' Equity................................... F-56 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 and Three-Month Periods ended March 31, 1998 and 1997 (Unaudited) and Six-Month Periods ended June 30, 1998 and 1997 (Unaudited)........................................................... F-57
F-1
PAGE ---- Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 and Three-Month Period ended March 31, 1998 (Unaudited) and Six-Month Periods ended June 30, 1998 and 1997 (Unaudited)............................................. F-58 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 and Three-Month Periods ended March 31, 1998 and 1997 (Unaudited) and Six Month Periods ended June 30, 1998 and 1997 (Unaudited)........................................................... F-59 Notes to Consolidated Financial Statements............................. F-60 CHAUTAUQUA & ERIE TELEPHONE CORPORATION: Report of Independent Auditors......................................... F-72 Consolidated Balance Sheet as of December 31, 1996..................... F-73 Consolidated Statement of Income and Retained Earnings for the Years ended December 31, 1996 and 1995...................................... F-74 Consolidated Statement of Cash Flows for the Years ended December 31, 1996 and 1995......................................................... F-75 Notes to Consolidated Financial Statements............................. F-76 Condensed Consolidated Statement of Income and Retained Earnings for the Six Months ended June 30, 1997 (Unaudited)........................ F-81 Condensed Consolidated Statement of Cash Flows for the Six Months ended June 30, 1997 (Unaudited)............................................. F-82 Notes to Condensed Consolidated Financial Statements................... F-83 BIG SANDY TELECOMMUNICATIONS, INC.: Independent Auditor's Report........................................... F-84 Balance Sheets as of December 31, 1995 and 1994........................ F-85 Statements of Income for the Years Ended December 31, 1995 and 1994.... F-87 Statements of Changes In Stockholders' Equity for the Years Ended December 31, 1995 and 1994............................................ F-88 Statements of Cash Flows for the Years Ended December 31, 1995 and 1994.................................................................. F-89 Notes to Financial Statements.......................................... F-90 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF MJD COMMUNICATIONS, INC. AND SUBSIDIARIES.................................... P-1
F-2 INDEPENDENT AUDITORS' REPORT The Board of Directors MJD Communications, Inc.: We have audited the accompanying consolidated balance sheets of MJD Communications, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial position of MJD Communications, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Lincoln, Nebraska February 27, 1998, except the last two paragraphs of note 2 and note 16 which are as of April 2, 1998 and note 17 which is as of April 8, 1998 F-3 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 ----------- ----------- ASSETS Current assets: Cash and cash equivalents.......................... $ 4,252,732 6,822,462 Accounts receivable, net of allowance for doubtful accounts of $57,734 in 1996 and $49,204 in 1997............ 4,889,608 8,312,778 Prepaid and other assets........................... 429,831 1,248,627 Income taxes recoverable........................... 27,047 757,001 ----------- ----------- Total current assets............................. 9,599,218 17,140,868 ----------- ----------- Property, plant and equipment, net................... 41,614,696 61,206,890 ----------- ----------- Other assets: Investments........................................ 8,388,677 11,423,521 Goodwill, net of amortization...................... 34,473,377 50,432,932 Loan origination costs, net of amortization........ 1,729,767 2,981,391 Covenant not to compete, net of amortization....... 343,750 987,500 Other.............................................. 870,918 439,677 ----------- ----------- Total other assets............................... 45,806,489 66,265,021 ----------- ----------- Total assets................................... $97,020,403 144,612,779 =========== =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable................................... $ 2,389,472 4,999,714 Current portion of long-term debt.................. 3,349,437 5,409,333 Demand notes payable............................... -- 879,000 Current portion of capital lease obligations....... 77,039 41,173 Current portion of early retirement benefits....... 22,809 14,283 Current portion of covenant not to compete......... 75,000 256,250 Accrued interest payable........................... 1,318,608 2,818,769 Accrued property taxes............................. 799,214 1,170,969 Other accrued liabilities.......................... 961,847 1,443,677 Deferred income taxes.............................. 10,042 -- ----------- ----------- Total current liabilities........................ 9,003,468 17,033,168 ----------- ----------- Long-term liabilities: Long-term debt, net of current portion............. 70,608,553 126,502,779 Put warrant obligation............................. 3,000,000 3,455,500 Accrued interest payable........................... 748,924 -- Long-term capital lease obligation, net of current portion........................................... 76,471 109,246 Early retirement benefits payable, net of current portion........................................... 38,371 22,083 Covenant not to compete, net of current portion.... 281,250 756,250 Deferred income taxes.............................. 4,304,585 6,983,449 Unamortized investment tax credits................. 69,471 198,817 ----------- ----------- Total long-term liabilities...................... 79,127,625 138,028,124 ----------- ----------- Minority interest.................................... 341,952 360,101 ----------- ----------- Redeemable preferred stock........................... 10,689,417 130,164 ----------- ----------- Stockholders' deficit: Common stock: Class A voting, par value $.01 per share, authorized 130,000 shares, issued and outstanding 38,370 and 88,060 shares in 1996 and 1997, respectively....................... 384 881 Class B non-voting, par value $.01 per share, authorized 125,000 shares, no shares issued and outstanding.................. -- -- Additional paid-in capital......................... -- 16,910,450 Retained deficit................................... (2,142,443) (27,850,109) ----------- ----------- Total stockholders' deficit...................... (2,142,059) (10,938,778) ----------- ----------- Total liabilities and stockholders' deficit.... $97,020,403 144,612,779 =========== ===========
See accompanying notes to consolidated financial statements. F-4 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ----------- ---------- ---------- Operating revenues: Switched services....................... $22,762,965 27,875,832 39,257,363 Other................................... 1,986,030 2,382,550 3,714,955 ----------- ---------- ---------- Total operating revenues.............. 24,748,995 30,258,382 42,972,318 ----------- ---------- ---------- Operating expenses: Plant operations........................ 3,746,124 4,181,469 6,856,901 Corporate and customer service.......... 6,432,591 7,576,699 11,580,804 Depreciation and amortization........... 5,757,403 6,644,157 8,777,103 Other................................... 1,406,845 1,657,772 3,318,258 ----------- ---------- ---------- Total operating expenses.............. 17,342,963 20,060,097 30,533,066 ----------- ---------- ---------- Income from operations.................... 7,406,032 10,198,285 12,439,252 ----------- ---------- ---------- Other income (expense): Net loss on sale of investments and other assets........................... (29,457) (2,933) (19,229) Interest income......................... 224,980 180,015 212,035 Dividend income......................... 663,575 666,760 1,182,124 Interest expense........................ (7,267,372) (9,605,063) (9,293,104) Other nonoperating, net................. 33,088 (14,883) 139,972 ----------- ---------- ---------- Total other expense................... (6,375,186) (8,776,104) (7,778,202) ----------- ---------- ---------- Earnings before income taxes and extraordinary item....................... 1,030,846 1,422,181 4,661,050 Income tax expense........................ (547,072) (1,461,583) (1,875,634) ----------- ---------- ---------- Earnings before extraordinary item........ 483,774 (39,402) 2,785,416 Extraordinary item-loss on early retirement of debt, net of income tax benefit of $2,296,480.................... -- -- (3,611,624) ----------- ---------- ---------- Earnings (loss) before minority interest.. 483,774 (39,402) (826,208) Minority interest in income of subsidiaries............................. (5,730) (32,698) (61,635) ----------- ---------- ---------- Net earnings (loss)....................... $ 478,044 (72,100) (887,843) =========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
CLASS TOTAL A ADDITIONAL RETAINED STOCKHOLDERS' COMMON PAID-IN EARNINGS EQUITY STOCK CAPITAL (DEFICIT) (DEFICIT) ------ ---------- ----------- ------------- Balance, December 31, 1994....... $380 191,770 (524,727) (332,577) Net earnings..................... -- -- 478,044 478,044 Issuance of common stock......... 4 40,696 -- 40,700 Accretion of preferred stock..... -- (83,104) -- (83,104) ---- ---------- ----------- ----------- Balance, December 31, 1995....... 384 149,362 (46,683) 103,063 Net earnings..................... -- -- (72,100) (72,100) Accretion of preferred stock..... -- (149,362) (2,023,660) (2,173,022) ---- ---------- ----------- ----------- Balance, December 31, 1996....... 384 -- (2,142,443) (2,142,059) Net loss......................... -- -- (887,843) (887,843) Issuance of common stock......... 488 15,874,616 -- 15,875,104 Conversion of preferred stock.... 9 112,334 -- 112,343 Capital contribution............. -- 923,500 -- 923,500 Repurchase of preferred stock.... -- -- (24,540,429) (24,540,429) Preferred stock dividends paid... -- -- (279,394) (279,394) ---- ---------- ----------- ----------- Balance, December 31, 1997....... $881 16,910,450 (27,850,109) (10,938,778) ==== ========== =========== ===========
See accompanying notes to consolidated financial statements. F-6 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)..................... $ 478,044 (72,100) (887,843) ----------- ----------- ----------- Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization......... 6,002,980 6,914,258 9,093,037 Provision for uncollectible revenue... 165,167 4,812 -- Deferred income taxes................. 707,667 428,970 207,397 Direct financing lease................ (36,403) -- -- Deferred patronage dividends.......... (329,350) (303,501) (585,237) Minority interest in income of subsidiaries......................... 5,730 32,698 61,635 Increase (decrease) in put warrant obligation........................... 88,650 2,071,500 (294,500) Net loss on sale of investments and other assets......................... 29,457 2,993 16,715 Loss on early retirement of debt...... -- -- 1,864,428 Amortization of investment tax credits.............................. (18,299) (16,135) (30,879) Changes in assets and liabilities arising from operations, net of acquisitions: Accounts receivable................. 525,388 (464,560) (1,563,230) Prepaid and other assets............ (11,150) (18,703) (105,885) Accounts payable.................... (571,531) 773,023 1,663,873 Accrued interest payable............ 72,560 105,463 720,369 Accrued liabilities................. 82,464 337,602 636,228 Income taxes recoverable............ (1,151,962) (24,373) (956,119) ----------- ----------- ----------- Total adjustments................. 5,561,368 9,844,047 10,727,832 ----------- ----------- ----------- Net cash provided by operating activities....................... 6,039,412 9,771,947 9,839,989 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of telephone properties, net.................................... (110,234) (11,261,934) (30,845,006) Acquisition of property, plant and equipment.............................. (4,438,891) (8,438,739) (8,239,237) Proceeds from sale of property, plant and equipment.......................... 55,990 70,180 120,660 Salvage proceeds less cost of removal... -- -- (22,673) Distributions from investments.......... -- 8,513 62,770 Payment on covenant not to compete...... -- (18,750) (93,750) Acquisition of investments.............. (23,718) (148,804) (240,522) Proceeds from sale of investments....... -- -- 402,706 Payments received on direct financing leases................................. 35,546 -- 248,829 Increase in other assets................ -- -- (360,737) ----------- ----------- ----------- Net cash used in investing activities....................... (4,481,307) (19,789,534) (38,966,960) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt................................... -- 12,823,684 71,134,318 Repayment of long-term debt............. (2,868,211) (3,672,890) (22,104,295) Net proceeds from issuance of preferred stock.................................. -- 1,815,558 -- Repurchase of preferred stock and warrants............................... -- -- (31,487,339) Dividends paid to preferred stockholders........................... -- -- (279,394) Net proceeds from the issuance of common stock.................................. 40,700 -- 15,875,104 Loan origination costs.................. -- (326,072) (1,949,205) Payment of early retirement benefits.... (23,468) (20,646) (24,814) Dividends paid to minority stockholders........................... (6,000) (4,020) (3,736) Release of restricted funds............. -- -- 560,654 Repayment of capital lease obligation... (45,650) (16,933) (24,592) ----------- ----------- ----------- Net cash provided by (used in) financing activities............. (2,902,629) 10,598,681 31,696,701 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents............................ (1,344,524) 581,094 2,569,730 Cash and cash equivalents, beginning of year................................... 5,016,162 3,671,638 4,252,732 ----------- ----------- ----------- Cash and cash equivalents, end of year.. $ 3,671,638 4,252,732 6,822,462 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-7 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization MJD Communications, Inc. (MJD) provides management services to its wholly- owned subsidiaries: S T Enterprises, Ltd. (STE); MJD Ventures, Inc. (Ventures); MJD Services Corp. (Services); MJD Holdings Corp. (Holdings) and MJD Capital Corp. STE, Ventures, Services and Holdings also provide management services to their wholly-owned subsidiaries. Collectively, the wholly-owned subsidiaries of STE, Ventures, Services and Holdings primarily provide telephone local exchange services in various states. Operations also include resale of long distance services, cable services, equipment sales, and installation and repair services. MJD Capital Corp. leases equipment to other subsidiaries of MJD. STE's wholly-owned subsidiaries include Sunflower Telephone Company (Sunflower); Northland Telephone Company of Maine, Inc. and Northland Telephone Company of Vermont, Inc. (The Northland Companies); S T Communications, Inc.; S T Paging, Inc.; and S T Long Distance, Inc. (S T Long Distance) Venture's wholly-owned subsidiaries include Sidney Telephone Company (Sidney), and C-R Communications, Inc. (C-R). Services' wholly-owned subsidiaries include Bluestem Telephone Company (Bluestem); Big Sandy Telecom, Inc. (Big Sandy); Columbine Telecom Company (Columbine); and Odin Telephone Exchange, Inc. (Odin). Holdings' wholly-owned subsidiaries include Kadoka Telephone Co. (Kadoka) and Chautauqua & Erie Telephone Corporation (C&E). Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of MJD Communications, Inc. and its subsidiaries (the Company). All intercompany transactions and accounts have been eliminated in consolidation. The consolidated financial statements have been prepared using generally accepted accounting principles applicable to regulated entities. The Company's telephone subsidiaries follow the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, Accounting for the Effects of Certain Types of Regulation (SFAS No. 71). This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, SFAS No. 71 requires the Company's telephone subsidiaries to depreciate telephone plant over useful lives that would otherwise be determined by management. SFAS No. 71 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. The Company's telephone subsidiaries periodically review the applicability of SFAS No. 71 based on the developments in their current regulatory and competitive environments. Revenue Recognition From Telephone Operations Revenues from telephone services are recognized from primarily three sources, access, pooling and miscellaneous. Local access charges are billed to local end users under tariffs approved by each state's Public Utilities Commission. Access revenues are derived on the intrastate jurisdiction by billing access charges to interexchange carriers and to regional bell operating companies. These charges are billed based on toll or access tariffs approved by the local state's Public Utilities Commission. Access charges for the interstate jurisdiction are billed in accordance with tariffs filed by the National Exchange Carrier Association (NECA) or by the individual company and approved by the Federal Communications Commission. F-8 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Revenues are determined on a bill and keep basis or a pooling basis. If on a bill and keep basis, the company bills the charges to either the access provider or the end user and keeps the revenue. If the company participates in a pooling environment (interstate or intrastate), the toll or access billed are contributed to a revenue pool. The revenue is then distributed to individual companies based on their company specific revenue requirement. This distribution is based on individual state Public Utilities Commission's (intrastate) or Federal Communications Commission's (interstate) approved separation rules and rates of return. Distribution from these pools can change relative to changes made to expenses, plant investment or rate of return. Some companies participate in federal and certain state universal service programs that are pooling in nature but are regulated by rules separate from those described above. These rules vary by state. Miscellaneous revenues are derived by billing to either end users, access providers or other parties, services such as directory advertising, billing and collecting services, rent, etc. These services are typically billed under contract or under tariff supervision. Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and temporary cash investments and trade receivables. The Company places its cash and temporary cash investments with high quality financial institutions. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers in several states. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company utilizes cash management accounts that invest excess funds in interest-bearing securities. Investments Investments consist of stock in CoBank, ACB (CoBank), Rural Telephone Bank, the Rural Telephone Finance Cooperative (RTFC), Southern Illinois Cellular, Inc. and other minority equity investments in nonregulated entities and are stated at cost. To determine if an impairment of an investment exists, the Company monitors and evaluates the financial performance of the businesses in which it invests and compares the carrying value of the investee to the fair values of similar investments, and in certain instances, based on traditional valuation models utilizing multiples of cash flows. When circumstances indicate that a decline in the fair value of the investment has occurred and the decline is other than temporary, the Company records the decline in value as a realized loss and a reduction in the cost of the security. The Company did not incur any losses from other than temporary declines in fair value in 1995, 1996 and 1997. The Company currently receives patronage dividends from its investments in businesses organized as cooperatives for Federal income tax purposes (CoBank and RTFC stock). Patronage dividends represent cash distributions of the cooperative's source earnings and notices of allocations of source earnings to the Company. Deferred and uncollected patronage dividends are included as part of the basis of the investment until collected. The Rural Telephone Bank investment pays dividends annually based on the discretion of its Board of Directors. Property, Plant and Equipment Property, plant and equipment are carried at cost. Repairs and maintenance are charged to expense as incurred; major renewals and improvements are capitalized. For telephone companies, the original cost of depreciable property retired, together with removal cost, less any salvage realized, is charged to accumulated depreciation. For all other companies, the original cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. The telephone companies capitalize estimated costs of debt and equity funds used for construction purposes for projects greater than $100,000. F-9 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Depreciation is determined using the straight-line method for financial reporting purposes. Depreciation expense was $5,020,699, $5,787,499 and $7,465,891 for the years ended December 31, 1995, 1996 and 1997, respectively. Loan Origination Costs Loan origination costs are being amortized using the straight-line method which approximates the effective interest rate method over the life of the loans ranging from ten to fifteen years. Accumulated amortization of loan origination costs was $478,785 and $664,753 at December 31, 1996 and 1997, respectively. Covenants not to Compete The covenants not to compete are being amortized over their contracted life of five years. Accumulated amortization of covenants not to compete was $31,250 and $137,500 at December 31, 1996 and 1997, respectively. Impairment of Long-Lived Assets and Excess Cost on Net Assets Acquired (Goodwill) In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The carrying value of long-lived assets, including allocated goodwill, is reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that such carrying value may not be recoverable, by assessing the recoverability of such carrying value through estimated undiscounted future net cash flows expected to be generated by the assets or the acquired business. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The adoption of SFAS No. 121 did not affect the Company's consolidated financial position or results of operations. Goodwill consists of the difference between the purchase price incurred in acquisitions using the purchase method of accounting and the fair value of net assets acquired. Goodwill is being amortized using the straight-line method over a 40-year period. Accumulated amortization of goodwill was $2,361,677 and $3,555,340 at December 31, 1996 and 1997, respectively. Income Taxes The Company files a consolidated income tax return with its subsidiaries. Current income tax expense is allocated to MJD and its subsidiaries based upon their relative income or loss. The current income tax expense or benefit is received from or paid to the respective subsidiaries. Deferred income taxes are calculated on a separate company basis. Investment tax credits were deferred and are taken into income over the estimated useful lives of the assets that gave rise to the credits. Stock-based Compensation During 1996 the Company adopted SFAS No. 123, Accounting for Stock-Based Compensation. As allowed by SFAS No. 123, the Company accounts for employee stock compensation plans in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, whereby no compensation expense is recognized in the consolidated financial statements. F-10 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) ACQUISITIONS Certain subsidiaries of MJD acquired telephone properties through four separate acquisitions in 1996 and four acquisitions in 1997. There were no acquisitions in 1995. On January 19, 1996, Ventures acquired 100% of the outstanding common stock of Sidney for $2,959,490. On June 3, 1996, Big Sandy acquired certain telephone exchanges of Big Sandy Telecommunications, Inc. through the purchase of certain assets for $3,114,055. On August 1, 1996, Bluestem acquired certain telephone exchanges of United Telephone Company through the purchase of certain assets for $3,885,348. On August 1, 1996, Services acquired 85% of the outstanding common stock of Odin through the purchase of 100% of the outstanding common stock of Penta-Gen, which owned Odin, for $5,038,596. Penta-Gen was subsequently merged into Services. On January 1, 1997, Holdings acquired 100% of the outstanding common stock of Kadoka for $2,949,404. On April 18, 1997, Services acquired certain telephone exchanges of Columbine Telephone Company, Inc. through the purchase of certain assets for $4,642,672. On July 31, 1997, Holdings acquired 100% of the outstanding common stock of C&E including its wholly-owned subsidiaries for $22,000,000. On October 15, 1997, Ventures acquired 100% of the outstanding common stock of C-R for $3,994,664. Acquisition costs were $411,428 and $625,777 in 1996 and 1997, respectively. The acquisitions have been accounted for using the purchase method and, accordingly, the results of their operations have been included in the Company's consolidated financial statements from the date of acquisition. The excess of the purchase price and acquisition costs over the fair value of the net identifiable assets acquired was $6,650,987 and $17,337,532 and has been recognized as goodwill in 1996 and 1997, respectively. Goodwill is being amortized using the straight-line method over forty years. The allocation of the total net purchase price for the 1996 and 1997 acquisitions follows:
1996 1997 ----------- ----------- Current assets................................... $ 1,606,576 5,947,244 Property, plant and equipment.................... 5,055,069 18,905,919 Excess cost over fair value of net assets acquired........................................ 6,650,987 17,337,532 Other assets..................................... 4,270,998 3,569,292 Current liabilities.............................. (2,149,748) (1,093,159) Noncurrent liabilities........................... (24,965) (10,454,311) ----------- ----------- Total net purchase price....................... $15,408,917 34,212,517 =========== ===========
The Company has entered into two contracts and two letters of intent to acquire four separate telephone properties as follows: Taconic Telephone Corp.; Ellensburg Telephone Company; Chouteau Telephone Company; and Utilities, Inc. except its subsidiaries, Seacoast Cellular and Western Maine Cellular. On March 30, 1998 the acquisition of Taconic was consummated for a purchase price of $67.5 million. The remaining acquisitions are anticipated to be consummated during 1998 for a total purchase price of approximately $163.5 million. These contemplated acquisitions will be accounted for using the purchase method. The excess of purchase price and acquisition costs over the fair value of the net identifiable assets acquired for all four acquisitions is estimated to be approximately $161.2 million. The Company plans to finance these acquisitions primarily with long-term debt. F-11 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following unaudited pro forma information presents the combined results of operations of the Company as though the acquisitions in 1996 and 1997 and those acquisitions contemplated in 1998 occurred on January 1, 1996 and 1997, respectively. These results include certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisitions and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations if the acquisitions had been in effect at the beginning of each period or which may be attained in the future.
PRO FORMA YEARS ENDED DECEMBER 31 ---------------------------------- 1996 1997 ---------------- ---------------- (UNAUDITED) Revenues............................... $ 97,653,533 104,606,454 Earnings (loss) before extraordinary item ................................. (7,601,154) (5,923,193) Net loss............................... (10,338,442) (12,275,052)
(3) PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment as of December 31, 1996 and 1997 follows:
ESTIMATED LIFE (IN YEARS) 1996 1997 --------------- ------------ ----------- Land............................ -- $ 523,694 878,752 Buildings....................... 30 5,808,308 8,648,890 Telephone equipment............. 10 - 25 82,166,545 112,356,634 Cable equipment................. 3 - 15 208,367 397,965 Furniture and equipment......... 5 - 10 1,633,250 3,196,328 Vehicles and equipment.......... 3 - 5 3,161,187 4,769,253 Computer software............... 5 174,656 246,288 ------------ ----------- Total property, plant and equipment.................... 93,676,007 130,494,110 Accumulated depreciation........ (52,061,311) (69,287,220) ------------ ----------- Net property, plant and equipment.................... $ 41,614,696 61,206,890 ============ ===========
(4) INVESTMENTS The investments are stated at cost and consist of the following at December 31, 1996 and 1997:
1996 1997 ---------- ---------- Southern Illinois Cellular, Inc. stock............... $4,551,800 4,551,800 Rural Telephone Bank stock........................... 2,348,104 2,364,698 CoBank stock and unpaid deferred CoBank patronage.... 1,108,541 1,689,416 RTFC secured certificates and unpaid deferred RTFC patronage........................................... 127,422 373,248 Other minority equity investments.................... 252,810 2,444,359 ---------- ---------- Total investments.................................. $8,388,677 11,423,521 ========== ==========
F-12 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (5)LONG-TERM DEBT Long-term debt consists of the following at December 31, 1996 and 1997:
1996 1997 ----------- ----------- Senior notes payable to CoBank: Fixed rates ranging from 7.29% to 9.32%, due 1998 to 2004................................... $59,102,344 99,058,093 Variable rates ranging from 7.50% to 7.75% at December 31, 1997, due 2002 to 2012............ -- 21,872,315 Senior notes payable to RTFC: Fixed rates ranging from 8.8% to 9.2%, due 2011........................................... 1,451,344 1,399,216 Variable rates ranging from 6.45% to 6.65% at December 31, 1997, due 2011 to 2012............ 984,840 5,686,309 Subordinated promissory notes payable, 8%, unless deferred, in which case interest shall accrue at 10%, due 2000.................................... -- 3,500,000 Subordinated notes payable, 18%, net of discount of $716,171, paid in 1997........................ 10,845,962 -- Other debt, 5.75% to 9.5%, due 1998 to 2002....... 1,573,500 396,179 ----------- ----------- Total outstanding long-term debt.............. 73,957,990 131,912,112 Less current portion.............................. (3,349,437) (5,409,333) ----------- ----------- Total long-term debt, net of current portion.. $70,608,553 126,502,779 =========== ===========
The approximate aggregate maturities of long-term debt for each of the five years subsequent to December 31, 1997 are: 1998--$5,409,000; 1999--$7,170,000; 2000--$12,395,000; 2001--$9,641,000; 2002--$10,356,000; and thereafter $86,941,000. Certain debt agreements contain various restrictive covenants which, among others, require that the Company maintain certain financial ratios. The Company received waivers related to noncompliance with certain covenants of the CoBank debt agreements. Those covenants requiring waivers from CoBank included restrictions on the Company and its subsidiaries on limits on capital expenditures, the maintenance of certain financial ratios related to leverage and liquidity, payments of dividends and other intercompany transfers of cash. The Company also received a waiver from RTFC relating to noncompliance with a restrictive covenant on the payment of dividends in 1997. As a result of receiving the waivers, it is management's opinion that the Company has complied with all such covenants or will be able to continue to meet the covenant requirements following the balance sheet date. The Company also has $879,000 unsecured demand notes payable to various individuals and entities with interest payable at 5.75%. The Company has available four lines of credit, with a total maximum limit of $2,750,000, expiring 1998 to 2002. Substantially all assets of the Company are collateralized to secure the long-term debt and lines of credit. As described in note 16, the Company refinanced its long-term debt on March 30, 1998. (6)EMPLOYEE BENEFIT PLAN The Company participates in a voluntary 401(k) savings plan (the Plan) of STE that covers all eligible employees. Each plan year, the Company contributes to the Plan an amount of matching contributions determined by the Company at its discretion. For the plan years ended December 31, 1996 and 1997, the Company matched 100% of each employee's contribution up to 3% of compensation and 50% of additional contributions up to 6%. The Plan also allows for a profit sharing contribution that is made based upon management discretion. Total Company contributions to the Plan were $267,799, $324,873, and $422,069, for the years ended December 31, 1995, 1996, and 1997, respectively. F-13 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) C&E also sponsors a defined contribution 401(k) retirement savings plan for union employees. C&E matches contributions to this plan based upon a percentage of pay of all qualified personnel. Contributions to the plan were $12,543 in 1997. (7)INCOME TAXES Income tax expense consists of the following components:
1995 1996 1997 --------- --------- --------- Current: Federal................................. $ (98,033) 913,116 1,425,059 State................................... (44,263) 135,632 274,057 --------- --------- --------- Total current income tax expense (benefit)............................ (142,296) 1,048,748 1,699,116 --------- --------- --------- Investment tax credits.................... (18,299) (16,135) (30,879) --------- --------- --------- Deferred: Federal................................. 560,823 338,243 130,190 State................................... 146,844 90,727 77,207 --------- --------- --------- Total deferred income tax expense..... 707,667 428,970 207,397 --------- --------- --------- Total income tax expense.............. $ 547,072 1,461,583 1,875,634 ========= ========= =========
Total income tax expense in 1995, 1996, and 1997 was greater than that computed by applying U. S. Federal income tax rates to earnings before income taxes. The reasons for the differences are as follows:
1995 1996 1997 -------- --------- --------- Computed "expected" tax expense............ $350,488 483,542 1,584,757 State income tax, net of federal income tax benefit................................... 67,703 148,738 231,834 Amortization of investment tax credits..... (18,299) (16,135) (30,879) Goodwill amortization...................... 105,311 103,707 185,690 Change in fair value of put warrant obligation................................ 30,140 704,310 (100,130) Other...................................... 11,729 37,421 4,362 -------- --------- --------- Total income tax expense................. $547,072 1,461,583 1,875,634 ======== ========= =========
F-14 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are presented on below:
1996 1997 ---------- --------- Deferred tax assets: State tax carryforward.............................. $ -- 123,126 Employee benefits................................... 23,768 14,281 Allowance for doubtful accounts..................... 5,507 -- Alternative minimum tax credits..................... 292,691 720,667 Warrants issued in connection with early retirement of debt............................................ -- 291,525 ---------- --------- Total gross deferred tax assets................... 321,966 1,149,599 Less, valuation allowance............................. -- -- ---------- --------- Net deferred tax assets............................... 321,966 1,149,599 ---------- --------- Deferred tax liabilities: Property, plant and equipment, principally due to depreciation differences........................... 1,924,895 4,288,167 Goodwill, due to amortization differences........... 768,199 1,172,089 Basis in investments................................ 1,943,499 2,672,792 ---------- --------- Total gross deferred tax liabilities.............. 4,636,593 8,133,048 ---------- --------- Net deferred tax liabilities.......................... $4,314,627 6,983,449 ========== =========
As a result of the nature and amount of the temporary differences which give rise to the gross deferred tax liabilities and the Company's expected taxable income in future years, no valuation allowance for deferred tax assets as of December 31, 1996 and 1997 was necessary. The alternative minimum tax credits carryforward indefinitely and can be used in a year when regular tax exceeds alternative minimum tax. (8)WARRANTS The subordinated notes included detachable warrants to purchase 10,000 shares of STE's common stock at the stated par value of $.01 per share. In conjunction with the retirement of the subordinated notes in 1997, STE issued additional warrants to purchase 2,857 shares of STE's common stock. This noncash transaction was recognized as part of the loss on the early retirement of debt described in note 9. The warrants are currently exercisable, have no expiration date and contain certain put and call provisions. The warrants may not be put back to STE prior to July 31, 1999. STE may call the warrants beginning after July 31, 1999. The agreement stipulates that the put/call price of the warrants shall be equal to STE's net equity, as defined in the agreement, multiplied by the ratio of exercisable warrants to the number of shares of common stock outstanding on a fully-diluted basis on the date of the put or call. The Company recorded the obligation for the warrants based on the fair value of STE's common stock as determined by management, at the issuance date of the warrants. At each balance sheet date,the warrants are valued utilizing cash flow models that management also uses in valuing potential acquisitions. Those models estimate fair value using earnings before interest, taxes, depreciation and amortization (EBITDA) and multiples of EBITDA for recent acquisitions of similar companies. The increase or decrease in fair value of the obligation for the warrants is recognized in earnings as interest expense. At December 31, 1996 and 1997, the estimated fair value of the obligation for the warrants, as determined by management, was $3,000,000 and $3,455,500, respectively. F-15 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In addition, on January 19, 1996, the Company issued warrants to purchase 7.69 shares representing 7.14% of Sidney's common stock in connection with the acquisition of Sydney. The Company estimated the fair value of the warrants at the date of issuance utilizing cash flow models that management also uses in valuing potential acquisitions. Those models estimate fair value using EBITDA and multiples of EBITDA for recent acquisitions of similar companies. The fair value of the warrants of $89,000 were included in the initial allocation of purchase price, with the related value of the warrants issued to minority shareholders included in the obligation for minority interests. The warrants carry an exercise price of $.01 per share and have no expiration date. The warrants are not exercisable until the RTFC loans are repaid or in the event of a sale, merger, consolidation, or other transaction involving Sidney pursuant to which such loans are to be repaid, refinanced, or substantially all of the equity interests in Sidney are transferred. There are no put/call provisions associated with these warrants. (9)STOCKHOLDERS' EQUITY AND RECAPITALIZATION Effective July 31, 1997, a recapitalization of the Company was completed. The Company issued 44,234 shares of its Class A Common Stock to unrelated third parties and members of management for proceeds of approximately $15.1 million (net of offering expenses of $925,602). These proceeds, together with additional borrowings of $39.2 million from CoBank and the issuance of subordinated promissory notes in the amount of $3.5 million, were utilized to repurchase and retire the remaining Series A Preferred Stock, all shares of Series C Preferred Stock not owned by members of management and all the warrants and contingent warrants (the Warrants) to purchase the Company's Class A Common Stock not owned by members of management for approximately $35.0 million. The difference between the carrying value of the Series A and Series C Preferred Stock and the Warrants and the price at which the stock was repurchased and retired ($24.5 million) was charged to retained earnings as it represents a return to the preferred shareholders. In conjunction with the recapitalization, STE also retired the subordinated notes payable of $11,562,133. As a result of retiring the subordinated debt of STE, the Company recognized an extraordinary loss of approximately $3.6 million (net of taxes of $2.3 million), consisting of prepayment penalties of approximately $4.0 million, the write-off of existing deferred financing costs of approximately $1.1 million and the issuance of additional put warrants valued at $750,000. The additional put warrants were issued to the holders of the STE warrants and debt in consideration of their consent to retire the STE debt. (See also note 8.) In connection with the recapitalization, the Company amended its certificate of incorporation so that Series A (11% cumulative, redeemable, convertible and nonvoting) Preferred Stock and Series B (11% cumulative, redeemable, convertible and nonvoting) Preferred Stock are no longer authorized. At December 31, 1997, the Company is authorized to issue up to 290,000 shares of Series C (14% cumulative, redeemable and nonvoting) preferred stock. During 1997, a shareholder of MJD contributed the net assets of Holdings totaling $150,000 in consideration for 145 shares of Class A Common Stock. Also in 1997, existing subordinated notes payable to stockholders of the Company in the amount of $923,500 were contributed as additional capital. In October 1997, there were an additional 4,379 shares of Class A Common Stock issued for proceeds of $1,500,000. The Company has a stock option plan that covers officers, directors and employees of the Company. The Company may issue qualified or nonqualified stock options to purchase up to 5,684 shares of the Company's Class A Common Stock to employees that will vest equally over five years from the date of employment of the recipient and are exercisable from five to ten years. In 1995, the Company granted options to purchase 4,264 shares at $50 per share. There were no options granted in 1996 or 1997. Since the Company applies APB Opinion No. 25 in accounting for its plan, no compensation cost has been recognized for its stock options in the financial statements. Had the Company recorded compensation cost based on the fair value at the grant date for its stock options following SFAS No. 123, the Company's net income for 1995, 1996 and 1997 would not have been F-16 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) significantly reduced. The per share weighted average fair value of stock options granted during 1995 was $13 on the date of grant using the Black Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%, risk-free interest rate of 6.41% and expected term of 5 years. Because the Company was non-public on the date of grant, no assumption as to the volatility of the stock price was made. Stock option activity for 1995, 1996 and 1997, under the plan, is summarized as follows:
1995 1996 1997 ------- ------- ------- Outstanding at January 1............................. -- 4,264.0 4,264.0 Granted............................................ 4,264.0 -- -- Exercised.......................................... -- -- -- Canceled........................................... -- -- -- ------- ------- ------- Outstanding at December 31........................... 4,264.0 4,264.0 4,264.0 ------- ------- ------- Exercisable at December 31........................... 1,350.2 2,203.0 3,055.8 ======= ======= =======
(10)REDEEMABLE PREFERRED STOCK The following is a summary of the Company's preferred stock:
SERIES A PREFERRED SERIES B PREFERRED SERIES C PREFERRED -------------------- -------------------- --------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ------- ----------- ------- ----------- -------- ----------- Balance at December 31, 1994................... 15,000 $ 1,418,086 55,000 $ 5,199,647 -- $ -- Conversion of preferred stock.................. 54,100 5,114,562 (54,100) (5,114,562) -- -- Accretion of preferred stock.................. -- 82,036 -- 1,068 -- -- ------- ----------- ------- ----------- -------- ----------- Balance at December 31, 1995................... 69,100 $ 6,614,684 900 $ 86,153 -- $ -- Conversion of preferred stock.................. 900 86,153 (900) (86,153) -- -- Issuance of preferred stock to an unrelated third party and members of management.......... -- -- -- -- 183,060 1,815,558 Accretion of preferred stock.................. -- 2,036,976 -- -- -- 136,046 ------- ----------- ------- ----------- -------- ----------- Balance at December 31, 1996................... 70,000 $ 8,737,813 -- $ -- 183,060 $ 1,951,604 Conversion of preferred stock.................. (900) (112,343) -- -- -- -- Repurchase of preferred stock.................. (69,100) (8,625,470) -- -- (170,044) (1,821,440) ------- ----------- ------- ----------- -------- ----------- Balance at December 31, 1997................... -- $ -- -- $ -- 13,016 $ 130,164 ======= =========== ======= =========== ======== ===========
The Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock not owned by management were purchased and retired in connection with the 1997 recapitalization. (See also Note 9.) At the option of the shareholders, the Series A Preferred Stock may be converted into Series B Preferred Stock and the Series B Preferred Stock may be converted into Series A Preferred Stock on a one-for-one basis. In addition, the shareholders of the Series A and Series B Preferred Stock may convert all or any portion of the stock into Series A Common Stock of the Company on a one-for-one basis. During 1997, certain Series A Preferred Stock shareholders converted 900 shares of their Series A Preferred Stock into 900 shares of Class A Common Stock. F-17 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Series A, Series B and Series C Preferred Stock contain certain put and call provisions. At the option of the shareholders, the Series A, Series B and Series C Preferred Stock may be put back to the Company beginning June 30, 1999, unless certain events occur, including an event of default under the MJD Preferred Stock security agreement or liquidation of the Company at which time the Series A, Series B and Series C Preferred Stock may be put back to the Company immediately. In addition, the Company has the right to call the Series A and the Series B Preferred Stock after June 30, 2000 and the Series C Preferred Stock at any time. The call/put price for the Series A and Series B Preferred Stock shall be the greater of $100 per share, the Company's net worth per share or the fair value as determined by an independent appraiser. The call/put price for the Series C Preferred Stock is $10 per share plus accrued unpaid dividends, whether or not declared to the date of such payment. The Series C Preferred Stock carries cumulative dividends that accrue quarterly at a rate of 14% per year on the issuance price and all accumulated and unpaid dividends. The accumulated dividends are payable upon declaration by the Board of Directors. The amount of unpaid cumulative dividends at December 31, 1997 was $7,593. On June 7 and July 31, 1996, the Company collectively issued 183,060 shares of its Series C Preferred Stock for proceeds of $1,830,600 or $10 per share. The Company incurred issuance costs in the amount of $15,042 which are reflected as a reduction in the proceeds received. As part of the recapitalization in 1997 discussed in note 9, 170,044 shares of the stock were repurchased. The Series C Preferred Stock contains certain put and call provisions. At the option of the shareholders, the Series C Preferred Stock may be put back to the Company beginning June 30, 1999, unless certain events occur, including an event of default under the preferred stock security agreement or liquidation of the Company at which time the Series C Preferred Stock may be put back immediately. In addition, the Company has the right to call the Series C Preferred Stock at any time. The put/call price is $10 per share plus accrued unpaid dividends, whether or not declared to the date of such payment. In the event of liquidation, dissolution or winding up of the Company, the Series C Preferred shareholders will be entitled to the $10 per share plus accrued unpaid dividends, whether or not declared to the date of such payment. In conjunction with the issuance of the Series C Preferred Stock in 1996, the Company issued warrants to purchase 1,168.99 shares of the Company's Class A Common Stock. In association with the recapitalization, the Company repurchased warrants to purchase 1,086.05 shares and contingent warrants to purchase 648 shares. There are no contingent warrants outstanding at December 31, 1997. The remaining warrants for 82.94 shares are currently exercisable, carry an exercise price of $.01 per share and expire July 31, 2016. There are no put/call provisions associated with these warrants. On an annual basis, management values the preferred stock based on cash flow models as described in Note 8. The increase in value is recognized as an increase to the carrying amount of the preferred stock and charged to retained earnings and additional paid-in capital using the straight-line method over the remaining period until the stockholders are allowed under the agreement to call/put the preferred stock as mentioned above. At December 31, 1997, the accretion of the Series C Preferred Stock was not significant. As described in note 16, the Company repurchased the remaining outstanding shares of Series C Preferred Stock on March 30, 1998. F-18 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (11)RELATED PARTY TRANSACTIONS During 1997, the Company entered into an agreement with MJD Partners, L.P. (Partners), a major shareholder of the Company. Under the terms of the agreement, Partners provided senior management and acquisition services to the Company. Partners was paid $1,020,000 under this agreement and this expense was classified with corporate and customer service expense in 1997. This agreement was terminated in 1998. In connection with the recapitalization, described in note 9, the Company entered into financial advisory agreements, dated July 31, 1997, with certain equity investors, pursuant to which the equity investors provide certain consulting and advisory services, related, but not limited to equity financings and strategic planning. Pursuant to these agreements, the Company pays annual advisory fees in an aggregate amount of $100,000 to the equity investors payable on a quarterly basis until December 31, 2007. During 1997, the Company paid $45,833 in such fees to the equity investors and this expense was classified with corporate and customers service expense in 1997. The agreements also provide that the Company will reimburse the equity investors for travel relating to the Company's Board of Directors meetings. In the event of additional equity investments in the Company by the equity investors, the parties have agreed to negotiate in good faith to increase the advisory fee. The Company also has entered into a consulting agreement dated as of July 31, 1997 with an entity controlled by a certain shareholder pursuant to which the shareholder has agreed to provide general consulting and advice to the Company as reasonably requested from time to time. Pursuant to the terms of the agreement, the consulting company is paid an annual fee of $120,000 in monthly installments plus all of the shareholder's out-of-pocket business expenses up to $30,000. The term of the agreement is one year, subject to automatic renewal for successive periods of one year each thereafter. In 1995 a law firm, in which a partner of such law firm is also a partner in Partners, was paid $208,199 for general counsel services which have been classified with corporate and customer service expense. In 1996, this same law firm was paid $321,251, of which $138,368 was for general counsel services, which have been classified with corporate and customer service expense, and $182,883 for acquisition related services, which have been capitalized as direct costs of acquisitions of subsidiaries. In 1997, this same law firm was paid $1,070,132 for general counsel services ($38,872) which are classified with corporate and customer service expense, services related to financings ($819,361) which have been recorded as debt issue costs and equity issue costs and new acquisitions ($211,899) which have been capitalized as direct costs of acquisitions of subsidiaries. (12)SUPPLEMENTAL CASH FLOW INFORMATION For the years ended December 31, 1995, 1996 and 1997, the Company paid interest of $6,868,074 $7,204,795 and $8,301,646, respectively. For the years ended December 31, 1995, 1996, and 1997, the Company paid income taxes of $1,288,000, $1,084,766, and $529,352, respectively. The Company received income tax refunds totaling $223,367 during 1997. In conjunction with the recapitalization, the Company issued subordinated promissory notes for $3.5 million for the repurchase of the Series A and Series C Preferred Stock. F-19 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (13)QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ---------- --------- ---------- ---------- ---------- 1996 Revenue................. $6,560,744 7,880,509 7,335,857 8,481,272 30,258,382 Income from operations.. 2,254,129 3,331,595 2,038,769 2,573,792 10,198,285 Net earnings............ 291,730 939,934 164,975 602,761 1,999,400 1997 Revenue................. $8,766,654 9,120,775 11,303,202 13,781,687 42,972,318 Income from operations.. 2,789,744 2,998,629 3,901,546 2,749,333 12,439,252 Earnings before extraordinary item and minority interest...... $ 615,925 461,415 762,484 651,092 2,490,916 Net earnings (loss)..... 593,471 461,415 (2,851,789) 614,560 (1,182,343)
During the third quarter 1997, the Company recognized a loss on early retirement of debt of $5,908,104. The loss had the effect of reducing net earnings by $3,611,624. (14)DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Demand Notes Payable The carrying amount approximates fair value because of the short maturity of these instruments. Investments Investments do not have a readily determinable fair value (not publicly traded). The investments are stated at cost which management believes is not impaired. On an annual basis, management determines a fair value of its investments based on the financial performance of the investee, the fair value of similar investments and in certain instances, based on traditional valuation models used by industry analysts. At December 31, 1997, the Company had investments with a carrying value of $11,423,521 and estimated fair value of $14,160,747. Long-Term Debt The fair value of the Company's long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities. At December 31, 1997, the Company had long-term debt with a carrying value of $131,912,112 and estimated fair value of $137,500,000. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (15)MAJOR CUSTOMER Compensation for interstate access services is based on reimbursement of costs and an allowed rate of return. This compensation is received from the National Exchange Carrier Association in the form of monthly F-20 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) settlements. Such compensation amounted to 31.8%, 30.8% and 30.0% of revenues in 1995, 1996 and 1997, respectively. The Company also derives significant revenues from Nynex, principally from network access and billing and collecting service. Such compensation amounted to 27.5%, 20.1% and 16.3% of revenues in 1995, 1996 and 1997, respectively. (16)SUBSEQUENT EVENTS On March 30, 1998, the Company closed a $315 million senior secured credit facility (the "New Credit Facility") which committed $75 million of term debt (tranche C) amortized over nine years, $155 million of term debt (tranche B) amortized over eight years and an $85 million reducing revolving credit facility with a term of 6.5 years. Borrowings under the facility bear interest at a rate based, at the option of the Company, on the participating banks' prime rate or Euro dollar rate, plus an incremental rate of 3.0%, 2.75% and 2.5% for the Euro dollar margin and 2.0%, 1.75% and 1.50% for the prime rate margins for the tranche C, tranche B and revolver facility, respectively. The New Credit Facility is secured by a perfected first priority pledge of the stock of certain subsidiaries of the Company as well as the promissory notes evidencing intercompany advances. The New Credit Facility is also guaranteed by four of the Company's intermediary holding companies, subject to contractual or regulatory restrictions. The Company pays fees of one half of 1% per annum on the aggregate unused portion of the revolver and tranche B commitment, in addition to an annual administrative agent's fee. Pursuant to the New Credit Facility, the Company is required to enter into interest hedging agreements that result in the fixing of the interest rate on no less than 50% of the principal amount of total outstanding debt, including any senior subordinated debt. Total proceeds received from the New Credit Facility in the amount of $195,000,000 were utilized to repay all of the outstanding long-term debt from CoBank and RTFC, certain other long-term debt, repurchase the Series C Preferred Stock, pay related transaction expenses and finance certain business acquisitions. On March 30, 1998, the Company recognized an extraordinary loss of approximately $4.3 million ($2.5 million net of income taxes) resulting from a prepayment penalty of approximately $1.4 million and the write-off of unamortized loan origination costs of [approximately $2.9 million] related to the refinanced debt. The Company's ability to make additional borrowings under the New Credit Facility is subject to compliance with certain financial ratios and other conditions set forth in the New Credit Facility. These conditions limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with another company or change the business conducted. Borrowings under the New Credit Facility to finance the acquisition of Ellensburg (see note 2) will be conditioned upon the Company's receipt of $15.0 million in common equity by certain existing shareholders. (17) LEGAL PROCEEDINGS The Company currently and from time to time is involved in litigation and regulatory proceedings incidental to the conduct of its business, but the Company is not a party to any lawsuit or proceeding which, in the opinion of the Company, is likely to have a material adverse effect on the Company. On April 6, 1998, Latin World Communications, Inc., ("LWC") and Debra A. Boudrot, LWC's principal (collectively, "Plaintiffs") sued B. Stephen May ("May"), who is a former officer of S T Long Distance (a subsidiary of STE), Siesta Telecom, Inc. ("Siesta"), which is a company controlled by May, and S T Long Distance in the Circuit Court for the Twelfth Judicial Circuit, Sarasota County, Florida. From March 1997 through early 1998, S T Long Distance provided long distance services to Plaintiffs in connection with Plaintiffs' prepaid telephone card distribution business. Plaintiffs have alleged, among other things, that May, Siesta and F-21 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) S T Long Distance have engaged in fraud, misappropriation of trade secrets, unfair competition, deceptive trade practices and trade slander; and that May, Siesta and S T Long Distance have breached various contractual obligations to the Plaintiffs and received certain overpayments from the Plaintiffs. Plaintiffs seek approximately $1 million in damages relating to such alleged overpayments, and unspecified monetary damages and injunctive relief relating to certain other matters. The Company intends to vigorously contest all of the Plaintiffs' allegations, and believes that it has no liability to the Plaintiffs. While the outcome of such litigation cannot be predicted, the Company does not believe that such litigation, even if determined adversely to the Company, would have a material adverse effect on its financial condition or results of operations. F-22 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND JUNE 30, 1998
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents......................... $ 6,822,462 14,045,260 Accounts receivable............................... 8,312,778 23,204,075 Prepaid and other assets.......................... 1,248,627 3,914,452 Income taxes recoverable.......................... 757,001 3,242,328 ------------ ----------- Total current assets............................ 17,140,868 44,406,115 ------------ ----------- Property, plant and equipment, net.................. 61,206,890 122,590,187 ------------ ----------- Other assets: Investments....................................... 11,423,521 17,227,421 Goodwill, net of amortization..................... 50,432,932 168,618,491 Loan origination costs, net of amortization....... 2,981,391 15,651,360 Covenant not to compete, net of amortization...... 987,500 875,000 Other............................................. 439,677 1,345,502 ------------ ----------- Total other assets.............................. 66,265,021 203,717,774 ------------ ----------- Total assets.................................. $144,612,779 370,714,076 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.................................. $ 4,999,714 8,413,431 Current portion of long-term debt................. 5,409,333 1,996,639 Demand notes payable.............................. 879,000 814,500 Current portion of capital lease obligations...... 41,173 52,182 Current portion of early retirement benefits...... 14,283 14,283 Current portion of covenant not to compete........ 256,250 256,250 Accrued interest payable.......................... 2,818,769 9,659,477 Accrued property taxes............................ 1,170,969 1,295,861 Other accrued liabilities......................... 1,443,677 3,137,306 ------------ ----------- Total current liabilities....................... 17,033,168 25,639,929 ------------ ----------- Long-term liabilities: Long-term debt, net of current portion............ 126,502,779 100,390,421 Subordinated debt................................. -- 200,000,000 Put warrant obligation............................ 3,455,500 3,625,688 Long-term capital lease obligation, net of current portion.......................................... 109,246 132,511 Early retirement benefits payable, net of current portion.......................................... 22,083 14,465 Covenant not to compete, net of current portion... 756,250 612,500 Deferred income taxes............................. 6,983,449 16,808,984 Unamortized investment tax credits................ 198,817 618,887 Other liabilities................................. -- 3,690,644 ------------ ----------- Total long-term liabilities..................... 138,028,124 325,894,100 ------------ ----------- Minority interest................................... 360,101 396,624 ------------ ----------- Redeemable preferred stock.......................... 130,164 -- ------------ ----------- Stockholders' equity (deficit): Common stock...................................... 881 1,811 Additional paid-in capital........................ 16,910,450 48,747,262 Retained deficit.................................. (27,850,109) (30,202,170) Accumulated other comprehensive income............ -- 236,520 ------------ ----------- Total stockholders' equity (deficit)............ (10,938,778) 18,783,423 ------------ ----------- Total liabilities and stockholders' equity (deficit).................................... $144,612,779 370,714,076 ============ ===========
See accompanying notes to consolidated financial statements. F-23 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
1997 1998 ----------- ---------- Operating revenues: Switched services................................... $16,541,598 29,485,512 Other............................................... 1,345,831 5,776,332 ----------- ---------- Total operating revenues.......................... 17,887,429 35,261,844 ----------- ---------- Operating expenses: Plant operations.................................... 2,277,101 5,731,047 Corporate and customer service...................... 4,532,472 8,762,269 Depreciation and amortization....................... 4,009,838 7,299,909 Other............................................... 1,279,630 3,926,595 ----------- ---------- Total operating expenses.......................... 12,099,041 25,719,820 ----------- ---------- Income from operations................................ 5,788,388 9,542,024 ----------- ---------- Other income (expense): Net gain on sale of investments and other assets.... -- 389,693 Interest income..................................... 102,910 126,471 Dividend income..................................... -- 44,895 Interest expense.................................... (3,998,383) (9,706,729) Other nonoperating, net............................. 23,542 198,203 ----------- ---------- Total other expense............................... (3,871,931) (8,947,467) ----------- ---------- Earnings before income taxes and extraordinary item... 1,916,457 594,557 Income tax expense.................................... (839,102) (389,152) ----------- ---------- Earnings before extraordinary item.................... 1,077,355 205,405 Extraordinary item, net of tax........................ -- (2,520,943) ----------- ---------- Earnings (loss) before minority interest.............. 1,077,355 (2,315,538) Minority interest in income of subsidiaries........... (22,464) (36,523) ----------- ---------- Net earnings (loss)................................... $ 1,054,891 (2,352,061) =========== ==========
See accompanying notes to consolidated financial statements. F-24 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
1997 1998 ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss)................................. $1,054,891 (2,352,061) ---------- ------------ Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization..................... 4,073,040 7,635,118 Deferred income taxes............................. 239,116 (303,700) Deferred patronage dividends...................... (6,076) (34,817) Minority interest in income of subsidiaries....... 22,455 36,523 Increase in put warrant obligation................ -- 170,188 Income from equity investments.................... -- (131,694) Unrealized loss on marketable securities.......... -- (104,292) Net loss on sale of investments and other assets.. (9,750) (217,053) Loss on early retirement of debt.................. -- 2,896,599 Amortization of investment tax credits............ (7,403) (47,741) Changes in assets and liabilities arising from op- erations, net of acquisitions: Accounts receivable............................. 1,309,736 (4,090,464) Prepaid and other assets........................ (552,963) (260,020) Accounts payable................................ (1,922,607) (1,186,658) Accrued interest payable........................ (392,686) 6,818,662 Accrued liabilities............................. (175,451) (64,282) Income taxes recoverable........................ 621,167 (1,439,495) ---------- ------------ Total adjustments............................. 3,198,578 9,676,874 ---------- ------------ Net cash provided by (used in) operating ac- tivities..................................... 4,253,469 7,324,813 ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment........ (2,922,425) (3,331,570) Proceeds from sale of property, plant and equip- ment............................................... 38,297 36,114 Salvage proceeds less cost of removal............... 26,078 10,799 Distributions from investments...................... 11,035 56,170 Payment on covenant not to compete.................. (56,250) (143,750) Acquisition of investments.......................... -- (856) Payments received on direct financing leases........ 45,421 -- Proceeds from sale of investments................... -- 720,000 Acquisition costs................................... -- (408,959) Organizational costs................................ -- (107,284) Decrease in other assets............................ 339,048 51,544 Increase in other liabilities....................... -- 60,331 Acquisitions of telephone properties................ (4,635,919) (171,264,840) ---------- ------------ Net cash used in investing activities......... (7,154,715) (174,322,301) ---------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt............ 5,725,000 451,000,000 Repayment of long-term debt......................... (1,639,431) (292,591,022) Repurchase of preferred stock and warrants.......... -- (130,166) Net proceeds from the issuance of common stock...... -- 31,837,741 Loan origination costs.............................. (267,524) (15,870,983) Payment of early retirement benefits................ (11,110) (7,619) Repayment of capital lease obligation............... (11,356) (17,665) ---------- ------------ Net cash provided by (used in) financing ac- tivities..................................... 3,795,579 174,220,286 ---------- ------------ Net increase in cash and cash equivalents........... 894,333 7,222,798 Cash and cash equivalents, beginning of period ..... 4,252,732 6,822,462 ---------- ------------ Cash and cash equivalents, end of period............ $5,147,065 14,045,260 ========== ============
See accompanying notes to consolidated financial statements. F-25 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 AND 1998 (1) BASIS OF FINANCIAL REPORTING Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, the Company believes the disclosures which are made are adequate to make the information presented not misleading. The consolidated balance sheet of MJD Communications, Inc. and Subsidiaries (the "Company") at December 31, 1997 was derived from the Company's audited balance sheet as of that date. The unaudited financial information for the six months ended June 30, 1997 and 1998 has not been audited by independent public accountants; however in the opinion of management, such financial information include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial position, results of operations, and cash flows for the six-month periods have been included therein in accordance with generally accepted accounting principles. The results of operations for the interim periods are not necessarily indicative of the results of operations which might be expected for the entire year. The consolidated financial statements should be read in conjunction with the Company's 1997 annual financial statements contained herein. (2) CREDIT FACILITY On March 30, 1998, the Company closed a $315 million senior secured credit facility (the "New Credit Facility") which committed $75 million of term debt (tranche C) amortized over nine years, $155 million of term debt (tranche B) amortized over eight years and an $85 million reducing revolving credit facility with a term of 6.5 years. Borrowings under the facility bear interest at a rate based, at the option of the Company, on the participating banks' prime rate or Euro dollar rate, plus an incremental rate of 3.0%, 2.75% and 2.5% for the Euro dollar margin and 2.0%, 1.75% and 1.50% for the prime rate margins for the tranche C, tranche B and revolver facility, respectively. The New Credit Facility is secured by a perfected first priority pledge of the stock of all the subsidiaries of the Company as well as the promissory notes evidencing intercompany advances. The New Credit Facility is also guaranteed by the Company's four intermediary holding companies, subject to contractual or regulatory restrictions. The Company pays fees of one half of one percent per annum on the aggregate unused portion of the revolver and tranche B commitment, in addition to an annual agent's fee. Pursuant to the New Credit Facility, the Company is required to enter into interest hedging agreements that result in the fixing of the interest rate on no less than 50% of the principal amount of total outstanding debt, including any subordinated debt. Total proceeds received from the New Credit Facility in the amount of $195,000,000 were utilized to repay all of the outstanding long-term debt from CoBank and RTFC, pay related transaction expenses and finance certain business acquisitions. On March 30, 1998, the Company recognized an extraordinary loss of approximately $4.3 million ($2.5 million net of income taxes) resulting from a prepayment penalty of approximately $1.4 million and the write-off of unamortized loan origination costs of approximately $2.9 million related to the refinanced debt. The Company's ability to make additional borrowings under the New Credit Facility is subject to compliance with certain financial ratios and other conditions set forth in the New Credit Facility. These conditions limit the ability of the Company and certain of its subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, merge or consolidate with another company or change the business conducted. F-26 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (3) ACQUISITIONS On March 30, 1998, the Company acquired 100% of the outstanding common stock of Taconic Telephone Corp. and subsidiaries for a purchase price of approximately $67.5 million. Acquisition costs were approximately $440,000. On April 30, 1998, the Company acquired 100% of the outstanding common stock of Ellensburg Telephone Company for a purchase price of approximately $91.0 million. Acquisition costs were approximately $254,000. On June 1, 1998, the Company acquired 100% of the outstanding common stock of Chouteau Telephone Company for a purchase price of $18.6 million. Acquisitions costs were approximately $120,000. These acquisitions have been accounted for as purchases and accordingly, the acquired assets and liabilities have been recorded at their estimated fair values at the dates of acquisition, and the results of operations have been included in the accompanying consolidated financial statements since the dates of acquisition. Goodwill recognized on these acquisitions was approximately $119.4 million and will be amortized over an estimated useful life of 40 years. In the first quarter of 1998, the Company entered into a letter of intent to purchase Utilities, Inc. (excluding its subsidiaries, Seacoast Cellular and Western Maine Cellular). The acquisition is anticipated to be consummated during the third or fourth quarter of 1998. The contemplated acquisition will be accounted for using the purchase method. The Company plans to finance this acquisition primarily with long-term debt. The following unaudited pro forma information presents the combined results of operations of the Company as though the acquisitions in 1997 and 1998, including the contemplated acquisition, occurred on January 1, 1997. These results include certain adjustments, including amortization of goodwill, increased interest expense on debt related to the acquisitions and related income tax effects. The pro forma financial information does not necessarily reflect the results of operations if the acquisitions had been in effect at the beginning of each period which may be attained in the future.
PRO FORMA SIX MONTHS ENDED JUNE 30, ----------------------------------- 1997 1998 ----------------- ----------------- (UNAUDITED) Revenues.................................... $50,260,447 56,033,490 Net loss.................................... (3,763,868) (3,831,178)
(4) ISSUANCE OF LONG-TERM NOTES On May 5, 1998, the Company issued $125.0 million of 9 1/2% senior subordinated notes due 2008 (the "Fixed Rate Notes"), and $75.0 million of floating rate callable securities due 2008 (the "Floating Rate Notes," and collectively with the Fixed Rate Notes, the "Notes"). Proceeds were used to reduce existing bank indebtedness under the New Credit Facility. The Notes are general unsecured obligations of the Company, subordinated in right of payment to all existing and future senior debt of the Company, and effectively subordinated to all existing and future debt and other liabilities (including trade payables and accrued liabilities) of the Company's subsidiaries. Interest in the Notes is payable semi-annually. Interest on the Fixed Rate Notes is fixed at 9 1/2% and interest on the Floating Rate Notes is equal to a rate per annum at LIBOR plus 418.75 basis points (10% at May 5, 1998). (5) ACCOUNTING PRONOUNCEMENT Statement of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The standard also requires disclosure of the total of comprehensive income in interim financial statements. The Company's comprehensive income was $1.1 million and $(2.5)million for the six months ended June 30, 1997 and 1998, respectively. The difference between the Company's reported net F-27 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) income and comprehensive income for the six months ended June 30, 1998 is due to an unrealized gain on marketable securities procured in connection with the Chouteau and Taconic acquisitions. The change in the unrealized gain since the dates of acquisition has been recorded as other comprehensive income. The accumulated other comprehensive income included in the Company's Consolidated Balance Sheet at June 30, 1998 is due to the unrealized gain on marketable securities. (6) SUBSEQUENT EVENTS On July 1, 1998 the Company issued notice of its intent to exercise its call right with respect to certain warrants held by other parties. These warrants are included in the Company's minority interest at a value of approximately $2.8 million June 30, 1998 and will be accreted to the determined purchase price. The Company intends to close the purchase of the warrants on July 1, 1999 for a purchase price which is currently being negotiated. F-28 INDEPENDENT AUDITORS' REPORT Board of Directors Taconic Telephone Corp. We have audited the consolidated balance sheets of Taconic Telephone Corp. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Taconic Telephone Corp. and subsidiaries at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP March 6, 1998 Albany, New York F-29 TACONIC TELEPHONE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 ------------ ------------ ASSETS Current assets: Cash and cash equivalents............................ $ 1,204,578 3,073,458 Accounts receivable, net of allowance of $119,553 and $225,800 in 1996 and 1997, respectively............. 4,052,061 3,651,252 Inventories.......................................... 1,097,107 863,414 Deferred income taxes (note 5)....................... 44,644 92,036 Other current assets................................. 339,702 430,636 ------------ ------------ Total current assets............................... 6,738,092 8,110,796 Property, plant and equipment (note 2): Telephone: In service......................................... 43,538,277 45,495,739 Under construction and other....................... 1,275,671 1,819,966 ------------ ------------ 44,813,948 47,315,705 Less accumulated depreciation.......................... (18,318,296) (20,756,761) ------------ ------------ 26,495,652 26,558,944 Subsidiary: Net of accumulated depreciation of $2,606,882 and $3,025,429 in 1996 and 1997, respectively........... 2,370,740 2,252,162 Other assets (note 4)................................ 2,706,464 3,276,261 ------------ ------------ $ 38,310,948 40,198,163 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 558,370 993,189 Accrued payroll and related items.................... 204,857 221,304 Other accrued expenses............................... 2,156,553 2,087,070 Current maturities of long-term debt (note 3)........ 642,254 668,278 ------------ ------------ Total current liabilities.......................... 3,562,034 3,969,841 Long-term debt, less current maturities (note 3)....... 9,271,428 8,605,381 Deferred income taxes (note 5)......................... 4,675,841 4,380,934 Other long-term liabilities (note 7)................... 461,581 1,287,390 ------------ ------------ Total liabilities.................................. 17,970,884 18,243,546 ------------ ------------ Stockholders' equity: Common stock, no par value; 80,000 shares authorized; 62,588 shares issued; 60,219 shares outstanding in 1996 and 1997....................................... 677,719 677,719 Retained earnings.................................... 20,124,170 21,697,303 Accumulated other comprehensive income............... 150,396 191,816 ------------ ------------ 20,952,285 22,566,838 Less cost of treasury stock, (2,369 shares in 1996 and 1997)........................................... (612,221) (612,221) ------------ ------------ Total stockholders' equity......................... 20,340,064 21,954,617 ------------ ------------ $ 38,310,948 40,198,163 ============ ============
See accompanying notes to consolidated financial statements. F-30 TACONIC TELEPHONE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
DECEMBER 31 MARCH 31 ----------------------------------- ----------------------- 1995 1996 1997 1997 1998 ----------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) Telephone operating revenues: Local network services............. $ 5,235,962 5,912,306 5,850,960 1,445,926 1,423,477 Long distance and access services...... 8,618,850 8,246,383 9,155,034 2,114,692 2,503,927 Directory advertising, billing and other services............. 2,725,430 2,670,607 2,595,355 864,018 712,205 ----------- ---------- ---------- --------- --------- Total telephone operating revenues........... 16,580,242 16,829,296 17,601,349 4,424,636 4,639,609 CATV and systems operations............. 2,326,816 2,446,677 2,795,713 673,911 725,110 ----------- ---------- ---------- --------- --------- Total operating revenues........... 18,907,058 19,275,973 20,397,062 5,098,547 5,364,719 Telephone operating expenses: Plant specific........ 2,329,605 2,593,113 2,678,778 538,335 545,433 Plant non-specific.... 1,274,544 1,263,568 1,327,241 281,764 342,379 Customer operations... 2,325,571 2,562,919 2,655,925 628,301 633,993 Corporate operations.. 3,039,519 3,261,519 3,436,270 833,841 1,230,212 Depreciation and amortization......... 2,704,164 2,818,757 2,912,796 718,848 748,323 Other taxes........... 906,586 1,099,188 1,080,140 311,530 232,947 ----------- ---------- ---------- --------- --------- Total telephone operating expenses........... 12,579,989 13,599,064 14,091,150 3,312,619 3,733,287 CATV and systems operations............. 2,104,323 2,242,855 2,530,484 625,159 690,784 ----------- ---------- ---------- --------- --------- Total operating expenses........... 14,684,312 15,841,919 16,621,634 3,937,778 4,424,071 ----------- ---------- ---------- --------- --------- Income from operations.. 4,222,746 3,434,054 3,775,428 1,160,769 940,648 Other income (expense): Equity in earnings of partnerships......... 74,000 595,000 565,000 55,628 65,447 Other income.......... 48,068 99,983 91,645 79,111 (360,891) Interest expense...... (1,034,609) (950,302) (891,437) (225,074) (209,067) ----------- ---------- ---------- --------- --------- (912,541) (255,319) (234,792) (90,335) (504,511) ----------- ---------- ---------- --------- --------- Earnings before income taxes.................. 3,310,205 3,178,735 3,540,636 1,070,434 436,137 Income tax expense (note 5)..................... 1,087,412 874,949 1,281,007 314,921 141,602 ----------- ---------- ---------- --------- --------- Net earnings............ $ 2,222,793 2,303,786 2,259,629 755,513 294,535 =========== ========== ========== ========= ========= Basic earnings per share of common stock........ $ 36.48 38.15 37.52 9.22 4.89 =========== ========== ========== ========= =========
See accompanying notes to consolidated financial statements. F-31 TACONIC TELEPHONE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
ACCUMULATED OTHER TOTAL COMPREHENSIVE COMMON RETAINED PAID IN TREASURY COMPREHENSIVE STOCKHOLDERS' INCOME STOCK EARNINGS CAPITAL STOCK INCOME EQUITY ------------- -------- ---------- ------- -------- ------------- ------------- Balance at December 31, 1994................... $ -- $677,719 16,979,189 -- (389,582) 132,275 17,399,601 Net earnings............ 2,222,793 -- 2,222,793 -- -- -- 2,222,793 Dividends............... -- -- (694,704) -- -- -- (694,704) Change in unrealized gain on securities, net of tax................. 183,808 -- -- -- -- 183,808 183,808 ---------- --- -------- ---------- ------- -------- -------- ---------- Balance at December 31, 1995................... 2,406,601 677,719 18,507,278 -- (389,582) 316,083 19,111,498 Net earnings............ 2,303,786 -- 2,303,786 -- -- -- 2,303,786 Purchase of common shares................. -- -- -- -- (222,639) -- (222,639) Dividends............... -- -- (686,894) -- -- -- (686,894) Change in unrealized gain on securities, net of tax................. (165,687) -- -- -- -- (165,687) (165,687) ---------- --- -------- ---------- ------- -------- -------- ---------- Balance at December 31, 1996................... 4,544,700 677,719 20,124,170 -- (612,221) 150,396 20,340,064 Net earnings............ 2,259,629 -- 2,259,629 -- -- -- 2,259,629 Dividends............... -- -- (686,496) -- -- -- (686,496) Change in unrealized gain on securities, net of tax................. 41,420 -- -- -- -- 41,420 41,420 ---------- --- -------- ---------- ------- -------- -------- ---------- Balance at December 31, 1997................... $6,845,749 $677,719 21,697,303 -- (612,221) 191,816 21,954,617 ========== === ======== ========== ======= ======== ======== ==========
See accompanying notes to consolidated financial statements. F-32 TACONIC TELEPHONE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
DECEMBER 31 MARCH 31 ----------------------------------- ----------------------- 1995 1996 1997 1997 1998 ----------- ---------- ---------- ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............. $ 2,222,793 2,303,786 2,259,629 555,513 294,536 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 3,078,954 3,288,659 3,401,706 831,666 874,918 Deferred income tax benefit............. (212,521) (324,320) (363,639) (67,336) (161,391) Amortization of discount on long- term debt........... 2,211 2,209 2,231 553 553 Gain on sale of equipment........... -- (413) (2,620) (966) (1,281) Undistributed income from investments.... (287,930) (166,433) (112,641) 71,908 107,912 Decrease (increase) in accounts receivable, net..... 396,183 (735,295) 400,809 (205,572) 57,668 Decrease (increase) in inventories...... (86,820) (74,872) 233,693 (140,766) (35,220) (Increase) decrease in other current assets.............. 48,162 139,711 (90,934) (24,181) 55,743 Increase (decrease) in accounts payable and accrued expenses............ 233,175 (358,667) 381,783 294,235 (157,713) Increase in other liabilities......... (83,755) 110,066 825,809 162,276 50,907 ----------- ---------- ---------- --------- ---------- Net cash provided by operating activities...... 5,310,452 4,184,431 6,935,826 1,477,330 1,086,632 CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property and equipment............. (1,782,958) (2,778,977) (3,407,297) (351,229) (284,105) Net salvage on retirements........... 10,446 2,877 571 4,430 2,235 Expenditures for subsidiary property and equipment......... (462,158) (337,070) (337,071) (7,462) (34,731) Proceeds from sale of equipment............. -- 9,142 5,601 3,666 91 Purchase of nonmarketable equity securities............ -- (4,000) -- -- -- Proceeds from collection of loan receivable............ -- 61,932 -- -- -- Purchase of other capitalized assets.... (144,901) -- -- -- -- ----------- ---------- ---------- --------- ---------- Net cash used in investing activities...... (2,379,571) (3,046,096) (3,738,196) (350,595) (316,510) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short- term borrowings....... 130,000 -- -- -- -- Repayment of short-term borrowings............ (600,000) (130,000) -- -- -- Repayment of long-term borrowings............ (559,560) (676,328) (642,254) (160,513) (2,315,894) Dividends paid......... (694,704) (686,894) (686,496) (168,613) (168,613) Purchase of treasury stock................. -- (222,639) -- -- -- Additional paid in capital............... -- -- -- -- 2,193,837 ----------- ---------- ---------- --------- ---------- Net cash used in financing activities...... (1,724,264) (1,715,861) (1,328,750) (329,126) (290,670) ----------- ---------- ---------- --------- ---------- Increase (decrease) in cash and cash equivalents........... 1,206,617 (577,526) 1,868,880 797,609 479,452 Cash and cash equivalents at beginning of year..... 575,487 1,782,104 1,204,578 1,204,578 3,073,458 ----------- ---------- ---------- --------- ---------- Cash and cash equivalents at end of year.................. $ 1,782,104 1,204,578 3,073,458 2,002,187 3,552,910 =========== ========== ========== ========= ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest.............. $ 1,038,466 1,104,521 891,437 225,074 209,067 =========== ========== ========== ========= ========== Cash paid for income taxes................. $ 985,000 1,265,000 1,627,623 -- -- =========== ========== ========== ========= ========== Supplemental schedule of non-cash investing activities: Capital lease obligation on equipment............. $ -- 143,852 -- -- -- =========== ========== ========== ========= ==========
See accompanying notes to consolidated financial statements. F-33 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 AND MARCH 31, 1997 AND 1998 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Organization The consolidated financial statements include the accounts of Taconic Telephone Corp. (the "Company") and its wholly owned subsidiaries (collectively the "subsidiaries") Taconic Technology Corp. ("TECH"), Taconic Cellular Corp. ("TCC"), Taconet Corp. ("TNC"), Taconet Wireless Corp. ("TWC") and Taconic TelCom Corp ("TTC"). All significant inter-company transactions and balances have been eliminated in consolidation. The Company provides local exchange telecommunications services to residential and commercial customers. TECH provides telecommunications products to residential and commercial customers, operates a cable television system and provides paging and Internet services. TCC has an ownership interest in several cellular telephone general partnerships. TNC was formed to hold interests in partnerships and corporations involved in signaling systems and related data base services. TWC was formed to hold interests in partnerships and corporations involved in the provision, marketing and operations of personal communication services. TTC resells long distance services to residential and commercial customers. TTC commenced operations in 1997. The companies operate in New York State, primarily in Columbia, Rensselaer and Dutchess Counties. The Company's telephone operation follows the accounting for regulated enterprises prescribed by Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. Accordingly, SFAS 71 requires the Company's telephone operation to depreciate telephone plant over useful lives as approved by regulators which could be longer than the useful lives that would otherwise be determined by management. SFAS 71 also requires deferral of certain costs and obligations based upon approvals received from regulators to permit recovery of such amounts in future years. The Company's telephone operation periodically reviews the applicability of SFAS 71 based on the developments in their current regulatory and competitive environment. SFAS 71 may, at some future date, be deemed inapplicable due to changes in the regulatory and competitive environments and/or a decision by the Company to accelerate deployment of new technology. If the Company were to discontinue the application of SFAS 71 for its regulated operation, the Company would be required to write off its regulatory assets and regulatory liabilities associated with such operation and would be required to adjust the carrying amount of any other assets, including property, plant and equipment, that would be deemed not recoverable. The Company believes its regulated operations continue to meet the criteria for SFAS 71 and that the carrying value of its regulated property, plant and equipment is recoverable in accordance with established rate-making practices. The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for telephone companies by the New York State Public Service Commission (the PSC). (b) Inventories Inventories are carried at the lower of average cost or market and consist primarily of materials and supplies. (c) Property, Plant and Equipment Property, plant and equipment is stated at cost. Expenditures for maintenance and repairs are expensed as incurred. Depreciation is provided for using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives which range from four to fifty years. F-34 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The cost of depreciable property retired is removed from telephone plant accounts and charged to accumulated depreciation, which is credited with the salvage less removal cost. Under this method, no profit or loss is calculated on ordinary retirements of depreciable telephone property. (d) Subsidiary Property and Equipment Subsidiary property and equipment are stated at cost. Major expenditures for property and those which substantially increase useful lives are capitalized. Maintenance and repairs are expensed as incurred. Any gain or loss on disposal is recognized in operations. The subsidiaries provide for depreciation of property and equipment using annual rates which are sufficient to amortize the cost of depreciable assets over their estimated useful lives which range from five to twenty years utilizing the straight-line method. (e) Allowance for Funds Used During Construction Regulatory bodies allow the Company to capitalize an allowance for funds used during construction ("AFUDC"). AFUDC represents the borrowing costs and a return on common equity of funds used to finance construction of regulated assets. AFUDC is capitalized as a component of additions to property, plant and equipment and is credited to income. AFUDC does not represent current cash earnings; however, under established regulatory rate-making practices, after the related plant is placed in service, the Company is permitted to include in the rates charged for utility services a fair return on and depreciation of such AFUDC included in plant in service. The allowance rates for funds capitalized during the construction of certain plant assets were 9.49%, 9.40% and 9.34%, and totaled $13,280, $28,510 and $23,435 for March 31, 1998, December 31, 1997 and December 31, 1996, respectively. (f) Investments The Company records investments in marketable debt and equity securities in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Statement 115 requires investments in marketable equity securities to be reported at fair value, with net unrealized gains reported, net of income taxes, as a separate component of stockholders' equity. The Company accounts for its investments in nonmarketable equity securities and partnerships in the following manner: . investments in excess of 50% in investee equity are consolidated. . investments of 20-50% in investee equity are accounted for under the equity method. That is, the Company adjusts its investments for its proportion of the income earned and distributions made by the investee. . investments under 20% are accounted for at the lower of cost or market unless the Company is able to exercise significant influence over operating and financial policies of the investee. (g) Revenues and Accounts Receivable Local service charges are recognized when earned regardless of the period in which they are billed. Long distance revenues are derived from interstate/intralata long-distance calls that originate or terminate in the Company's Hancock, Massachusetts exchange. Network access service revenues are earned from interexchange carriers by providing access to the Company's local exchange network. The Company also generates revenue through billing subscriber line charges to their end user customers. Interstate carrier common line revenues are F-35 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) recognized under pooling arrangements with other telephone companies and are allocated among the companies based on respective costs and investments to provide these services. Revenues recognized through the various pooling processes are initially based on estimates. Adjustments are recorded in subsequent years as participating companies finalize their respective costs and investments. The Company has settled all toll and access charge revenue agreements through 1996. Accounts receivable consists primarily of amounts due from residential, commercial and interexchange carrier customers for telecommunications services. The Company performs ongoing credit evaluations of its customers. The Company maintains an allowance for doubtful accounts to cover potential credit losses. (h) Income Taxes The Company accounts for income taxes using the asset and liability method whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. The Company files consolidated Federal tax returns with its subsidiaries. Investment tax credits are deferred and amortized over the estimated useful life of the equipment which gave rise to the credit. (i) Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. (j) Regulatory Matters On May 30, 1995, the Company filed a petition with the PSC for approval of a proposed Quality Assurance Plan (the Plan), which was approved August 21, 1996. This incentive plan eliminated rate of return regulation for the Company's New York State operations as of September 1, 1996. The five-year plan freezes basic local rates with limited exceptions. Non-basic rates will not increase in excess of 40% over this same time period. Additionally, the Company has offered its local exchange service for resale to competitors at a discounted rate. The Company is the first small telephone company in the country to successfully negotiate an incentive regulation plan. Regarding federal issues, the Telecommunications Act of 1996 ("Act") was passed early in 1996. This legislation encourages competition, anticipates lower rates for consumers, and assures rural customers they will have the same services as their urban counterparts. The Company continues to monitor recent court decisions and the activity of the Federal Communications Commission as it issues orders which attempt to interpret and implement the Act. (k) Reclassifications Certain items in the 1995 and 1996 financial statements have been reclassified to conform to the 1997 presentation. (l) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and F-36 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (m) Impairment of Long-Lived Assets In 1996 the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The carrying value of long-lived assets is reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that such carrying value may not be recoverable, by assessing the recoverability of such carrying value through estimated undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The adoption of SFAS No. 121 did not affect the Company's consolidated financial position or results of operations. (n) Basic Earnings Per Share Basic earnings per share of common stock was computed by dividing net earnings by the weighted average number of common shares outstanding during the respective periods. The weighted average number of common shares outstanding was 60,939, 60,393 and 60,219 during 1995, 1996 and 1997, respectively. (o) Comprehensive Income On January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." The statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income includes the reported net income of a company adjusted for items that are currently accounted for as direct entries to equity, such as the mark-to-market adjustment on securities available for sale, foreign currency items and minimum pension liability adjustments. In the case of the Company, comprehensive income represents net income plus other comprehensive income, which consists of the net change in unrealized gains and losses on securities available for sale for the period. Accumulated other comprehensive income represents the net unrealized gain on securities available-for-sale as of the balance sheet dates. All periods for which the Company has presented financial information contain the prescribed disclosures. (2)PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment in service at December 31, 1996 and December 31, 1997 is summarized as follows:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Land............................................... $ 100,442 100,442 Customer premises wiring........................... 427,210 427,210 Other work equipment............................... 563,445 561,383 Motor vehicles..................................... 720,357 716,834 Furniture and office equipment..................... 1,088,148 1,120,792 Buildings.......................................... 3,091,851 3,157,272 Central office equipment........................... 14,348,632 15,040,958 Poles, cables and wire............................. 22,475,840 23,593,356 Other.............................................. 722,352 777,492 ------------ ---------- Total telephone plant in service................. $ 43,538,277 45,495,739 ============ ==========
F-37 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company provides for depreciation on a straight-line basis at annual rates which will amortize the depreciable property over its estimated useful life. Such provision as a percentage of the average balance of telephone plant in service was 6.48 percent at December 31, 1996, December 31, 1997 and March 31, 1998. Individual annual depreciable rates are as follows: Motor vehicles................................................... 9.50-15.00% Other work equipment............................................. 5.67% Buildings........................................................ 2.66% Furniture and office equipment................................... 5.00-20.00% Central office equipment......................................... 6.67-10.35% Customer premises wiring......................................... 5.91% Poles, cables, and wire.......................................... 2.00-11.33%
(3)LONG-TERM DEBT Long-term debt at December 31, 1996 and 1997 consists of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ First mortgage notes payable to the Rural Utilities Service at 8.72%, due in quarterly installments of $158,802 including interest, through December 31, 2009............................................... $4,914,431 4,700,767 First mortgage note payable to the Rural Utilities Service at 10.782%, due in quarterly installments of $70,658 including interest, through December 31, 2016............................................... 2,309,321 2,274,222 First mortgage note payable at prime, (8.50% and 8.25% at December 31, 1997 and 1996, respectively) due in quarterly installments of $51,667 plus interest, through December 31, 2004................ 1,653,333 1,446,667 Capital lease at 8.15% due in monthly installments of $3,498 including interest, through March 31, 2000............................................... 119,505 86,034 Note payable at prime plus 1/2% (9.00% and 8.75% at December 31, 1997 and 1996, respectively) due in monthly installments of $10,833 plus interest, through February 1, 1999, at which time remaining principal of $563,334 is due in full, secured by interest in TECH accounts receivable, inventory, and a second lien on property and equipment........ 823,333 693,334 Note payable at prime plus 1/2% (9.00% and 8.75% at December 31, 1997 and 1996, respectively) due in monthly installments of $1,944 plus interest, through March 1, 2002, secured by TECH property and equipment.......................................... 122,501 99,167 ---------- --------- Total long-term debt................................ 9,942,424 9,300,191 Less discount on long-term debt..................... (28,742) (26,532) Less current maturities............................. (642,254) (668,278) ---------- --------- Long-term debt, net of current maturities......... $9,271,428 8,605,381 ========== =========
Certain of the obligations contain covenants which restrict the amount of dividends that may be paid without approval and limit other obligations, guarantees, and require maintenance of certain operating ratios. A subsidiary of the Company, TECH, was in violation of three covenants related to notes payable as of December 31, 1997, with respect to working capital, current ratio and capital expenditure levels. Appropriate waivers were obtained in all cases. F-38 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The estimated minimum future principal payments at December 31, 1997 are scheduled as follows:
DECEMBER 31, 1997 ----------------- 1998.......................................................... $ 668,278 1999.......................................................... 1,130,031 2000.......................................................... 565,428 2001.......................................................... 585,429 2002.......................................................... 601,144 Thereafter.................................................... 5,749,881 ---------- $9,300,191 ==========
As of December 31, 1996 and 1997, the Company had available unsecured lines of credit totaling $8,500,000, with interest based on referenced rates at the times of borrowing. (4)OTHER ASSETS Other assets at December 31, 1996 and 1997 consist of the following:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Investments in partnerships...................... $1,065,269 1,177,910 Investments in marketable equity securities, available for sale.............................. 738,284 801,044 Deferred pension expense due to regulatory requirements (note 7)........................... 625,991 1,037,246 Other............................................ 276,920 260,061 ---------- --------- $2,706,464 3,276,261 ========== =========
(5)INCOME TAXES The Company accounts for income taxes using the asset and liability method required by Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes". Generally accepted accounting principles for regulated enterprises adopting Statement 109 required the recognition of deferred tax assets and liabilities. The net effect of deferred regulatory assets and liabilities of approximately $275,000 was recorded as an increase to deferred income tax liabilities as of January 1, 1993, and is being amortized over a fifteen-year period. The balance of deferred regulatory assets and liabilities was $220,000 and $238,333 at December 31, 1997 and 1996, respectively. The components of income tax expense (benefit) are as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1995 1996 1997 1997 1998 ------------ ------------ ------------ --------- --------- Income taxes charged to the statements of operations Federal: Current............... $1,299,933 1,199,269 1,644,646 382,207 302,993 Deferred.............. (212,521) (324,320) (363,639) (67,386) (161,391) ---------- --------- --------- ------- -------- Income taxes charged to the statements of operations........... 1,087,412 874,949 1,281,007 314,821 141,602 Income taxes charged (credited) to stockholders' equity Deferred.............. 94,692 (85,360) 21,340 44,010 91,353 ---------- --------- --------- ------- -------- Total income taxes.. $1,182,104 789,589 1,302,347 358,931 232,955 ========== ========= ========= ======= ========
F-39 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are presented below.
1996 1997 ----------- ----------- Deferred tax assets: Accounts receivable due to allowance for doubtful accounts............................. $ 42,274 $ 86,501 Investments in partnerships.................... 190,951 298,853 Warranty reserve............................... 2,370 3,168 Current deferred revenue....................... -- 2,367 Deferred revenue due to regulatory require- ments......................................... 80,487 62,601 Deferred pension expense....................... -- 68,746 Deferred expense due to environmental remediation................................... -- 48,745 ----------- ----------- Total gross deferred tax assets.............. 316,082 570,981 Less valuation allowance....................... -- -- ----------- ----------- Net deferred tax assets...................... 316,082 570,981 ----------- ----------- Deferred tax liabilities: Plant and equipment, principally due to differ- ences in depreciation......................... (4,424,130) (4,313,310) Unamortized investment tax credits............. (340,642) (275,528) Deferred pension expense due to regulatory requirements.................................. (55,899) (13,838) Investment differences due to market adjust- ments......................................... (116,836) (248,183) Unamortized discount on debt................... (9,772) (9,020) ----------- ----------- Total gross deferred tax liabilities......... (4,947,279) (4,859,879) ----------- ----------- Net deferred tax liability................... $(4,631,197) $(4,288,898) =========== ===========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. (6)LEASES The Company leases equipment under operating leases, for which the future non-cancelable minimum lease payments as of December 31, 1997 are as follows:
YEAR ENDING DECEMBER 31 ----------------------- 1998............................................................. $234,627 1999............................................................. 206,003 2000............................................................. 134,188 2001............................................................. 7,486 -------- $582,304 ========
F-40 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Total rental expense for all operating leases was $228,908, $334,647 and $303,017 for 1995, 1996 and 1997, and $66,847 and $60,986 for the three months ended March 31, 1997 and March 31, 1998, respectively. (7)RETIREMENT PLANS The Company has a qualified defined benefit pension plan covering substantially all of its full-time employees. The Company's funding policy is to contribute annually an amount within the range established by the Employee Retirement Income Security Act (ERISA) of 1974. Contributions to the plan are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Effective January 1, 1996, the plan was frozen with respect to the employees of TECH. The defined benefit plan was amended in 1997 to cease benefit accruals for all participants in preparation to terminate and liquidate the plan in 1998. The amendment also increased benefits to the level of the fair value of plan assets at December 31, 1997 or $5,452,047. In accordance with regulatory policy, a curtailment gain of $1,010,268 was deferred as of December 31, 1997 and is included in other long-term liabilities on the accompanying consolidated balance sheet. Net periodic pension cost for 1995, 1996 and 1997 included the following components:
1995 1996 1997 --------- -------- -------- Service cost-benefits earned during the period..................................... $ 284,812 404,989 435,351 Interest cost on projected benefit obligations................................ 349,426 434,571 476,026 Actual return on plan assets................ (197,636) (678,898) (529,998) Net amortization and deferral............... (150,102) 488,347 167,308 --------- -------- -------- Net periodic pension cost................... 286,500 649,009 548,687 Increase (decrease) due to pension expense computed under regulatory requirements..... 14,660 (34,839) (548,687) Amortization of deferred pension asset...... -- 68,716 137,432 --------- -------- -------- Pension cost expensed due to regulatory requirements............................... $ 301,160 682,886 137,432 ========= ======== ========
The following table sets forth the funded status of the plan and amounts recognized in the Company's balance sheets at December 31, 1996 and 1997:
1996 1997 ---------- --------- Projected benefit obligation: Vested employees................................... $3,971,160 5,452,047 Non-vested employees............................... 253,167 -- ---------- --------- Accumulated benefit obligation................... 4,224,327 5,452,047 Effect of projected future compensation levels....... 2,667,089 -- ---------- --------- Total projected benefit obligation............... 6,891,416 5,452,047 Plan assets at fair value (primarily corporate securities and government bonds).................... 5,434,130 5,452,047 ---------- --------- Projected benefit obligation in excess of plan assets.............................................. (1,457,286) -- Unrecognized net obligation.......................... 38,828 -- Unrecognized prior service cost...................... (57,287) -- Unrecognized net (gain) loss......................... 1,014,164 -- ---------- --------- Accrued pension obligation........................... $ (461,581) -- ========== =========
F-41 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The assumptions used in determining the funded status information and pension expense under Financial Accounting Standards Board Statement No. 87 (SFAS No. 87) for 1995, 1996 and 1997 were:
1995 1996 1997 ----- ----- ----- Discount rate.............................................. 7.15% 7.15% 7.00% Expected long-term rate of return on assets................ 9.50% 8.15% 7.50% Rate of increase in compensation levels.................... 5.00% 5.00% 5.00%
In accordance with the provisions of Financial Accounting Standards Board Statement No. 71, a deferred asset of $625,991 $1,037,246 and at December 31, 1996 and 1997, respectively, has been established to provide for any variation between pension expense computed under SFAS No. 87 and pension expense computed for regulatory purposes. The Company has a defined contribution retirement plan, pursuant to Section 401(k) of the Internal Revenue Code, covering substantially all of its full- time employees. The plan provides that participants may contribute a percentage of compensation, but not in excess of the maximum allowed under the Code. Prior to 1996, the plan made no provision for employer contributions. Effective January 1, 1996, full-time employees of Taconic Technology having at least one year of service were eligible to receive employer contributions under the plan of 5% of gross wages and matching up to 3% of employee contributions. Effective January 1, 1997, full-time employees of Taconic Telephone having at least one year of service were eligible for the same level of employer contributions as Taconic Technology employees. The Company's expense was $10,546 for 1996 and $344,616 for 1997 and $85,097 and $18,295 for the three months ended March 31, 1997 and March 31, 1998, respectively. . (8)SALE OF COMPANY During 1997, the Company's board of directors approved a definitive agreement to sell 100% of the Company's common stock to MJD Ventures, Inc. of Charlotte, N.C. The transaction received PSC approval in February, 1998 and is expected to be consummated no later than the second quarter of 1998. (9)ENVIRONMENTAL REMEDIATION During 1997, the Company engaged an environmental consultant to undertake an environmental site assessment of all property owned by the Company. As a result, the Company opted to remove all in-ground fuel tanks and replace most with above ground storage tanks. In those locations where testing detected the existence of soil contamination, remediation was either undertaken or planned. Utilizing projected costs derived from the remediation plan, the Company was able to develop estimates of cash payments for the remediation costs which are considered fixed and reliably determinable. The aggregate cost related to remediation, principally the removal and treatment of contaminated soil is estimated to be $103,000. Other costs, including site assessments, testing and tank removal and replacement are estimated to be $168,000. Approximately $128,000 has been incurred as of December 31, 1997. The remaining estimated costs have been recorded in current liabilities on the accompanying consolidated balance sheet. (10)DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued Expenses: the carrying amount approximates fair value because of the short maturity of these instruments Investments: the investments are stated at fair value Long-Term Debt: the carrying value of the Company's long-term debt approximates fair value. F-42 TACONIC TELEPHONE CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) (11) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER TOTAL ---- ---------- ---------- ---------- ---------- ----------- Revenue................. $4,706,451 $4,869,411 $4,975,221 $4,724,890 $19,275,973 Income from operations.. 1,020,069 1,048,612 923,243 442,130 3,434,054 Net earnings............ 665,202 689,007 649,973 299,604 2,303,786 FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER TOTAL ---- ---------- ---------- ---------- ---------- ----------- Revenue................. $4,898,547 $5,031,223 $5,274,498 $5,192,794 $20,397,062 Income from operations.. 960,769 964,894 1,129,248 700,517 3,775,428 Net earnings............ 555,513 560,451 702,345 441,328 2,259,629
(12) MAJOR CUSTOMERS The Company derives significant revenues from AT&T and NYNEX principally from network access and billing and collection services. Such revenues amounted to 19.9%, 18.3% and 16.6% for AT&T and 11.4%, 8.1%, and 8.5% for NYNEX of total operating revenues for the years ended December 31, 1995, 1996 and 1997, respectively and 17.7% and 13.0% for AT&T and 8.7% and 7.4% for NYNEX for the three months ended March 31, 1997 and 1998, respectively. F-43 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Ellensburg Telephone Company We have audited the accompanying consolidated balance sheet of Ellensburg Telephone Company and subsidiary as of December 31, 1996 and 1997 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ellensburg Telephone Company and subsidiary as of December 31, 1996 and 1997 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Moss Adams LLP Seattle, Washington February 11, 1998 F-44 ELLENSBURG TELEPHONE COMPANY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 AND 1997 AND MARCH 31, 1998
DECEMBER 31 -------------------------- MARCH 31, 1996 1997 1998 ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets Cash............................... $ 793,800 $ 575,500 $ 377,828 Short-term marketable securities... 4,549,500 4,893,600 6,441,152 Receivables less allowance for uncollectibles: 1996--$198,000; 1997--$209,500.... 930,400 1,015,100 1,499,729 Materials and supplies (first-in, first-out cost basis)............. 264,100 220,000 243,598 Prepaid expenses................... 170,200 198,200 68,313 Income tax prepaid and deferred.... 234,200 72,600 184,700 ------------ ------------ ------------ Total current assets............. 6,942,200 6,975,000 8,815,320 ------------ ------------ ------------ Other investments and assets......... 3,263,700 4,508,600 4,312,075 ------------ ------------ ------------ Property, plant and equipment, at cost................................ 55,312,800 57,692,000 58,175,974 Less accumulated depreciation...... (25,207,200) (27,557,800) (28,104,516) ------------ ------------ ------------ 30,105,600 30,134,200 30,071,458 ------------ ------------ ------------ $ 40,311,500 $ 41,617,800 $ 43,198,853 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt.. $ 133,300 $ -- $ -- Accounts payable................... 1,272,400 439,900 1,000,135 Accrued liabilities................ 865,500 791,700 1,377,204 ------------ ------------ ------------ Total current liabilities........ 2,271,200 1,231,600 2,377,339 ------------ ------------ ------------ Deferred federal income tax.......... 4,239,500 4,224,300 4,201,973 ------------ ------------ ------------ Employee benefit plans............... 1,429,000 1,748,300 1,827,797 ------------ ------------ ------------ Regulatory liability................. 482,900 429,600 429,600 ------------ ------------ ------------ Shareholders' equity Common stock, $10 par; authorized 1,000,000 shares.................. 6,851,600 6,851,600 6,851,600 Additional paid-in capital......... 11,476,700 11,476,700 11,476,700 Retained earnings.................. 13,560,600 15,655,700 16,033,844 ------------ ------------ ------------ 31,888,900 33,984,000 34,362,144 ------------ ------------ ------------ $ 40,311,500 $ 41,617,800 $ 43,198,853 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-45 ELLENSBURG TELEPHONE COMPANY CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
DECEMBER 31 MARCH 31 ------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) Operating revenues Local telephone services............. $ 3,386,000 $ 3,656,000 $ 3,894,700 $ 942,783 $1,025,374 Network access........ 8,320,600 9,040,800 9,301,400 2,544,922 2,104,583 Long distance services............. 138,000 108,500 104,700 26,778 21,251 Miscellaneous revenues............. 1,386,100 1,269,100 1,397,200 339,979 354,482 Uncollectible revenues............. (45,800) (15,500) (39,300) (13,875) 2,573 ----------- ----------- ----------- ---------- ---------- 13,184,900 14,058,900 14,658,700 3,840,587 3,508,263 ----------- ----------- ----------- ---------- ---------- Operating expenses Plant operations...... 1,957,300 2,310,700 2,298,500 605,994 528,670 Depreciation and amortization......... 3,112,000 3,324,800 3,601,100 944,154 843,853 Network operations.... 350,400 297,000 340,100 73,088 114,187 Marketing and customer services............. 1,439,800 1,571,900 1,610,800 443,877 414,444 General and administrative....... 1,238,800 1,202,200 1,441,400 351,168 444,063 Operating taxes....... 506,400 408,800 484,300 118,851 122,140 ----------- ----------- ----------- ---------- ---------- 8,604,700 9,115,400 9,776,200 2,537,132 2,467,357 ----------- ----------- ----------- ---------- ---------- Operating income.... 4,580,200 4,943,500 4,882,500 1,303,455 1,040,906 ----------- ----------- ----------- ---------- ---------- Other income (expenses) Interest income....... 239,900 235,700 242,800 56,250 72,882 Interest expense...... (1,000) (100) (100) -- -- Other income.......... 317,800 515,000 811,600 192,847 155,332 ----------- ----------- ----------- ---------- ---------- 556,700 750,600 1,054,300 249,097 228,214 ----------- ----------- ----------- ---------- ---------- Income before income tax provision...... 5,136,900 5,694,100 5,936,800 1,552,552 1,269,120 Income tax provision.... 1,523,100 1,760,000 1,923,200 501,960 411,365 ----------- ----------- ----------- ---------- ---------- Net income.............. $ 3,613,800 $ 3,934,100 $ 4,013,600 $1,050,592 $ 857,755 =========== =========== =========== ========== ========== Earnings per share...... $ 5.27 $ 5.74 $ 5.86 $ 1.53 $ 1.25 =========== =========== =========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-46 ELLENSBURG TELEPHONE COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1998
PAR NUMBER VALUE OF ADDITIONAL OF SHARES COMMON PAID-IN RETAINED OUTSTANDING STOCK CAPITAL EARNINGS ----------- ---------- ----------- ----------- Balance, December 31, 1994..... 685,158 $6,851,600 $11,476,700 $ 9,644,000 Cash dividends paid, $2.60 per share................... -- -- -- (1,781,400) Net income for the year...... -- -- -- 3,613,800 ------- ---------- ----------- ----------- Balance, December 31, 1995..... 685,158 6,851,600 11,476,700 11,476,400 Cash dividends paid, $2.70 per share................... -- -- -- (1,849,900) Net income for the year...... -- -- -- 3,934,100 ------- ---------- ----------- ----------- Balance, December 31, 1996..... 685,158 6,851,600 11,476,700 13,560,600 Cash dividends paid, $2.80 per share................... -- -- -- (1,918,500) Net income for the year...... -- -- -- 4,013,600 ------- ---------- ----------- ----------- Balance, December 31, 1997..... 685,158 6,851,600 11,476,700 15,655,700 Cash dividends paid, $.70 per share....................... -- -- -- (479,611) Net income for the three months...................... -- -- -- 857,755 ------- ---------- ----------- ----------- Balance, March 31, 1998........ 685,158 $6,851,600 $11,476,700 $16,033,844 ======= ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-47 ELLENSBURG TELEPHONE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
DECEMBER 31 MARCH 31 ---------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ------------ ------------ ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income............. $ 3,613,800 $ 3,934,100 $ 4,013,600 $ 1,050,592 $ 857,755 Adjustments to reconcile net income to cash flows from operating activities Depreciation and amortization........ 3,250,900 3,472,400 3,732,300 977,831 860,902 Deferred income tax and investment credit.............. 98,300 (61,600) (15,200) (15,146) (22,327) Joint venture and affiliate income.... (250,000) (310,900) (736,000) (9,837) (131,755) Employee benefit plans............... 178,100 322,400 319,300 82,405 79,497 Regulatory liability........... (174,300) (117,900) (53,300) -- -- Changes in assets and liabilities Receivables........ (339,100) 113,800 (84,700) (552,678) (484,629) Materials and supplies.......... (32,100) (52,800) 44,100 -- (23,598) Prepaid expenses... (32,200) (25,800) (28,000) 114,818 129,887 Income tax prepaid and deferred...... (151,000) (210,400) 161,600 234,200 72,600 Accounts payable and accrued liabilities....... 132,100 598,300 (906,300) (259,057) 961,034 ------------ ------------ ------------ ----------- ----------- Cash flows from operating activities...... 6,294,500 7,661,600 6,447,400 1,623,128 2,299,366 ------------ ------------ ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment, net................... (3,355,900) (5,103,500) (3,760,900) (1,174,804) (541,643) Decrease (increase) in investments and other assets................ (1,458,000) 1,112,500 (508,900) (630,000) 71,760 Proceeds from sales of marketable securities............ 16,579,600 13,527,200 19,114,000 5,651,118 3,525,853 Purchases of marketable securities............ (15,840,400) (15,469,600) (19,458,100) (5,733,777) (5,073,397) ------------ ------------ ------------ ----------- ----------- Cash flows from investing activities...... (4,074,700) (5,933,400) (4,613,900) (1,887,463) (2,017,427) ------------ ------------ ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt.................. (133,300) (133,300) (133,300) -- -- Cash dividends paid.... (1,781,400) (1,849,900) (1,918,500) (479,611) (479,611) ------------ ------------ ------------ ----------- ----------- Cash flows from financing activities...... (1,914,700) (1,983,200) (2,051,800) (479,611) (479,611) ------------ ------------ ------------ ----------- ----------- CHANGE IN CASH......... 305,100 (255,000) (218,300) (743,946) (197,672) CASH Beginning of year...... 743,700 1,048,800 793,800 793,800 575,500 ------------ ------------ ------------ ----------- ----------- End of year............ $ 1,048,800 $ 793,800 $ 575,500 $ 49,854 $ 377,828 ============ ============ ============ =========== =========== SUPPLEMENTAL INFORMATION Cash paid during the year for: Income tax........... $ 1,750,100 $ 2,150,000 $ 1,830,000 $ -- $ 60,000 ============ ============ ============ =========== =========== Interest............. $ 1,000 $ 100 $ 100 $ -- $ -- ============ ============ ============ =========== ===========
The accompanying notes are an integral part of these financial statements. F-48 ELLENSBURG TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1996 AND 1997 AND MARCH 31, 1997 AND 1998 (INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company's principal business is operation of a telephone company serving Ellensburg and Selah, Washington and surrounding areas. The Company also provides wireless communication services directly and with other joint venture partners. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the accounts of the Company and a wholly-owned subsidiary. The Company's investments in affiliated ventures (not majority owned) engaged in paging, cellular and other services are reported on the equity method. Income from these ventures amounted to $250,000, $310,900, $736,000 and $140,000 for the years ended December 31, 1995, 1996, 1997 and for the three months ended March 31, 1998, respectively. Investments in ventures where the ownership percentage is less than 20% are carried at cost. All significant intercompany accounts and transactions have been eliminated. PROPERTY, PLANT AND EQUIPMENT--The cost of property, plant and equipment is depreciated on the straight-line composite method based upon the estimated useful lives of the related assets. Provisions for depreciation were 6.4%, 6.4%, 6.5% and 6.5% of average depreciable assets in service for 1995, 1996, 1997 and for the three months ended March 31, 1998, respectively. INCOME TAX--Deferred income taxes are computed using the liability method. Under the liability method, taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company's assets and liabilities. In estimating future tax consequences, all expected future events are considered, except for potential income tax law or rate changes. Deferred income tax expense is measured by the change in the net deferred income tax asset or liability during the year. For regulated companies, the deferred regulatory liabilities are recognized at the revenue requirement level. Investment tax credits are deferred and amortized to income over the estimated useful lives of the related plant additions. The net deferrals accumulate to $252,700, $183,400, $122,900 and $111,600 at December 31, 1995, 1996, 1997 and March 31, 1998, respectively. NETWORK ACCESS REVENUES--Certain network access revenues are recorded on an estimated basis each month. These revenues are subject to later settlement with an exchange carrier association based on studies of actual costs. The 1995, 1996 and 1997 revenues were increased by $113,200, $308,200 and $145,900, respectively, representing prior years' amounts refunded by the exchange carrier association. Certain network access revenue for 1995, 1996 and 1997 is subject to final settlement. There were no increases or decreases for the first three months of 1998. INVESTMENTS--Short-term marketable securities are carried at cost, adjusted for amortization of premium and accretion of discounts, which are recognized as adjustments to income. Such cost approximates market. These securities consist of U.S. Treasury Bills and, generally, have a maturity of less than twelve months from date of purchase. Under the provisions of Statement of Financial Accounting Standards No. 115, Investments in Debt and Equity Securities, these investments are classified as held-to-maturity. F-49 ELLENSBURG TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CALCULATION OF EARNINGS AND DIVIDENDS PER SHARE--Earnings per share are computed based on the average number of shares outstanding. These calculations are in conformity with recently issued Statement of Financial Accounting Standards No. 128. Dividends per share are computed based on the number of shares outstanding on the date the dividend is paid. RECLASSIFICATIONS--Certain reclassifications of 1995 and 1996 balances have been made to conform to the 1997 presentation. The reclassifications have no effect on net income for 1995 and 1996. FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS--Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, short-term marketable securities and receivables. The Company maintains bank accounts with major financial institutions and balances from time to time exceed insured limits. Investments are in securities issued by the U.S. Government and its agencies. Receivables are due from a large number of customers in the Company's service area, and also include settlements from other carriers and exchange associations. The Company believes these policies do not result in significant risks. FUTURE ACCOUNTING CHANGES--Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" will be effective for the Company in 1998. This standard requires that certain items recognized under accounting principles as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" will be effective for the Company in 1998. This standard revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. Other recent pronouncements do not affect the Company. NOTE 2--LINES OF CREDIT The Company has a revolving credit facility with a bank with maximum borrowings of $3,000,000, bearing interest at the bank's reference lending rate plus .25%. The line is unsecured and matures October 1, 1998. The Company also has a revolving credit facility with a finance cooperative with maximum borrowings of $6,000,000, bearing interest at the prime rate plus 1.50%. The line is unsecured, and available through March 10, 2001. The Company has an understanding with the lenders that the total outstanding balances will not exceed $6,000,000. There were no balances outstanding on either credit line at December 31, 1996, 1997, or March 31, 1998. NOTE 3--INCOME TAX The income tax provision is composed of the following:
DECEMBER 31 MARCH 31 ---------------------------------- ----------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- -------- -------- Current................. $1,599,100 $2,122,500 $2,000,700 $521,327 $426,365 Deferred................ 1,200 (293,200) (17,000) (4,250) (3,672) Investment credits amortized.............. (77,200) (69,300) (60,500) (15,117) (11,328) ---------- ---------- ---------- -------- -------- $1,523,100 $1,760,000 $1,923,200 $501,960 $411,365 ========== ========== ========== ======== ========
F-50 ELLENSBURG TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The difference between the total expected income tax provision at the federal statutory rate of 34% and the actual provision is accounted for as follows:
DECEMBER 31 MARCH 31 ---------------------------------- ----------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- -------- -------- Computed expected tax expense............... $1,746,600 $1,936,000 $2,018,500 $527,875 $431,541 Investment tax credit amortization.......... (77,200) (69,300) (60,500) (15,117) (11,328) Rate differential on temporary differences that are reversing.... (53,000) (53,000) (53,000) (13,248) (13,248) Other, net............. (93,300) (53,700) 18,200 2,450 4,400 ---------- ---------- ---------- -------- -------- Income tax provision........... $1,523,100 $1,760,000 $1,923,200 $501,960 $411,365 ========== ========== ========== ======== ========
The components of the deferred income tax assets and liabilities are as follows:
DECEMBER 31 ------------------------ MARCH 31 1996 1997 1998 ----------- ----------- ----------- Deferred tax assets Pension costs and benefit plans..... $ 485,900 $ 594,600 $ 621,650 Other investments................... 4,300 4,300 4,300 Allowance for doubtful accounts..... 67,000 71,300 64,000 Accrued vacation.................... 116,000 120,700 120,700 ----------- ----------- ----------- Total deferred income tax assets.. 673,200 790,900 810,650 ----------- ----------- ----------- Deferred tax liabilities Depreciation and asset basis differences........................ (4,729,700) (4,823,200) (4,827,923) ----------- ----------- ----------- Net deferred income taxes......... $(4,056,500) $(4,032,300) $(4,017,273) =========== =========== ===========
Net deferred income tax balances at December 31 are classified as follows:
DECEMBER 31 ------------------------ MARCH 31 1996 1997 1998 ----------- ----------- ------------ Deferred tax asset--current............ $ 183,000 $ 192,000 $ 184,700 Deferred tax liabilities--long-term.... (4,239,500) (4,224,300) (4,201,973) ----------- ----------- ------------ $(4,056,500) $(4,032,300) $(4,017,273) =========== =========== ============
As a result of implementing the liability method of accounting for income taxes, the Company recorded a regulatory liability, which represents the reduction of deferred taxes resulting from the decrease in the statutory federal income tax rate to 34%. This reduction of accumulated deferred income taxes is being amortized over the regulatory lives of the related depreciable assets concurrent with their inclusion in the ratemaking base. F-51 ELLENSBURG TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 4--ACCRUED LIABILITIES Accrued liabilities at December 31, 1996 and 1997 include the following components:
DECEMBER 31 ----------------- MARCH 31 1996 1997 1998 -------- -------- ---------- Vacation pay..................................... $342,600 $354,900 $ 354,900 Property taxes................................... 350,100 371,100 464,886 Income tax payable............................... -- -- 485,796 Other............................................ 172,800 65,700 71,622 -------- -------- ---------- $865,500 $791,700 $1,377,204 ======== ======== ==========
NOTE 5--EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan which covers substantially all employees. This plan provides pension benefits based upon participants' compensation levels and length of service. The Company's funding policy is to contribute amounts deductible for federal income tax purposes. The Company contributed $99,000 in 1995, $83,200 in 1996, $88,100 in 1997 and $0 in the three months ended March 31, 1997 and 1998, respectively. Pension cost amounted to $279,700, $339,600 and $321,400 for 1995, 1996 and 1997, respectively. Pension cost for the years ended December 31, 1995, 1996 and 1997 includes the following components:
1995 1996 1997 --------- --------- --------- Service cost................................. $ 191,300 $ 228,500 $ 224,300 Interest cost................................ 420,900 485,500 511,700 Return on assets............................. (585,100) (555,400) (819,800) Amortization of transition adjustment........ 252,600 181,000 405,200 --------- --------- --------- Net pension cost............................. $ 279,700 $ 339,600 $ 321,400 ========= ========= =========
The following table sets forth the plan's funded status and amounts recognized in the accompanying balance sheet at December 31, 1996 and 1997.
1996 1997 ---------- ---------- Actuarial present value of benefit obligations Vested benefit obligation............................ $5,314,000 $5,809,800 ========== ========== Accumulated benefit obligation....................... $5,326,100 $5,909,000 ========== ==========
1996 1997 ----------- ----------- Projected benefit obligation....................... $(7,575,600) $(8,009,400) Fair value of plan assets.......................... 6,011,700 6,774,800 ----------- ----------- Projected benefit obligation in excess of (less than) plan assets................................. (1,563,900) (1,234,600) Unrecognized amounts of net assets, liabilities and gains............................................. 386,900 (175,700) ----------- ----------- Pension plan obligation............................ $(1,177,000) $(1,410,300) =========== ===========
F-52 ELLENSBURG TELEPHONE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The actuarial present value of the projected benefit obligation at December 31, 1996 and 1997, respectively, was determined using a weighted average discount rate of 7.0%, and a rate of increase in future compensation levels of 5.5%. The expected long-term rate of return on assets was 8%. The Company applies Statement of Financial Accounting Standards No. 106, Employers' Accounting for Post-retirement Benefits Other than Pensions ("FAS 106"), which requires the cost of nonpension, post-retirement benefits granted to employees to be accrued and recognized as expense over the period in which the employee provides services and becomes eligible to receive benefits. The accumulated post-retirement benefits granted to employees as of January 1, 1993 amounted to approximately $677,000, which is being amortized over a 20 year period. The Company recognized net periodic post-retirement benefit costs approximating $78,900, $72,500, $93,400, $17,000 and $21,000 in 1995, 1996, 1997 and for the three months ended March 31, 1997 and 1998, respectively. The recorded obligation for this plan is $252,000, $338,000 and $359,000 at December 31, 1996, 1997 and March 31, 1998, respectively. The accumulated post-retirement benefits and net periodic post-retirement benefit costs are based upon an assumed medical inflation rate of 7.0%, which is subject to change. An increase in the assumed medical inflation rate of 1.0% would effectively increase the accumulated post-retirement benefits obligation by 13% and the net periodic benefit expense by 15%. Substantially all employees are eligible to participate in a thrift plan which allows each employee to contribute up to 6% of individual earnings to the plan. Company contributions to the plan are at least one half of the employee contributions and amounted to $74,800 in 1995, $66,300 in 1996, $82,400 in 1997 and $21,100 and $22,900 for the three months ended March 31, 1997 and 1998, respectively. It is the current policy of the plan trustees to invest contributions in common stock of the Company, when available, and U.S. government securities. NOTE 6--PROPOSED MERGER The Company has entered into an Agreement and Plan of Merger dated December 31, 1997 (the "Merger Agreement"), which is subject to approval by the shareholders at a special meeting to be held on February 24, 1998. Under terms of the Merger Agreement, and as more fully explained in the Proxy Statement, the Company's shareholders will receive cash for their shares of common stock. F-53 INDEPENDENT AUDITORS' REPORT The Directors and Stockholders Utilities, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Utilities, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income and retained earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 Utilities, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results of their consolidated operations and their consolidated cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Berry, Dunn, McNeil & Parker Portland, Maine February 12, 1998 (except for Notes 3, 13, and 14, which are dated May 17, 1998, July 31, 1998, and March 27, 1998, respectively) F-54 UTILITIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 AND MARCH 31 AND JUNE 30, 1998
DECEMBER 31, ----------------------- MARCH 31, JUNE 30, 1997 1996 1998 1998 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) ASSETS Current assets Cash and cash equivalents.... $ 6,999,028 $ 4,297,997 $ 4,830,278 $ 3,863,729 Accounts receivable, net of allowance for doubtful accounts of $42,664 in 1997, $45,829 in 1996, $14,986 at March 31, 1998, and $17,631 at June 30, 1998............ 2,818,058 2,580,390 3,081,515 3,435,891 Due from affiliates.......... 13,396 6,886 -- 48,189 Recoverable income taxes..... -- -- 169,621 62,630 Materials and supplies....... 153,547 116,334 138,596 257,772 Prepaid expenses............. 12,725 48,150 13,507 349,452 ----------- ----------- ----------- ----------- Total current assets....... 9,996,754 7,049,757 8,233,517 8,017,663 ----------- ----------- ----------- ----------- Property, plant, and equipment, at cost Telecommunications plant in service General support assets..... 6,200,971 6,156,449 6,189,111 6,188,856 Central office equipment... 17,977,267 15,999,835 17,598,995 17,616,588 Information origination/termination equipment................. 162,417 283,704 162,417 162,417 Cable and wire facilities.. 20,599,704 19,636,679 20,590,636 20,645,266 Cellular communications plant..................... 1,203,173 1,192,851 1,203,173 1,196,861 ----------- ----------- ----------- ----------- 46,143,532 43,269,518 45,744,332 45,809,988 Less accumulated depreciation.............. 24,041,978 21,233,463 24,527,391 25,393,763 ----------- ----------- ----------- ----------- 22,101,554 22,036,055 21,216,941 20,416,225 Telecommunications plant under construction.................. 647,549 567,755 1,032,974 1,911,402 ----------- ----------- ----------- ----------- Net property, plant, and equipment................. 22,749,103 22,603,810 22,249,915 22,327,627 ----------- ----------- ----------- ----------- Other assets Cellular license, net........ 1,730,786 1,824,338 1,707,398 1,684,010 Investment in and advances to Portland Cellular Partnership................. 777,784 785,778 789,340 848,245 Investment in nontraded stocks...................... 1,871,091 1,913,859 1,871,091 1,826,767 Deferred charges, net........ 1,220,984 700,510 1,359,050 1,605,525 Goodwill, net................ 8,150,527 8,420,707 8,085,006 8,020,497 ----------- ----------- ----------- ----------- Total other assets......... 13,751,172 13,645,192 13,811,885 13,985,044 ----------- ----------- ----------- ----------- $46,497,029 $43,298,759 $44,295,317 $44,330,334 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-55 UTILITIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--(CONTINUED) DECEMBER 31, 1997 AND 1996 AND MARCH 31 AND JUNE 30, 1998
DECEMBER 31, ------------------------ MARCH 31, JUNE 30, 1997 1996 1998 1998 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long- term debt............... $ 1,889,584 $ 1,878,639 $ 1,960,439 $ 1,960,439 Dividends payable........ 1,082,522 82,524 82,522 82,522 Accounts payable......... 1,213,178 1,942,039 1,467,861 1,937,726 Due to affiliates........ -- -- 11,693 -- Income taxes payable..... 1,201,889 162,202 -- -- Accrued expenses......... 535,094 294,220 675,523 410,640 Accrued wages............ 291,586 338,187 304,077 322,455 Accrued interest......... 235,869 261,517 229,672 224,858 Customer deposits........ 50,333 48,590 36,459 58,533 ----------- ----------- ----------- ----------- Total current liabilities........... 6,500,055 5,007,918 4,768,246 4,997,173 ----------- ----------- ----------- ----------- Deferred credits Income taxes............. 3,395,612 2,388,995 3,453,190 3,447,819 Unamortized investment tax credits............. 143,497 191,324 131,540 119,583 Other deferred credits... 259,112 298,086 268,855 278,598 ----------- ----------- ----------- ----------- Total deferred credits............... 3,798,221 2,878,405 3,853,585 3,846,000 ----------- ----------- ----------- ----------- Long-term debt, excluding current portion........... 24,022,957 25,885,685 23,484,054 22,969,336 Other liabilities.......... 773,243 596,379 776,961 810,090 ----------- ----------- ----------- ----------- Total liabilities...... 35,094,476 34,368,387 32,882,846 32,622,599 ----------- ----------- ----------- ----------- Minority interest.......... 37,500 42,000 37,500 33,000 ----------- ----------- ----------- ----------- Stockholders' equity Common stock, no par value; authorized 50,000 shares, issued 31,136 shares, outstanding 30,792 shares........... 815,205 815,205 815,205 815,205 Retained earnings........ 10,622,318 8,145,637 10,632,236 10,932,000 ----------- ----------- ----------- ----------- 11,437,523 8,960,842 11,447,441 11,747,205 Less common stock in treasury, 344 shares, at cost.................... (72,470) (72,470) (72,470) (72,470) ----------- ----------- ----------- ----------- Total stockholders' equity................ 11,365,053 8,888,372 11,374,971 11,674,735 ----------- ----------- ----------- ----------- $46,497,029 $43,298,759 $44,295,317 $44,330,334 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-56 UTILITIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
DECEMBER 31, MARCH 31, JUNE 30, ------------------------------------- ------------------------ ------------------------ 1997 1996 1995 1998 1997 1998 1997 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Operating revenues Basic local network services.............. $ 3,264,356 $ 3,049,929 $ 3,057,114 $ 771,891 $ 765,596 $1,620,146 $1,587,107 Network access services.............. 6,015,791 5,718,810 5,873,537 1,603,207 1,294,771 3,148,370 2,523,705 Long-distance network services.............. 5,557,779 5,476,960 5,329,295 1,406,256 1,332,532 2,830,550 2,807,127 Miscellaneous.......... 322,933 257,210 255,384 78,514 75,648 163,689 143,672 Service revenues....... 1,198,392 1,777,538 1,369,284 269,334 357,455 624,713 629,566 Cellular communications revenues.............. 1,645,974 1,421,054 1,209,728 366,891 364,731 762,645 747,043 Less uncollectible revenues.............. (174,359) (145,279) (141,599) (48,549) (42,562) (82,862) (79,464) ----------- ----------- ----------- ---------- ---------- ---------- ---------- Total operating revenue............... 17,830,866 17,556,222 16,952,743 4,447,544 4,148,171 9,067,251 8,358,756 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Operating expenses Plant specific operations............ 2,394,140 2,327,448 2,712,240 964,986 609,518 1,638,744 1,188,150 Plant nonspecific operations............ 2,255,028 1,963,413 929,670 624,998 605,588 1,198,044 1,226,847 Depreciation and amortization.......... 3,515,918 3,376,023 3,112,306 924,259 874,155 1,851,943 1,746,816 Customer operations.... 1,410,351 1,162,523 1,430,682 503,328 335,904 1,030,994 898,556 Corporate operations... 2,272,279 2,275,615 2,684,846 428,514 573,747 844,795 1,109,748 Cellular operations.... 1,331,868 1,268,310 1,147,582 226,905 288,340 372,270 346,235 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Total operating expenses.............. 13,179,584 12,373,332 12,017,326 3,672,990 3,287,252 6,936,790 6,516,352 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Operating taxes Federal and state income taxes.......... 1,357,276 1,475,894 1,178,488 146,941 131,768 524,259 356,958 Other operating taxes.. 653,907 647,566 656,085 174,420 146,239 377,428 332,852 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Total operating taxes.. 2,011,183 2,123,460 1,834,573 321,361 278,007 901,687 689,810 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Net operating income... 2,640,099 3,059,430 3,100,844 453,193 582,912 1,228,774 1,152,594 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Other income (expense) Interest and dividends............. 215,578 189,475 125,828 75,646 51,842 133,215 103,399 Loss from Portland Cellular Partnership.. (282,994) (284,932) (338,871) (28,444) (79,891) (89,539) (190,567) Legal settlement....... 4,500,000 -- -- -- -- -- -- Gain on sale of subsidiary............ -- 367,516 -- -- -- -- -- Goodwill amortization.. (270,180) (269,820) (275,285) (65,521) (67,545) (130,030) (135,090) Other, net............. 299,047 519,442 384,953 74,447 62,601 117,595 163,792 Income taxes........... (1,103,800) 542,242 723,657 98,539 95,200 247,076 248,236 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Net other income (expense)............. 3,357,651 1,063,923 620,282 154,667 62,207 278,317 189,770 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Income before interest expense............... 5,997,750 4,123,353 3,721,126 607,860 645,119 1,507,091 1,342,364 Income before interest expense (brought forward).............. 5,997,750 4,123,353 3,721,126 607,860 645,119 1,507,091 1,342,364 Interest expense........ 2,187,849 2,647,443 2,937,493 514,670 584,181 1,030,863 1,127,440 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Net income before minority interest..... 3,809,901 1,475,910 783,633 93,190 60,938 476,228 214,924 Minority interest....... 3,130 3,450 3,810 750 840 1,500 1,680 ----------- ----------- ----------- ---------- ---------- ---------- ---------- Net income............. $ 3,806,771 $ 1,472,460 $ 779,823 $ 92,440 $ 60,098 $ 474,728 $ 213,244 =========== =========== =========== ========== ========== ========== ========== Earnings per common share.................. $ 123.63 $ 47.82 $ 25.17 $ 3.00 $ 1.95 $ 15.42 $ 6.93 =========== =========== =========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-57 UTILITIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND THREE-MONTH PERIOD ENDED MARCH 31, 1998 AND SIX-MONTH PERIOD ENDED JUNE 30, 1998
COMMON RETAINED TREASURY STOCK EARNINGS STOCK TOTAL -------- ----------- --------- ----------- Balances, December 31, 1994...... $815,205 $ 6,515,352 $ (9,737) $ 7,320,820 Net income..................... -- 779,823 -- 779,823 Dividends declared, $9.84 per share......................... -- (303,917) -- (303,917) Purchase of stock for the treasury, 457 shares.......... -- (107,778) (107,778) Sale of treasury stock, 191 shares........................ -- -- 45,045 45,045 -------- ----------- --------- ----------- Balances, December 31, 1995...... 815,205 6,991,258 (72,470) 7,733,993 Net income..................... -- 1,472,460 -- 1,472,460 Dividends declared, $10.33 per share......................... -- (318,081) -- (318,081) -------- ----------- --------- ----------- Balances, December 31, 1996...... 815,205 8,145,637 (72,470) 8,888,372 Net income..................... -- 3,806,771 -- 3,806,771 Dividends declared, $43.20 per share......................... -- (1,330,090) -- (1,330,090) -------- ----------- --------- ----------- Balances, December 31, 1997...... 815,205 10,622,318 (72,470) 11,365,053 Net income (unaudited)......... -- 92,440 -- 92,440 Dividends declared, $2.68 Per share (unaudited)............. -- (82,522) -- (82,522) -------- ----------- --------- ----------- Balances, March 31, 1998......... $815,205 $10,632,236 $ (72,470) $11,374,971 -------- ----------- --------- ----------- Net income (unaudited)......... 382,287 382,287 Dividends declared, $2.68 per share (unaudited)............. (82,523) (82,523) -------- ----------- --------- ----------- Balances, June 30, 1998.......... $815,205 $10,932,000 $ (72,470) $11,674,735 ======== =========== ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. F-58 UTILITIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 AND THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
DECEMBER 31, MARCH 31, JUNE 30, ------------------------------------- ------------------------ ------------------------ 1997 1996 1995 1998 1997 1998 1997 ----------- ----------- ----------- ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash flows from operating activities Net income............ $ 3,806,771 $ 1,472,460 $ 779,823 $ 92,440 $ 60,098 $ 474,727 $ 213,244 Adjustments to reconcile net income to net cash provided (used) by operating activities Patronage dividends... -- -- (39,069) -- -- -- -- Depreciation and amortization......... 3,795,180 3,645,843 3,387,591 989,780 941,700 1,981,973 1,881,906 Deferred income taxes................ 976,209 282,655 298,108 47,837 17,000 108,541 34,000 Amortization of deferred investment tax credits.......... (45,823) (45,823) (47,827) (11,957) (11,456) (23,914) (22,912) Loss from Portland Cellular Partnership.......... 282,994 284,932 338,871 28,444 79,891 89,539 190,567 Legal settlement...... (4,500,000) -- -- -- -- -- -- Gain on sale of subsidiary........... -- (367,516) -- -- -- -- -- Decrease (increase) in Accounts receivable... (237,668) 381,814 (449,206) (263,457) (11,529) (617,833) (210,201) Recoverable income taxes................ -- 31,583 (31,583) (169,621) -- (62,630) (120,076) Due from affiliates... (6,510) (6,886) 144,178 13,396 6,886 (34,793) 6,886 Materials and supplies............. (37,213) (48,379) 47,928 14,951 (56,283) (104,225) (149,846) Prepaid expenses...... 35,425 (29,553) (9,531) (782) -- (336,727) (356,010) Increase (decrease) in Accounts payable...... (728,861) 781,663 290,110 254,683 (210,872) 724,548 (379,952) Income taxes payable.. 1,039,687 162,202 (280,867) (1,201,889) (73,333) (1,201,889) (163,982) Due to affiliates..... -- (85,840) 31,295 11,693 -- -- 59,515 Accrued expenses and other liabilities.... 291,012 130,222 111,647 150,441 153,305 (104,596) 32,849 Customer deposits..... 1,743 174 22,857 (13,874) -- 8,200 22,104 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Net cash provided (used) by operating activities.......... 4,672,946 6,589,551 4,594,325 (57,915) 895,407 900,921 1,038,092 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Cash flows from investing activities Plant additions....... (3,552,217) (2,802,602) (2,741,179) (384,883) (714,945) (1,350,091) (1,807,603) Proceeds from sale of subsidiary........... -- 969,225 -- -- -- -- -- Proceeds from legal settlement........... 4,500,000 -- -- -- -- -- -- Plant removal costs... (39,601) (13,500) (7,206) -- -- -- -- Salvage............... 57,518 16,811 30,485 -- -- -- -- Contributions to plant................ 19,841 4,410 1,236 -- -- -- -- Distributions from (contributions to) Portland Cellular Partnership.......... (275,000) (100,000) 350,000 (40,000) (50,000) (160,000) (150,000) Payment of deferred charges.............. (538,849) (11,615) (34,756) (135,382) -- (373,817) 42,769 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Net cash provided (used) by investing activities.......... 171,692 (1,937,271) (2,401,420) (560,265) (764,945) (1,883,908) (1,914,834) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Cash flows from financing activities Retirement of preferred stock of subsidiary........... (4,500) (4,500) (4,500) -- -- (4,500) (4,500) Payment of long-term debt................. (1,809,015) (2,452,487) (1,270,141) (468,048) (431,321) (982,766) (929,045) Receipt (payment) on line of credit....... -- -- (250,000) -- -- -- 200,000 Dividends paid........ (330,092) (314,077) (300,868) (1,082,522) (83,363) (1,165,046) (166,726) Purchase of treasury stock................ -- -- (107,778) -- -- -- -- Sale of treasury stock................ -- -- 45,045 -- -- -- -- ----------- ----------- ----------- ----------- ---------- ----------- ----------- Net cash used by financing activities.......... (2,143,607) (2,771,064) (1,888,242) (1,550,570) (514,684) (2,152,312) (900,271) ----------- ----------- ----------- ----------- ---------- ----------- ----------- Net increase (decrease) in cash and cash equivalents......... 2,701,031 1,881,216 304,663 (2,168,750) (384,222) (3,135,299) (1,777,013) Cash and cash equivalents, beginning of period............. 4,297,997 2,416,781 2,112,118 6,999,028 4,297,997 6,999,028 4,297,997 ----------- ----------- ----------- ----------- ---------- ----------- ----------- Cash and cash equivalents, end of period................ $ 6,999,028 $ 4,297,997 $ 2,416,781 $ 4,830,278 $3,913,775 $ 3,863,729 $ 2,520,984 =========== =========== =========== =========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-59 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996, 1995, MARCH 31, 1998 AND JUNE 30, 1998 (INFORMATION AS OF AND FOR THE THREE-MONTHS ENDED MARCH 31, 1998 AND 1997 AND SIX-MONTHS ENDED JUNE 30, 1998 AND 1997 IS UNAUDITED) NATURE OF OPERATIONS Utilities, Inc. (the Company) and its subsidiaries derive operating revenues primarily from providing regulated telephone, cellular communication and data processing services to customers in Maine and to other domestic telecommunication providers. The Company extends credit at standard terms, after appropriate review, to customers. The Company's telephone and cellular operations are subject to various degrees of regulation by the Federal Communications Commission (FCC) and the Maine Public Utilities Commission (MPUC). On February 8, 1996, the "Telecommunications Act of 1996" (the Act) was signed into law. The Act seeks to stimulate competition in the provision of telecommunications services. The FCC and MPUC are charged with implementing its provisions. The effect of the Act on the Company cannot be determined at this time. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basis of Reporting The consolidated financial statements include the accounts of the Company and its subsidiaries: Standish Telephone Company, Maine Telephone Company, China Telephone Company, Seacoast Cellular, Inc., and Western Maine Cellular, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Regulatory Accounting The Telephone Companies follow the accounting prescribed by the Uniform System of Accounts of the Federal Communications Commission (FCC) and the Maine Public Utilities Commission (MPUC) and Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the Effects of Certain Types of Regulation. This accounting recognizes the economic effects of rate regulation by recording costs and a return on investment as such amounts are recovered through rates authorized by regulatory authorities. The Company annually reviews the continued applicability of SFAS No. 71 based on the current regulatory and competitive environment. Cash and Cash Equivalents All liquid investments with an original maturity of three months or less are considered to be cash equivalents. The Company maintains its cash in bank deposit accounts, which at times may exceed federally insured limits, or in government securities. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk on cash and cash equivalents. Depreciation Depreciation is computed on average plant investment by primary plant accounts using the straight-line method over the assets' useful lives. Depreciation expense was $3,369,166, $3,199,371 and $2,922,521 for the F-60 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) years ended December 31, 1997, 1996, and 1995, respectively, $884,071 and $829,992 for the three-month periods ended March 31, 1998 and 1997, respectively, and $1,771,567 and $1,666,440 for the six-month periods ended June 30, 1998 and 1997, respectively. Capitalization Policy Additions to property, plant, and equipment, telecommunications plant in service and replacements of retirement units of property are capitalized at original cost, which includes labor, material and overhead. Cellular License The Western Maine Cellular, Inc. license is being amortized by the straight- line method over twenty-five years. Amortization expense related to the license was $93,552 for each of the years ended December 31, 1997, 1996, and 1995, and $23,388 for the three-month periods ended March 31, 1998 and 1997, and $47,550 for the six-month periods ended June 30, 1998 and 1997. Deferred Charges Deferred charges include start-up, organization and deferred financing costs being amortized by the straight-line method over ten years, deferred pension costs of the regulated telephone companies, and billing system software development costs. The billing system software costs approximated $539,000 as of December 31, 1997, and when placed in service, will be amortized using the straight-line method over the useful life of the billing software. Amortization expense on deferred charges was $62,282, $83,100 and $96,233 for the years ended December 31, 1997, 1996, and 1995. Amortization expense was $16,800 and $20,775 for the three-month periods ended March 31, 1998 and 1997; and $33,600 and $41,550 for the sixth-month periods ended June 30, 1998 and 1997. Impairment of Long-Lived Assets and Excess Cost on Net Assets Acquired (Goodwill) Goodwill arose from the purchase of the Maine Telephone Company from GTE of Maine in 1994. It is being amortized on the straight-line method over thirty- five years. By agreement with the MPUC, the goodwill and related amortization are excluded from regulated operations for rate making purposes. In 1996, the Company adopted SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 established accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used, and for long-lived assets and certain identifiable intangibles to be disposed of. The carrying value of long-lived assets, including allocated goodwill, is reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that such carrying value may not be recoverable, by assessing the recoverability of such carrying value through estimated undiscounted future net cash flows expected to be generated by the assets or the acquired business. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The adoption of SFAS No. 121 did not affect the Company's consolidated financial position or results of operations. Investments Investments in the Rural Telephone Finance Cooperative (RTFC) Subordinated Capital Certificates (SCCs) and the Rural Telephone Bank (RTB) Class B stock were purchased as a requisite to obtaining financing and are carried at cost. RTB Class C stock acquired by Maine Telephone Company pursuant to its acquisition of F-61 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) telecommunications property is carried at cost. The Seacoast Cellular, Inc. investment in Portland Cellular Partnership (PCP) is accounted for by the equity method. Materials and Supplies Materials and supplies are valued at the lower of first-in, first-out (FIFO) average cost or market. Income Taxes Deferred income taxes are provided for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Investment tax credits deferred for financial reporting purposes are being amortized over the lives of the properties that gave rise to the credits. Pension Plan The Company has a noncontributory pension plan covering substantially all employees, and an unqualified supplemental plan for certain officers. Benefits are based on years of service and levels of compensation. The Company funds pension costs accrued. As mandated by the MPUC, the telephone companies recognize periodic pension expense as the amounts to be funded are accrued. Pension costs calculated under SFAS No. 87 are carried as deferred charges until such time as they are funded. Revenue Recognition Operating revenues are recognized when services are provided to customers. Interstate network access services revenues are recorded based on estimates of the Telephone Companies' telephone plant investment, operating expenses, and allowable rates of return on investment allocable to those services. Nationwide pooling of the revenues is administered by the National Exchange Carrier Association (NECA), of which the Telephone Companies are members. NECA files interstate access charge tariff schedules with the FCC and accumulates and distributes pooled revenues derived from interstate network access services to its members. The Telephone Companies record the effect of NECA settlements, including retroactive adjustments, upon notification of such settlements from NECA. The Telephone Companies' intrastate network access and long-distance services revenues are based on agreements with Bell Atlantic, the interconnecting carrier. In 1998, Bell Atlantic plans to cancel the long-distance network revenue settlement agreement referred to above. The cancellation will be effective no later than May 31, 1998, and possibly earlier at the Company's discretion. After cancellation, the Company will bill Bell Atlantic and other intrastate long-distance carriers for access to its customers. The Company intends to file access rates, based on revenue generated from existing settlements for similar services and usage, with the MPUC. During 1997, the Maine legislature enacted a law requiring that, by May 30, 1999, charges for intrastate access service be less than or equal to those charged for interstate access services. The MPUC has amended its access charge rules to ensure compliance with the law. The access filing referred to above will be the first step in the compliance phase for the Company. This phase is expected to last through much of 1998 and possibly into 1999. The impact of this process, if any, on the future earnings of the Company is not known at this time. F-62 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Earnings Per Share Earnings per share data are based on the weighted average number of common shares outstanding during each year. There were no potentially dilative securities in any of the years presented. Reclassification Based on updated property records, approximately $385,000 of goodwill was reclassified to telecommunications plant in service during 1997. The impact on earnings was not significant. The December 31, 1996, balances have been reclassified to conform to the December 31, 1997, presentation. Effect of New Financial Accounting Standards During 1997, the Financial Accounting Standards Board issued two Statements of Financial Accounting Standards ("SFAS") which apply to the Company: SFAS No. 128, Earnings Per Share, and SFAS No. 129, Disclosure About Capital Structure. These statements do not change the measurement or recognition methods used in financial statements but, rather, deal with disclosure and presentation requirements. 2. SALE OF SUBSIDIARY On January 19, 1996, the Company sold all the common stock of its subsidiary, Sidney Telephone Company, in a cash transaction. The Company recognized a pretax gain on the sale of $367,516. The results of Sidney Telephone Company's operations during the nineteen days it was owned by the Company in 1996 were not significant and were included in the gain. 3. INVESTMENT IN AND ADVANCES TO PORTLAND CELLULAR PARTNERSHIP The Company's wholly-owned subsidiary, Seacoast Cellular, Inc. ("Seacoast"), is a one-third general partner in Portland Cellular Partnership. The investment is accounted for by the equity method and represents Seacoast's only activity. The Partnership was originally granted a license to provide service in the Portland New England County Metropolitan Area (NECMA). That grant was subsequently challenged by losing applicants and was ultimately rescinded and awarded to Northeast Cellular Telephone Company (Northeast). On November 28, 1994, Northeast commenced operations and the Partnership ceased providing service in the Portland NECMA while continuing to pursue its legal rights in an attempt to regain the license. On November 18, 1996, the FCC rescinded Northeast's Portland license, reinstated the Partnership's license, and granted Northeast interim authority to operate until ten days after the Partnership notifies Northeast that it is ready to recommence operations. Subsequently, Northeast filed, with the United States Court of Appeals, an emergency motion for stay of the FCC decision pending appeal. The motion was granted on March 10, 1997. The Court heard arguments on the appeal on September 30, 1997, and on January 16, 1998, affirmed the FCC decision. Northeast filed a motion for rehearing on March 2, 1998. The Court denied Northeast's motion for rehearing on March 19, 1998. On April 17, 1998, the Court granted Northeast a stay of the effectiveness of its affirmation of the FCC decision. This has the effect of leaving Northeast the operator until the Supreme Court rules on its petition for certiorari which was filed on May 17, 1998. The Supreme Court will likely decide whether to hear the case in October 1998. The Partnership intends to resume operations in Portland as soon as legally and operationally practicable and has obtained a bank commitment for financing in an amount that management believes is adequate to effect the transition. F-63 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. LEGAL SETTLEMENT During 1997, Seacoast Cellular, Inc. received $4,500,000 from a party against whom it had commenced a civil action, in settlement of that action. The legal settlement is essentially compensation for lost investment value of the Company's interest in Portland Cellular Partnership resulting from the license dispute described in Note 3. Accordingly, the proceeds are shown in cash from investing activities on the 1997 statement of cash flows. Management believes this presentation most clearly reflects the economic substance of the event. 5. INVESTMENTS IN NONTRADED STOCKS Investments in nontraded stocks consist of the following:
DECEMBER 31, (UNAUDITED) (UNAUDITED) --------------------- MARCH 31, JUNE 30, 1997 1996 1998 1998 ---------- ---------- ----------- ----------- Rural Telephone Finance Cooperative (RTFC) Subordinated Capital Certificates and Patronage Capital Certificates, carried at original cost, held as a requisite to obtaining RTFC financing....................... $ 728,384 $ 771,152 $ 728,384 $ 684,060 Rural Telephone Bank (RTB) Class B stock, carried at original cost, held as a requisite to obtaining RTB financing......... 399,050 399,050 399,050 399,250 RTB Class C stock, carried at cost............................ 701,600 701,600 701,600 701,600 Other, at cost................... 42,057 42,057 42,057 42,057 ---------- ---------- ---------- ---------- $1,871,091 $1,913,859 $1,871,091 $1,826,967 ========== ========== ========== ==========
6. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, (UNAUDITED) (UNAUDITED) --------------------- MARCH 31, JUNE 30, 1997 1996 1998 1998 ---------- ---------- ----------- ----------- UTILITIES, INC. Mortgage payable to bank, due in monthly installments, including interest at 9%, of $5,029, through 2003; collateralized by real estate.................... $ 254,588 $ 292,673 $ 245,372 $ 235,787 Note payable to bank, unsecured, due in monthly installments of $6,917, plus interest, at the bank's prime rate (8.5% at December 31, 1997, March 31, and June 30, 1998), through July 1999...................... 124,500 214,416 103,750 83,000 Note payable to bank, due in installments of $32,389, plus interest at the LIBOR rate, for the LIBOR interest period selected from time-to-time by the Company, plus 2% (8% at December 31, 1997, 7.68% at March 31, 1998 and 7.65% at June 30, 1998), through January 2002, with a final payment of the balance due in February 2002; collateralized by all assets of Utilities, Inc., excluding certain real estate and Investments in subsidiaries................... 3,562,778 3,960,000 3,465,611 3,368,444
F-64 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, ----------------------- MARCH 31, JUNE 30, 1997 1996 1998 1998 ----------- ----------- ----------- ----------- STANDISH TELEPHONE COMPANY 10.50% notes payable to the Rural Telephone Bank, due in monthly installments of $10,616, including interest, through 2009; collateralized by all corporate assets except vehicles............... $ 816,415 $ 855,833 $ 805,610 $ 794,761 10.50% notes payable to the Rural Telephone Bank, due in monthly installments of $28,823, including interest, through 2019; collateralized by all corporate assets except vehicles............... 2,957,378 2,990,861 2,947,396 2,939,004 MAINE TELEPHONE COMPANY The following consists of notes payable to the RTFC, collateralized by a blanket mortgage on all property, except vehicles, of Maine Telephone Company: Variable rate note pay- able due in quarterly installments, including interest at the RTFC short-term rate (6.65% at December 31, 1997, March 31, and June 30, 1998), through October 2008................... 2,638,422 2,813,362 2,595,422 2,543,007 9.2% note payable due in quarterly installments, including interest, through October 2008... 5,280,481 5,630,604 5,194,419 5,089,518 Note payable, due in quarterly installments, including interest (fixed through October 2001 at 8.8%, then variable), through Oc- tober 2008............. 5,280,481 5,630,604 5,194,419 5,089,518 CHINA TELEPHONE COMPANY 6.50% notes payable to the Rural Telephone Bank, due in quarterly installments of $46,169, including in- terest, through 2013; collateralized by all corporate assets, ex- cept vehicles.......... 1,801,953 1,871,236 1,784,100 1,766,493 WESTERN MAINE CELLULAR, INC. Note payable to bank, due in monthly installments of $29,050, plus interest at the LIBOR rate, for the LIBOR interest period selected from time-to-time by the Company, plus 2% (8% at December 31, 1997, 7.68% at March 31, 1998 and 7.65% at June 30, 1998), through January 2002, with a final payment of the balance due in February 2002. The note is made jointly and severally by Utilities, Inc. and Western Maine Cellular, Inc., and is collateralized by all assets of Western Maine Cellular, Inc. ........ 3,195,545 3,504,735 3,108,394 3,021,243 ----------- ----------- ----------- ----------- 25,912,541 27,764,324 25,444,493 24,930,775 Less current portion.. 1,889,584 1,878,639 1,960,439 1,960,439 ----------- ----------- ----------- ----------- Long-term debt, excluding current portion.............. $24,022,957 $25,885,685 $23,484,054 $22,970,336 =========== =========== =========== ===========
F-65 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Maturities on long-term debt for the next five years are estimated to be as follows: 1998........................................................... $1,960,439 1999........................................................... 1,920,900 2000........................................................... 1,941,200 2001........................................................... 2,014,900 2002........................................................... 5,168,745
As of June 30 and March 31, 1998, and December 31, 1997 and 1996, $1,072,050 of additional Rural Telephone Bank (RTB) funds were available to China Telephone Company under an RTB note approved in December 1991. The notes due to the RTB contain restrictions on additional borrowings and on the payment of dividends on common stock. Retained earnings of the telephone subsidiaries available for the payment of dividends to the Company at June 30 and March 31, 1998, December 31, 1997 and 1996, approximated $1,520,000, $1,676,000, $1,632,000 and $1,322,000, respectively. All, or portions, of the RTFC variable rate notes may be converted to a fixed rate at any time as long as the RTFC continues to offer a fixed rate at such time for similar loans. The loan agreements with RTFC contain restrictions on additional borrowings and limit payment of dividends on common stock. Under the terms of the agreement, Maine Telephone Company may not pay dividends if its equity drops below 20% of its total assets and as long as that equity ratio is less than 40%, it may not pay dividends for any purpose other than retiring debt incurred by Utilities, Inc., in connection with the investment in the subsidiary. Maine Telephone Company's separately stated equity of $5,408,857 and $5,219,154 amounted to approximately 26% of total assets at March 30 and June 30, 1998, respectively. At December 31, 1997, Maine Telephone Company's separately stated equity of $5,399,789 amounted to approximately 26% of total assets. As a requisite to obtaining the RTFC financing, Maine Telephone Company purchased Subordinated Capital Certificates (SCCs), which represent investments in the lender that will be amortized against the loan principal as the debt is repaid. Cash paid for interest was $2,247,496, $2,633,266 and $3,093,192 in 1997, 1996, and 1995, respectively; and $546,989 and $651,825 for the three-month periods ended March 31, 1998 and 1997, respectively. Cash paid for interest was $1,082,829 and $1,129,060 for the six-month periods ended June 30, 1998 and 1997, respectively. During 1997, the Company refinanced $7,372,716 of notes payable to the bank in a noncash transaction. 7. LINES OF CREDIT Utilities, Inc., and Standish Telephone Company maintain separate $500,000 unsecured lines of credit which bear interest at the prime rate. As of June 30 and March 31, 1998, December 31, 1997 and 1996, no advances were outstanding. F-66 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. INCOME TAXES The components of income tax expense are:
(UNAUDITED) (UNAUDITED) DECEMBER 31, MARCH 31, JUNE 30, ---------------------------------- ------------------ -------------------- 1997 1996 1995 1998 1997 1998 1997 ---------- ---------- ---------- -------- -------- --------- --------- Current: Federal................ $1,152,585 $ 555,304 $ 158,387 $ 10,522 $ 24,079 $ 147,556 $ 75,777 State.................. 378,105 141,516 46,163 2,000 6,945 45,000 21,857 ---------- ---------- ---------- -------- -------- --------- --------- Total current income tax expense........... 1,530,690 696,820 204,550 12,522 31,024 192,556 97,634 ---------- ---------- ---------- -------- -------- --------- --------- Amortization of investment tax credits................ (45,823) (45,823) (47,827) (11,957) (11,456) (23,914) (22,912) ---------- ---------- ---------- -------- -------- --------- --------- Deferred: Federal................ 806,169 210,458 239,877 36,506 13,000 86,880 26,000 State.................. 170,040 72,197 58,231 11,331 4,000 21,661 8,000 ---------- ---------- ---------- -------- -------- --------- --------- Total deferred income tax expense........... 976,209 282,655 298,108 47,837 17,000 108,541 34,000 ---------- ---------- ---------- -------- -------- --------- --------- Total income tax expense............... $2,461,076 $ 933,652 $ 454,831 $ 48,402 $ 36,568 $ 277,183 $ 108,722 ========== ========== ========== ======== ======== ========= ========= Income tax expense is allocated as follows: (UNAUDITED) (UNAUDITED) DECEMBER 31, MARCH 31, JUNE 30, ---------------------------------- ------------------ -------------------- 1997 1996 1995 1998 1997 1998 1997 ---------- ---------- ---------- -------- -------- --------- --------- Operating income........ $1,357,276 $1,475,894 $1,178,488 $146,941 $131,768 $ 524,259 $ 356,958 Other income and expense items.................. 1,103,800 (542,242) (723,657) (98,539) (95,200) (247,076) (248,236) ---------- ---------- ---------- -------- -------- --------- --------- $2,461,076 $ 933,652 $ 454,831 $ 48,402 $ 36,568 $ 277,183 $ 108,722 ========== ========== ========== ======== ======== ========= ========= Total income tax expense in 1997, 1996, and 1995 was greater than that computed by applying U.S. Federal income tax rates to earnings before income taxes. The reasons for the differences are as follows: (UNAUDITED) (UNAUDITED) DECEMBER 31, MARCH 31, JUNE 30, ---------------------------------- ------------------ -------------------- 1997 1996 1995 1998 1997 1998 1997 ---------- ---------- ---------- -------- -------- --------- --------- Computed "expected" tax expense................ $2,131,068 $ 818,078 $ 419,782 $ 47,886 $ 32,866 $ 255,649 $ 109,468 State income tax, net of federal income tax benefit................ 361,776 141,051 68,900 8,798 7,224 43,996 19,706 Amortization of investment tax credits................ (45,823) (45,823) (47,827) (11,957) (11,456) (23,914) (22,912) Other................... 14,055 20,346 13,976 3,675 7,934 1,452 2,460 ---------- ---------- ---------- -------- -------- --------- --------- Total income tax expense............... $2,461,076 $ 933,652 $ 454,831 $ 48,402 $ 36,568 $ 277,183 $ 108,722 ========== ========== ========== ======== ======== ========= =========
F-67 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The components of the deferred tax liability (asset) at December 31 are as follows:
(UNAUDITED) (UNAUDITED) DECEMBER 31, MARCH 31, JUNE 30, ---------------------- ----------- ----------- 1997 1996 1998 1998 ---------- ---------- ----------- ----------- Tax effect of temporary differences related to: Depreciation............ $3,306,956 $2,978,681 $3,358,330 $3,060,845 Regulatory assets and liabilities--deferred taxes.................. (9,064) (42,661) (9,396) (9,396) Regulatory liability-- deferred toll revenue.. (42,635) (42,635) (42,635) (42,635) Unamortized investment tax credits............ (79,517) (76,313) (71,582) (71,582) Goodwill amortization... 317,988 323,335 354,800 391,612 Other................... (98,116) (246,164) (93,782) (91,213) Alternative minimum tax credit carryforward...... -- (505,248) (42,545) -- ---------- ---------- ---------- ---------- $3,395,612 $2,388,995 $3,453,190 $3,237,631 ========== ========== ========== ==========
Cash paid for income taxes was $491,000, $540,000, and $517,000 in 1997, 1996, and 1995, respectively. Cash paid for income taxes for the three-month periods ended March 31 was $1,439,500 and $130,000 for 1998 and 1997, respectively. Cash paid for income taxes for the six-month periods ended June 30, 1998 and 1997 was $1,600,636 and $316,000, respectively. 9. PENSION PLAN The Companies have defined benefit pension plans covering substantially all employees. Benefits are based on years of service and levels of compensation. The Companies' funding policies are to contribute annually the amount deducted for tax purposes. Also included below is an unqualified supplemental pension plan for certain officers which will be funded as benefits are paid. The net pension cost was comprised of the following components:
DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- Service cost.............................. $ 190,163 $ 158,660 $ 131,482 Interest on projected benefit obligation.. 178,251 160,982 148,766 Expected return on plan assets............ (166,297) (145,506) (118,596) Amortization of unrecognized net obliga- tion at January 1, 1989.................. 4,091 4,091 4,091 Amortization of unrecognized net obligation on supplemental pension at January 1, 1992.......................... 9,011 10,137 11,819 Amortization of unrecognized net gain..... (11,225) (8,064) (2,597) --------- --------- --------- $ 203,994 $ 180,300 $ 174,965 ========= ========= =========
F-68 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following reconciles the Plan's funded status to amounts recognized in the Company's financial statements as of December 31:
DECEMBER 31, ------------------------ 1997 1996 ----------- ----------- Actuarial present value of projected benefit obligation Vested......................................... $(1,605,469) $(1,305,607) Nonvested...................................... (87,000) (286,567) ----------- ----------- Accumulated benefit obligation............... (1,692,469) (1,592,174) Additional amounts related to projected salary increases....................................... (613,589) (485,107) ----------- ----------- Projected benefit obligation................. (2,306,058) (2,077,281) Plan assets at fair value, Group Annuity Con- tracts and bank deposits at interest............ 2,139,343 1,785,124 ----------- ----------- Unfunded excess projected obligation over plan assets................................. $ (166,715) $ (292,157) =========== ===========
The unfunded excess consists of:
DECEMBER 31, -------------------- 1997 1996 --------- --------- Unrecognized net gains from assumption changes and favorable actuarial experience....................... $ 494,906 $ 400,882 Unrecognized net obligation at January 1, 1989, being amortized over 20 years.............................. (16,436) (20,527) Unrecognized net obligation on supplemental pension plan at January 1, 1992, being recognized over four years................................................ (72,086) (81,097) Accrued pension cost included in recorded liabilities.......................................... (573,099) (591,415) --------- --------- $(166,715) $(292,157) ========= =========
The rate of increase in future compensation levels used in determining the actuarial value of projected benefit obligation was 6% for 1997, 1996, and 1995. The weighted-average discount rate and the expected long-term rate of return on assets was 8% for 1997, 1996, and 1995. Actuarial information was not available for disclosure as of and for the periods ended June 30 and March 31, 1998 and 1997. 10. MINORITY INTEREST Minority interest at June 30 and March 31, 1998, December 31, 1997, and December 31, 1996, consisted of 1,500, 1,500 and 1,680, respectively, shares of $25 par value 8% cumulative preferred stock issued by Standish Telephone Company (Standish). Standish has agreed to redeem 180 shares of this stock annually at par. In addition to the annual redemption requirement, the stock may be called at $26.25 per share. Minority interest in the consolidated statements of income and retained earnings represents preferred dividends. 11. RELATED PARTY TRANSACTIONS The Company is affiliated, through common ownership, with Telephone Service Company, which provides plant construction and maintenance services to the Telephone Companies under contracts subject to regulation by the MPUC. Charges from Telephone Service Company for construction and maintenance in 1997, 1996 and F-69 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1995, approximated $640,000, $439,000, and $529,000, respectively. These charges were $209,300 and $110,330 for the three-month periods ended March 31, 1998 and 1997, respectively. These charges totaled $430,983 and $259,419 for the six-month periods ended June 30, 1998 and 1997. The Company provides data processing services to Portland Cellular Partnership (PCP). Total billings for 1997, 1996, and 1995 approximated $171,000, $135,000, and $122,000, respectively. Total billings for the three- month periods ended March 31, 1998 and 1997, were $47,900 and $41,400, and $97,310 and $68,891 for the six-month periods ended June 30, 1998 and 1997, respectively. Western Maine Cellular, Inc. has network usage, revenue sharing, trademark and service agreements with PCP. Amounts incurred relative to the agreements approximated $143,000, $149,000, and $121,000 in 1997, 1996, and 1995, respectively, and $32,600 and $36,163 for the three-month periods ended March 31, 1998 and 1997, respectively. The totals for the six-month periods ended June 30, 1998 and 1997, were $66,664 and $69,656. Amounts received for network usage provided to PCP approximated $98,000, $102,000, and $90,000 in 1997, 1996, and 1995, respectively, and $18,300 and $22,200 for the three-month periods ended March 31, 1998 and 1997, respectively. For the six-month periods ended June 30, 1998 and 1997, these amounts totaled $41,890 and $47,189, respectively. 12. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents, Accounts Receivable and Accounts Payable The carrying amount approximates fair value because of the short maturity of these instruments. Investments Investments do not have a readily determinable fair value (not publicly traded). With the exception of the Investment in Portland Cellular Partnership, which is accounted for using the equity method, the investments are stated at cost which management believes is not impaired. An estimate of the fair value could not be reasonably made without incurring excessive costs. Long-Term Debt The fair value of the Company's long-term debt is estimated by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities. At June 30, 1998, the Company had long-term debt with a carrying value of $24,929,775 and estimated fair value of $26,778,040. At March 31, 1998, the Company had long- term debt with a carrying value of $25,444,493 and estimated fair value of $26,751,000. At December 31, 1997, the Company had long-term debt with a carrying value of $25,912,541 and estimated fair value of $27,270,000. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 13. SUBSEQUENT EVENT--AGREEMENT TO SELL SUBSIDIARY On February 19, 1998, the Company signed a stock purchase agreement to sell 100% of the common stock of Western Maine Cellular, Inc. for approximately $7.5 million. The transaction was completed on July 31, 1998. F-70 UTILITIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) Condensed financial data of Western Maine Cellular, Inc. included in the basic financial statements are as follows:
DECEMBER 31, (UNAUDITED) (UNAUDITED) ----------------------- MARCH 31, JUNE 30, 1997 1996 1998 1998 ---------- ----------- ----------- ----------- BALANCE SHEETS Current assets........... $ 262,027 $ 262,646 $ 215,727 $ 279,025 Net property, plant, and equipment............... 630,679 728,176 610,379 589,745 Cellular license......... 1,730,786 1,824,338 1,707,398 1,684,010 Other assets............. 28,690 25,320 28,303 27,916 ---------- ----------- ----------- ---------- $2,652,182 $ 2,840,480 $ 2,561,807 $2,580,696 ========== =========== =========== ========== Current liabilities...... $ 599,701 $ 578,425 $ 702,300 $ 543,770 Long-term debt........... 2,846,945 3,156,735 2,759,794 2,672,643 Deferred income taxes.... 133,000 367,495 133,000 133,000 Stockholders' deficit.... (927,464) (1,262,175) (1,033,287) (768,717) ---------- ----------- ----------- ---------- $2,652,182 $ 2,840,480 $ 2,561,807 $2,580,696 ========== =========== =========== ==========
(UNAUDITED) (UNAUDITED) DECEMBER 31, MARCH 31, JUNE 30, ---------------------------------- ------------------ -------------------- 1997 1996 1995 1998 1997 1998 1997 ---------- ---------- ---------- -------- -------- --------- --------- STATEMENTS OF INCOME Operating revenues...... $1,615,534 $1,407,088 $1,206,516 $365,448 $361,278 $ 756,463 $ 740,504 Operating expenses...... 1,592,076 1,540,458 1,400,270 440,959 358,983 811,543 737,175 ---------- ---------- ---------- -------- -------- --------- --------- Net operating income (loss)................ 23,458 (133,370) (193,754) (75,511) 2,295 (55,080) 3,328 Interest expense........ (280,055) (405,557) (454,749) (63,363) (76,392) (125,930) (147,209) Income tax benefit...... 99,000 215,876 258,457 55,467 29,547 72,346 57,467 ---------- ---------- ---------- -------- -------- --------- --------- Net loss............... $ (157,597) $ (323,051) $ (390,046) $(83,407) $(44,550) $(108,664) $ (86,414) ========== ========== ========== ======== ======== ========= =========
14. SUBSEQUENT EVENT--MERGER On March 27, 1998, the Company entered into an agreement to merge with a subsidiary of MJD Communications, Inc. (MJD). The agreement contemplates that the pre-merger stockholders' shares will be redeemed for cash, leaving MJD as the sole remaining stockholder. The post-merger entity will consist of the existing operation of Utilities, Inc., Standish Telephone Company, Maine Telephone Company, and China Telephone Company. The transaction is expected to close in the third or fourth quarter of 1998. F-71 REPORT OF INDEPENDENT AUDITORS Board of Directors Chautauqua & Erie Telephone Corporation We have audited the accompanying consolidated balance sheet of Chautauqua & Erie Telephone Corporation as of December 31, 1996, and the related consolidated statements of income and retained earnings, and cash flows for the years ended December 31, 1996 and 1995. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chautauqua & Erie Telephone Corporation as of December 31, 1996, and the consolidated results of its operations and its cash flows for the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. Ernst & Young LLP Buffalo, New York February 24, 1997 F-72 CHAUTAUQUA & ERIE TELEPHONE CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 ASSETS Current assets: Cash............................................................. $ 4,094,370 Due from customers and agents.................................... 466,227 Other accounts receivable........................................ 803,655 Materials and supplies........................................... 480,362 Prepaid expenses................................................. 154,080 ----------- Total current assets........................................... 5,998,694 Noncurrent assets: Net cash value of life insurance................................. 183,878 Other assets, net of accumulated amortization.................... 714,919 ----------- Total noncurrent assets........................................ 898,797 Telephone plant, at cost: Telephone plant in service....................................... 21,654,432 Telephone plant under construction............................... 31,251 ----------- 21,685,683 Less accumulated depreciation.................................... 8,018,651 ----------- Net telephone plant................................................ 13,667,032 ----------- Total assets................................................... $20,564,523 =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities on long-term debt............................. $ 870,000 Notes payable.................................................... 2,319,000 Accounts payable................................................. 400,503 Accrued taxes, interest and dividends............................ 2,048,147 Other current liabilities........................................ 484,540 ----------- Total current liabilities...................................... 6,122,190 Long-term debt, less current maturities............................ 1,012,294 Deferred federal income taxes...................................... 2,493,610 Pension obligation................................................. 17,564 ----------- Total liabilities.............................................. 9,645,658 Shareholders' equity: Common stock, no par value; 100,000 shares authorized; 79,498 shares issued and outstanding................................... 775,320 Retained earnings................................................ 10,143,545 ----------- Total shareholders' equity..................................... 10,918,865 ----------- Total liabilities and shareholders' equity..................... $20,564,523 ===========
See accompanying notes. F-73 CHAUTAUQUA & ERIE TELEPHONE CORPORATION CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS YEAR ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ----------- ----------- Operating revenues: Local service............. $ 1,892,626 $ 1,729,458 Network access service.... 3,777,331 3,843,309 Long distance network service.................. 73,965 91,858 Miscellaneous............. 1,002,697 1,016,265 ----------- ----------- 6,746,619 6,680,890 Other..................... (17,190) 6,541 ----------- ----------- Total operating reve- nues................... 6,729,429 6,687,431 Operating expenses: Plant specific............ 1,474,595 1,171,283 Plant nonspecific......... 1,322,827 1,425,352 Customer operations....... 605,798 696,700 Corporate operations...... 1,269,154 1,373,167 Operating taxes........... 431,227 662,655 ----------- ----------- Total operating ex- penses................. 5,103,601 5,329,157 ----------- ----------- Operating income........ 1,625,828 1,358,274 Other income (expense): Interest.................. (345,669) (419,791) Gain on sale of investment in cellular partnership.. 4,658,700 -- Other, net................ (72,259) (136,635) ----------- ----------- Total other income (ex- pense)................. 4,240,772 (556,426) ----------- ----------- Income before income taxes.. 5,866,600 801,848 Federal income taxes: Current................... 1,953,570 221,063 Deferred.................. 276,046 20,454 ----------- ----------- 2,229,616 241,517 ----------- ----------- Net income.................. 3,636,984 560,331 Retained earnings--January 1.......................... 7,047,147 7,027,495 ----------- ----------- 10,684,131 7,587,826 Dividends paid: Common, $6.80 per share... 540,586 540,679 ----------- ----------- Retained earnings--December 31......................... $10,143,545 $7,047,147 =========== ===========
See accompanying notes. F-74 CHAUTAUQUA & ERIE TELEPHONE CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---------- ----------- OPERATING ACTIVITIES: Net income............................................ $3,636,984 $ 560,331 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation--telephone plant....................... 1,032,829 1,124,126 Amortization........................................ 49,609 32,598 Gain on sale of cellular partnership................ (4,658,306) -- Provision for deferred income taxes................. 220,894 24,700 (Decrease) increase in pension obligation........... (124,035) 47,517 Changes in operating assets and liabilities, net of effects from purchase of Chautauqua Cable, Inc.: (Increase) decrease in due from customers and agents........................................... (22,287) 25,215 Increase in other accounts receivable............. (36,738) (73,855) Decrease (increase) in materials and supplies..... 124,702 (125,190) Decrease in prepaid expenses...................... 6,147 1,465 Decrease (increase) in other assets............... 17,685 (175,113) (Decrease) increase in accounts payable........... (538,320) 69,165 Increase in accrued taxes, interest and dividends and other current liabilities.................... 1,798,423 240,819 ---------- ----------- Net cash provided by operating activities....... 1,507,587 1,751,778 INVESTING ACTIVITIES: Premium payments for officer's life insurance....... (7,206) (1,042) Capital expenditures--telephone plant............... (955,656) (1,003,636) Salvage proceeds in excess (less than) of cost of removal--telephone plant........................... 7,025 61,962 Payment for purchase of Chautauqua Cable, Inc., net of cash acquired................................... -- (699,004) Proceeds from sale of cellular partnership.......... 4,988,700 -- ---------- ----------- Net cash provided by investing activities....... 4,032,863 (1,641,720) FINANCING ACTIVITIES: Principal payments on notes payable and long-term debt............................................... (1,241,243) (823,500) Proceeds from the issuance of Notes Payable......... -- 891,324 Redemption of common stock.......................... -- (5,000) Dividends paid...................................... (540,586) (540,679) ---------- ----------- Net cash used in financing activities................. (1,781,829) (477,855) ---------- ----------- Net increase (decrease) in cash....................... 3,758,621 (367,797) Cash at beginning of year............................. 335,749 703,546 ---------- ----------- Cash at end of year................................... $4,094,370 $ 335,749 ========== ===========
See accompanying notes. F-75 CHAUTAUQUA & ERIE TELEPHONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 1.ACCOUNTING POLICIES The Company maintains its accounts in accordance with the Uniform System of Accounts prescribed for telephone companies by the New York State Public Service Commission (PSC), which is in accordance with generally accepted accounting principles. A summary of significant accounting policies is as follows: Consolidation The financial statements include the accounts of Chautauqua & Erie Telephone Corporation and its wholly-owned, deregulated subsidiaries, Chautauqua & Erie Communications, Inc., C & E Communications, Ltd., Western New York Cellular, Inc. and Chautauqua & Erie Network, Inc. Chautauqua & Erie Communications, Inc., C & E Communications, Ltd., and Chautauqua Cable, Inc. are active operating companies, while the remaining two represent investments. All material intercompany accounts have been eliminated in the financial statements. Certain costs and expenses of Chautauqua & Erie Communications, Inc. provided by Chautauqua & Erie Telephone Corporation have not been eliminated in order to more accurately reflect the operations of the telephone company and this subsidiary. These costs are for expenses that would have been paid to an outside supplier if not to Chautauqua & Erie Telephone Corporation. 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. Revenue Recognition Revenues are recognized upon the placing of calls by customers or rendering, by the company, of other related services. Toll Settlements Toll revenues are often pooled by telephone companies on a national and a state-wide basis and are apportioned back to the companies based upon cost to provide services. This process is known as "toll settlements." The computations are very complex and on a routine basis, these toll settlements are adjusted for previous quarters and years. When calculations are changed the companies are notified of a retroactive toll settlement (plus or minus) which applies to previously reported periods. Retroactive toll settlements may have a material effect on current net income. It is industry practice to record retroactive toll settlements in the year determined. There are no known material unrecorded retroactive settlements as of the balance sheet date. The amount of retroactive toll settlements recognized in 1996 was not material. Other Assets Other assets include $577,656 of franchise licenses and goodwill associated with the purchase of Chautauqua Cable, Inc., which is being amortized over 15 years. Accumulated amortization was $63,731 at December 31, 1996. Telephone Plant Telephone plant is stated at original cost. The Company has consistently followed the practice of capitalizing certain costs related to construction, including payroll and payroll related costs. F-76 CHAUTAUQUA & ERIE TELEPHONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Depreciation is provided on the straight-line basis over the estimated useful lives of the assets. Upon retirement, the cost of the asset retired is charged against accumulated depreciation together with the costs of removal, net of salvage. Materials and Supplies New materials, reusable materials and deregulated station equipment and other electronic equipment are carried at cost or market, if lower, utilizing the first-in, first-out method. Federal Income Taxes Deferred federal income taxes are provided for temporary differences in the basis of assets and liabilities for financial and income tax accounting purposes, principally with respect to telephone plant. The Internal Revenue Service does not recognize expensing of the inside wiring component of station connections as required by the New York State Public Service Commission. Therefore, the inside wiring component of station connections is capitalized for Federal income tax purposes resulting in greater income for tax purposes than that used for accounting purposes. The tax benefit created by this timing difference has been normalized. In accordance with PSC requirements, the Company has identified a portion of its deferred tax liability as being associated with investment tax credits realized in prior years which are fully normalized and amortized to income over the average service life of the related telephone plant and other equipment. Risks and Uncertainties The Company provides services to residential and commercial customers generally located within Chautauqua County, New York. The deregulation of the telecommunications industry allows for the possible entry of other local and long distance carriers into the Chautauqua County market. The Company requires deposits for certain equipment leased to customers. Collateral is generally not required in connection with ongoing services provided. 2.LONG-TERM DEBT Long-term debt at December 31, 1996 consists of two separate mortgage bonds. One of the bonds is due February 1, 1997 and accrues interest at 8 1/8%. The balance outstanding at December 31, 1996 for this bond, before unamortized discount, was $840,000 . The second bond is due November 1, 2001 and accrues interest at 9 1/8%. The balance outstanding at December 31, 1996 for this bond, before unamortized discount, was $1,050,000. The bonds are collateralized by all of the telephone plant and equipment. These bonds are covered by indenture agreements which require, under certain conditions, annual sinking fund payments. Aggregate maturities of sinking fund requirements for the five years following December 31, 1996 are as follows: 1997................................................................ $870,000 1998................................................................ 30,000 1999................................................................ 30,000 2000................................................................ 30,000 2001................................................................ 930,000
F-77 CHAUTAUQUA & ERIE TELEPHONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3.NOTES PAYABLE Notes payable consists of:
DECEMBER 31, 1996 ----------------- Outstanding amounts under a $3,000,000 available unsecured line of credit at approximately prime......... $1,150,000 Unsecured demand notes payable to various individuals and entities with interest payable at 5.75%................. 1,169,000 Unsecured time notes--repaid in 1996..................... -- ---------- $2,319,000 ==========
4.RETIREMENT PLANS The Company sponsors two defined benefit pension plans covering substantially all employees. These plans are individually maintained for union and management employees, both of which are funded by trusteed funds and are noncontributory. The Company's policy is to fund pension costs annually based on current actuarial determinations. Pension benefits are based on years of service and compensation. Net periodic pension cost for the union plan includes the following components:
1996 1995 --------- --------- Service cost-benefits earned during the period........... $ 25,693 $ 18,054 Interest cost on projected benefit obligation............ 27,692 34,655 Actual return on plan assets............................. (73,169) (148,852) Net amortization and deferral............................ 19,879 116,149 --------- --------- Net periodic pension cost................................ $ 95 $ 20,006 ========= ========= Actuarial assumptions used in the calculation for the union plan were as follows: Discount rates........................................... 7.5% 7.5% Rates of increase in compensation levels................. 4.0% 4.0% Expected long-term rate of return on assets.............. 8.0% 8.0% The following table sets forth the union plan's funded status at December 31, 1996: Actuarial present value of benefit obligations: Vested................................................. $ 279,228 $ 193,555 Nonvested.............................................. 7,315 860 --------- --------- Total accumulated benefit obligations................ $ 286,543 $ 194,415 ========= ========= Projected benefit obligation............................. $(422,618) $(416,324) Plan assets at fair value................................ 540,831 461,452 --------- --------- Excess of plan assets over projected benefit obligation.. 118,213 45,128 Unrecognized transition asset............................ (38,100) (42,863) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions...... (128,218) (56,485) Amount deferred as regulatory asset...................... 30,541 34,901 --------- --------- Accrued pension cost..................................... $ (17,564) $ (19,319) ========= =========
F-78 CHAUTAUQUA & ERIE TELEPHONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On December 31, 1996, the Company froze the benefits accrued under its pension plan for management employees. The Company expects to distribute lump sum payments to all participants as actuarially determined in the fourth quarter of 1997. The Company has calculated its accrued pension liability at December 31, 1996 in accordance with all the requirements of the Pension Benefit Guaranty Corporation, the Internal Revenue Service, and the U.S. Department of Labor. As such, the Company has recorded an accrual of approximately $300,000 to account for the unfunded benefit obligation at December 31, 1996 which is included in other current liabilities. The unfunded benefit obligation is the difference between the expected settlement obligation of approximately $1,850,000 and the fair value of plan assets at December 31, 1996 of approximately $1,500,000. A contribution of $300,000 was made to the plan by the Company in January of 1997. As a result of these transactions, the Company recorded a net periodic pension cost for the management plan of approximately $130,000 for 1996. Net periodic pension cost for the management plan consisted of the following components for 1995: Service cost-benefits earned during the period................... $ 92,421 Interest cost on projected benefit obligation.................... 95,430 Actual return on plan assets..................................... (373,896) Net amortization and deferral.................................... 292,950 ----------- Net periodic pension cost........................................ $ 106,905 =========== Actuarial assumptions used in the calculation for the management plan for 1995 were as follows: Discount rates................................................... 7.5% Rates of increase in compensation levels......................... 4.0% Expected long-term rate of return on assets...................... 8.0% The following table sets forth the management plan's funded status at December 31, 1995: Actuarial present value of benefit obligations: Vested......................................................... $ 736,457 Nonvested...................................................... 20,053 ----------- Total accumulated benefit obligations........................ $ 756,510 =========== Projected benefit obligation..................................... $(1,248,142) Plan assets at fair value........................................ 1,217,876 ----------- Projected benefit obligation in excess of plan assets............ (30,266) Unrecognized transition asset.................................... (225,605) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions................... (87,325) Amount deferred as regulatory asset.............................. 220,916 ----------- Accrued pension cost............................................. $ (122,280) ===========
Assets of the plans are stated at fair value and consist primarily of listed stocks and corporate debt. The Company sponsors a defined contribution 401(k) retirement savings plan for non union employees. Contributions to the plan are based upon a percentage of salaries of all qualified personnel. Additional contributions may be made at the discretion of management. Contributions to this plan amounted to $32,334 in 1996 and $129,811 in 1995. F-79 CHAUTAUQUA & ERIE TELEPHONE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company also sponsors a defined contribution 401(k) retirement savings plan for union employees. The Company matches contributions to this plan based upon a percentage of pay of all qualified personnel. Contributions to this plan amounted to $9,311 in 1996 and $8,284 in 1995. 5.SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
1996 1995 -------- -------- Interest...................................................... $350,267 $418,197 Income taxes.................................................. 280,000 220,976
6.SALE OF PARTNERSHIP INTEREST The Company sold its 11.25% ownership interest in a cellular communications partnership, during 1996. The Company's carrying value for the ownership interest was approximately $330,000 and the sale price was $4,988,700. The gain on the sale, net of tax of $1,736,000, is included in income from deregulated subsidiaries in the income statement. 7.COMMITMENTS During 1996, the Company entered into an agreement to sell all of its outstanding stock to MJD Holding Corp., pending approval from the PSC and the Federal Communications Commission (FCC). F-80 CHAUTAUQUA & ERIE TELEPHONE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
JUNE 30, 1997 ----------- Operating revenues: Local service.................................................... $ 967,481 Network access service........................................... 1,914,905 Long distance network service.................................... 38,135 Miscellaneous.................................................... 545,386 ----------- 3,465,907 Other............................................................ (3,000) ----------- Total operating revenues....................................... 3,462,907 Operating expenses: Plant specific................................................... 677,771 Plant nonspecific................................................ 675,200 Customer operations.............................................. 321,376 Corporate operations............................................. 590,775 Operating taxes.................................................. 253,058 ----------- Total operating expenses....................................... 2,518,180 ----------- Operating income............................................... 944,727 Other income (expense): Interest......................................................... (171,780) Gain on sale of investment in cellular partnership............... -- Other, net....................................................... 3,973 ----------- Total other income (expense)................................... (167,807) ----------- Income before income taxes......................................... 776,920 Federal income taxes: Current.......................................................... 214,710 Deferred......................................................... 60,000 ----------- 274,710 ----------- Net income......................................................... 502,210 Retained earnings--January 1....................................... 10,143,545 ----------- 10,645,755 Dividends paid: Common, $6.80 per share.......................................... -- ----------- Retained earnings June 30.......................................... $10,645,755 ===========
See accompanying note to condensed consolidated financial statements. F-81 CHAUTAUQUA & ERIE TELEPHONE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
JUNE 30, 1997 ----------- OPERATING ACTIVITIES: Net income........................................................ $ 502,210 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation--telephone plant................................... 534,626 Amortization.................................................... 2,521 Gain on sale of cellular partnership............................ -- Other non cash expenses......................................... 12,679 Changes in operating assets and liabilities, net of effects from purchase of Chautauqua Cable, Inc.: Increase in due from customers and agents..................... 61,825 Increase in other accounts receivable......................... 97,982 Decrease in materials and supplies............................ 13,543 Decrease in prepaid expenses.................................. 87,316 Decrease in other assets...................................... -- Decrease in accounts payable.................................. (262,032) Increase (Decrease) in accrued taxes, interest and dividends and other current liabilities................................ (1,947,813) ----------- Net cash provided by operating activities................... (897,143) INVESTING ACTIVITIES: Premium payments for officer's life insurance................... (3,866) Capital expenditures--telephone plant........................... (383,486) Salvage proceeds in excess (less than) of cost of removal-- telephone plant................................................ (50,205) Proceeds from sale of cellular partnership...................... -- ----------- Net cash provided by investing activities................... (437,557) FINANCING ACTIVITIES: Principal payments on notes payable and long-term debt.......... (810,000) Proceeds from the issuance of Notes Payable..................... 976,500 Dividends paid.................................................. (274,268) ----------- Net cash used in financing activities............................. (107,768) ----------- Net increase (decrease) in cash................................... (1,442,468) Cash at beginning of year......................................... 4,094,370 ----------- Cash at end of year............................................... $ 2,651,902 ===========
See accompanying note to condensed consolidated financial statements. F-82 (1)BASIS OF FINANCIAL REPORTING Certain information and footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission; however, the Company believes the disclosures which are made are adequate to make the information presented not misleading. The unaudited financial information for the six months ended June 30, 1997 has not been audited by independent public accountants; however, in the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results of operations and cash flows for the six month period have been included therein in accordance with generally accepted accounting principles. The results of operations for the interim period are not necessarily indicative of the results of operations which might be expected for the entire year. The condensed consolidated financial statements should be read in conjunction with the Company's 1996 annual financial statements contained herein. F-83 INDEPENDENT AUDITOR'S REPORT The Board of Directors Big Sandy Telecommunications, Inc. Simla, Colorado We have audited the accompanying balance sheets of Big Sandy Telecommunications, Inc. (a Colorado Corporation) as of December 31, 1995 and 1994, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Big Sandy Telecommunications, Inc. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the Company changed its method of accounting for investments in 1994. Kiesling Associates Colorado Springs, Colorado February 6, 1996 F-84 BIG SANDY TELECOMMUNICATIONS, INC. BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents............................. $ 1,858,423 $ 686,684 Temporary investments................................. 81,256 81,256 Accounts receivable-- Due from customers.................................. 19,387 16,374 Interexchange carriers.............................. 59,148 68,215 Other............................................... 661 28,902 Materials and supplies, at average cost............... 25,503 31,849 Prepayments-- Income Taxes........................................ -- 26,481 Other............................................... 34,422 30,432 Deferred income taxes................................. 9,090 11,438 ----------- ---------- 2,087,890 981,631 ----------- ---------- NONCURRENT ASSETS Investments-- Marketable equity securities........................ 7,302,239 5,505,808 Other............................................... 37,478 37,478 Cash value of life insurance.......................... 128,194 101,472 ----------- ---------- 7,467,911 5,644,758 ----------- ---------- PROPERTY AND EQUIPMENT Telecommunications plant in service................... 2,953,752 2,949,651 Other property........................................ 229,156 228,917 ----------- ---------- 3,182,908 3,178,568 ----------- ---------- Less accumulated depreciation......................... 2,016,173 1,893,578 ----------- ---------- 1,166,735 1,284,990 ----------- ---------- TOTAL ASSETS............................................ $10,722,536 $7,911,379 =========== ==========
The accompanying notes are an integral part of these financial statements F-85 BIG SANDY TELECOMMUNICATIONS, INC. BALANCE SHEETS--(CONTINUED) DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable-- Interexchange carriers.............................. $ 1,289 $ 39,002 Other............................................... 38,061 18,903 Customer deposits..................................... 9,127 7,058 Current portion of long-term debt..................... 189,600 178,700 Current portion of deferred compensation liability.... 46,098 42,701 Accrued taxes-- Income taxes........................................ 346,138 -- Other............................................... 27,297 29,357 Other accrued liabilities............................. 43,144 49,093 ----------- ---------- 700,754 364,814 ----------- ---------- LONG-TERM DEBT, less current portion.................... 2,417,581 2,607,177 ----------- ---------- DEFERRED CREDITS Deferred income taxes................................. 2,807,232 2,121,822 Deferred investment tax credit, net................... 38,824 50,040 Deferred compensation liability, less current portion.............................................. 22,617 68,715 Deferred regulatory liability......................... 26,687 35,372 ----------- ---------- 2,895,360 2,275,949 ----------- ---------- STOCKHOLDERS' EQUITY Common stock, no par value, 50,000 shares authorized; 21,250 shares issued and outstanding................. 12,166 12,166 Unrealized holding gains and losses on certain investments.......................................... 2,197,504 631,075 Retained earnings..................................... 2,499,171 2,020,198 ----------- ---------- 4,708,841 2,663,439 ----------- ---------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY................ $10,722,536 $7,911,379 =========== ==========
The accompanying notes are an integral part of these financial statements F-86 BIG SANDY TELECOMMUNICATIONS, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 -------- -------- OPERATING REVENUES Local network services.................................... $188,586 $183,053 Network access services................................... 550,829 524,573 Miscellaneous............................................. 162,198 148,622 -------- -------- 901,613 856,248 -------- -------- OPERATING EXPENSES Plant specific operations................................. 173,882 138,608 Plant nonspecific operations.............................. 7,872 7,999 Depreciation and amortization............................. 175,951 161,418 Customer operations....................................... 107,194 94,466 Corporate operations...................................... 263,161 252,507 General taxes............................................. 29,550 29,123 -------- -------- 757,610 684,121 -------- -------- NET OPERATING INCOME........................................ 144,003 172,127 -------- -------- OTHER INCOME Interest and dividend income.............................. 367,439 353,986 Gain--sale of investments................................. 446,957 27,511 Other, net................................................ (45,428) (64,076) Interest expense.......................................... (129,159) (142,263) -------- -------- 639,809 175,158 -------- -------- INCOME BEFORE INCOME TAX EXPENSE............................ 783,812 347,285 -------- -------- INCOME TAX EXPENSE.......................................... 204,114 41,096 -------- -------- NET INCOME.................................................. $579,698 $306,189 ======== ======== Earnings per share.......................................... $ 27.27 $ 14.41 ======== ========
The accompanying notes are an integral part of these financial statements. F-87 BIG SANDY TELECOMMUNICATIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1994
UNREALIZED INVESTMENT COMMON GAINS AND RETAINED STOCK LOSSES EARNINGS ------- ---------- ---------- Balance, December 31, 1993..................... $12,166 $ -- $1,920,009 Net income for the year........................ -- -- 306,189 Cash Dividends ($9.69/share)................... -- -- (206,000) Change in unrealized gains and losses, net of income taxes of $375,425...................... -- 631,075 -- ------- ---------- ---------- Balance, December 31, 1994..................... 12,166 631,075 2,020,198 Net income for the year........................ -- -- 579,698 Cash Dividends ($4.74/share)................... -- -- (100,725) Change in unrealized gains and losses, net of income taxes of $931,862...................... -- 1,566,429 -- ------- ---------- ---------- Balance, December 31, 1995..................... $12,166 $2,197,504 $2,499,171 ======= ========== ==========
The accompanying notes are an integral part of these financial statements F-88 BIG SANDY TELECOMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................ $ 579,698 $ 306,189 Adjustments to reconcile net income to net cash provided by operating activities-- Gain on sale of investments......................... (446,957) (27,511) Depreciation........................................ 173,048 158,514 Amortization-- Intangible property............................... 2,872 2,872 Acquisition adjustment............................ 31 31 Increase in cash value of life insurance............ (26,721) (7,863) Deferred income tax expense (benefit)............... (252,789) 16,973 Deferred investment tax credits, net................ (11,216) (13,084) Change in assets and liabilities (Increase) decrease in: Accounts receivable............................. 6,302 (18,766) Material and supplies........................... 1,629 (758) Inventories..................................... 4,716 (1,206) Prepayments..................................... 22,491 (50,544) Increase (decrease) in: Accounts payable................................ (16,486) (5,569) Accrued taxes................................... 344,078 (70,670) Other accrued liabilities....................... (5,948) (20,778) ---------- ---------- Net cash provided by operating activities..... 374,748 267,830 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment................. (57,695) (223,552) Purchase of investments............................. -- (7,710) Sale of investments................................. 1,176,808 -- Salvage from property retired....................... -- 8,250 ---------- ---------- Net cash provided by (used in) investing activities................................... 1,119,113 (223,012) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of long-term debt......................... (178,696) (168,539) Dividends paid...................................... (100,725) (206,000) Reduction of deferred compensation liability........ (42,701) (39,423) ---------- ---------- Net cash used in financing activities......... (322,122) (413,962) ---------- ---------- Net Increase (Decrease) in Cash and Cash Equivalents.. 1,171,739 (369,144) Cash and Cash Equivalents at Beginning of Year........ 686,684 1,055,828 ---------- ---------- Cash and Cash Equivalents at End of Year.............. $1,858,423 $ 686,684 ========== ==========
The accompanying notes are an integral part of these financial statements. F-89 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Nature of Operations The Company's principal business is providing telecommunications exchange and local access services in a service area located primarily in eastern Colorado. The Company also operates a small cable television system in the same area. B. System of Accounts The accounting policies of Big Sandy Telecommunications, Inc. conform to generally accepted accounting principles. Telephone operations reflect practices appropriate to the telephone industry. The accounting records of the Company are maintained in accordance with the Uniform System of Accounts for Class A and B Telephone Companies prescribed by the Federal Communications Commission and the Colorado Public Utilities Commission. C. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. D. Property and Equipment Telephone plant is capitalized at original cost, including the capitalized cost of salaries and wages, materials, certain payroll taxes and employee benefits. Beginning in September, 1995, regulators modified accounting principles for the allowance for funds used during construction (AFUDC) to conform with Statement of Financial Accounting Standards No. 34 "Capitalization of Interest Cost". The impact of this change was not material. No AFUDC was taken in 1995 or 1994. Renewals and betterments of units of property are charged to telephone plant in service. When telephone plant is retired, its cost is removed from the asset account and charged against accumulated depreciation, together with removal cost less any salvage realized. No gains or losses are recognized in connection with routine retirements of depreciable telephone property. Repairs and renewals of minor items of property are included in plant specific operations expense. E. Depreciation The Company provides for depreciation for financial reporting purposes on the straight-line method by the application of rates, based on the estimated service lives of the various classes of depreciable property, as approved by the Colorado Public Utilities Commission. Depreciation on depreciable property resulted in composite rates of 5.51% and 5.17% for 1995 and 1994, respectively. F. Income Taxes Income taxes are accounted for using a liability method and provide for the tax effects of transactions reported in the financial statements including both taxes currently due and deferred. Deferred income taxes reflect F-90 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using current enacted tax rates. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Investment tax credits (ITC), which were deferred prior to the Tax Reform Act of 1986, are being amortized over the regulatory life of the plant which produced the ITC. G. Revenue Recognition Local network, network access, and miscellaneous revenues are recognized when earned regardless of the period in which they are billed. Revenues relating to the provision of access services to customers are derived, in part, from tariffed access charges to toll service providers (interexchange carriers), and in part from sharing in interstate pools. Interstate revenues are determined in accordance with cost separation procedures. The Company is compensated for intrastate access under access charge procedures based on expense and plant investment levels as determined by the Company and approved by the Colorado Public Utilities Commission. Reported interstate revenues and certain intrastate revenues are estimates subject to subsequent adjustments resulting from changes in expense and plant investment levels and the rate of return experience of the various pools. H. Cash Equivalents All highly liquid investments with a maturity of three months or less from date of purchase are considered cash equivalents. I. Pension Expenses The Company's policy is to fund pension costs accrued. J. Investments Effective January 1, 1994, the Company implemented Statement of Financial Accounting Standards No. 115 (SFAS 115) "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 requires certain investments to be categorized as either trading, available-for-sale, or held-to-maturity. Debt and marketable equity securities bought and held principally for selling in the near future are classified as trading securities and carried at fair value. Unrealized holding gains and losses on trading securities are reported in earnings. Debt and marketable equity securities classified as available- for-sale are carried at fair value with unrealized holding gains and losses recorded as a separate component of stockholders' equity. Debt securities the Company has both the positive intent and ability to hold to maturity are classified as held-to-maturity and are carried at amortized cost. The Company uses FIFO method of computing realized gains and losses. In accordance with SFAS 115, prior period financial statements have not been restated. The cumulative effect of adopting this standard was an increase in stockholders' equity at January 1, 1994, of $1,634,994 (net of $972,652 in deferred income taxes) to reflect the net unrealized holding gains and losses on securities classified as available-for-sale. F-91 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Non-marketable equity investments, over which the Company has significant influence or a 20% ownership, are reflected on the equity method. Other non- marketable equity investments are stated at cost. 2.PROPERTY AND EQUIPMENT Property and equipment at December 31, 1995 and 1994 includes the following:
1995 1994 ---------- ---------- Telephone plant in service-- Land................................................ $ 26,419 $ 26,419 Buildings........................................... 200,685 199,306 Switching equipment................................. 954,140 983,702 Outside plant....................................... 1,440,835 1,407,461 Furniture and office equipment...................... 70,007 71,977 Vehicles and work equipment......................... 247,516 246,102 Other plant and equipment........................... 14,150 14,684 ---------- ---------- 2,953,752 2,949,651 ---------- ---------- Other property-- CATV plant in service............................... 229,010 228,741 CATV plant adjustment............................... 146 176 ---------- ---------- 229,156 228,917 ---------- ---------- Total property and equipment...................... $3,182,908 $3,178,568 ========== ==========
3.LONG-TERM DEBT Long-term debt at December 31, 1995 and 1994 consists of:
1995 1994 ---------- ---------- 2% RUS mortgage notes................................. $1,526,183 $1,588,675 8% note payable--H. Raymond Hope...................... 1,080,998 1,197,202 ---------- ---------- 2,607,181 2,785,877 Less current maturity................................. 189,600 178,700 ---------- ---------- $2,417,581 $2,607,177 ========== ==========
The annual requirements for principal payments on long-term debt for the next five years are as follows: 1996..................................... $189,600 1997..................................... 201,300 1998..................................... 213,900 1999..................................... 227,500 2000..................................... 242,200
In January, 1996, the Company repaid in full its RUS mortgage notes. Substantially all property and equipment of the telephone company is pledged as security for the long-term debt under a loan agreement with the Rural Utilities Service (RUS). These mortgage notes are to be repaid in equal quarterly installments covering principal and interest beginning three years after date of issue and expiring by 2010. F-92 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In connection with the redemption of all of his stock, the Company issued to H. Raymond Hope an unsecured promissory note of $1,427,135, dated August 25, 1992, with interest at 8%. The note is payable in 120 monthly installments of $17,315, including principal and interest, beginning October 1, 1992. The note is due and payable in full if certain events should occur in the future. Cash paid for interest during the years ended December 31, 1995 and 1994 totaled $129,739 and $143,801, respectively. The mortgage to the United States of America, underlying the RUS notes, contains certain restrictions on the declaration or payment of cash dividends, redemption of capital stock, or investment in affiliated companies. As of December 31, 1995, the maximum amount which could be distributed in accordance with these restrictions was approximately $1,305,600, except as might be specifically authorized in writing in advance by the RUS. 4.INCOME TAXES Income taxes reflected in the Statements of Operations consist of the following:
DECEMBER 31, ------------------- 1995 1994 --------- -------- Income Taxes Federal income taxes-- Current tax expense................................. $ 406,075 $ 36,677 Deferred tax expense (benefit)...................... (218,057) 13,999 Amortization of investment tax credits.............. (6,236) (12,441) State income taxes-- Current tax expense................................. 62,044 530 Deferred tax expense (benefit)...................... (34,732) 2,974 Investment tax credits (net)........................ (4,980) (643) --------- -------- --------- -------- Total income tax expense................................ $ 204,114 $ 41,096 ========= ========
Cash paid for income taxes and estimated income taxes for 1995 and 1994, totaled $95,500 and $56,000, respectively. The following is a reconciliation of the statutory federal income tax rate of 34% to the Company's effective tax rate:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 ----------- ------------ Statutory federal income tax rate............. 34.0 % 34.0 % State income taxes, net of federal benefit.... 2.3 1.7 Amortization of investment tax credits........ (1.5) (5.4) Benefit of graduated rates.................... -0- (13.6) Dividends received deduction and other permanent differences........................ (8.1) (16.4) Other differences............................. (0.7) 0.9 ----------- ------------ Effective income tax rate..................... 26.0 % 1.2 % =========== ============
F-93 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Deferred Federal and state tax liabilities and assets at December 31, 1995 and 1994 comprise the following:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Deferred tax asset: Regulatory liabilities and unamortized ITC........ $ (24,436) $ (28,613) Accrued liabilities............................... (34,721) (48,763) ---------- ---------- Deferred tax assets............................. (59,157) (77,376) ---------- ---------- Deferred tax liability: Investments....................................... 2,715,290 2,043,661 Property, plant and equipment..................... 139,606 141,486 Other............................................. 2,403 2,613 ---------- ---------- Deferred tax liabilities........................ 2,857,299 2,187,760 ---------- ---------- Net deferred tax liability.......................... $2,798,142 $2,110,384 ========== ========== Current portion..................................... $ (9,090) $ (11,438) Noncurrent portion.................................. 2,807,232 2,121,822 ---------- ---------- $2,798,142 $2,110,384 ========== ==========
Deferred Credits includes a regulatory liability at December 31, 1995 and 1994 of $26,687 and $35,372, respectively. A substantial portion of the regulatory liability represents an amount associated with unamortized investment tax credits. This amount will be amortized in the same manner as the underlying investment tax credits. The regulatory liability also includes an amount representing excess deferred taxes on depreciable assets, resulting primarily from reductions in the statutory Federal income tax rate. This amount is being amortized over the lives of the related depreciable assets in accordance with the average rate assumption method as required by income tax regulations. F-94 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5.INVESTMENTS Investments at December 31, 1995 and 1994 include: The amortized costs and fair value of available-for-sale securities are:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COSTS GAINS LOSSES VALUE ---------- ---------- ---------- ---------- DECEMBER 31, 1995 Available-for-Sale: Equity securities............ $3,797,448 $3,504,791 $-0- $7,302,239 ---------- ---------- ---- ---------- Amount included in: Noncurrent investments....... $7,302,239 ========== Held-to-maturity: Debt securities.............. $ 20,000 $ 19,500 $-0- $ 39,500 ========== ========== ==== ========== Amount included in: Noncurrent investments....... $ 20,000 ========== DECEMBER 31, 1994 Available-for-Sale: Equity securities............ $4,499,308 $1,006,500 $-0- $5,505,808 ========== ========== ==== ========== Amount included in: Noncurrent investments....... $5,505,808 ========== Held-to-maturity: Debt securities.............. $ 20,000 $ 18,800 $-0- $ 38,800 ========== ========== ==== ========== Amount included in: Noncurrent investments....... $ 20,000 ==========
Proceeds from sales of available-for-sale securities totaled $1,148,816 and $27,992 in 1995 and 1994, respectively. The gross realized gains on sales of available-for-sale securities totaled $446,957 and $27,511, in 1995 and 1994, respectively. There were no realized losses in 1995 or 1994. The net adjustment to unrealized holding gains (losses) on available-for-sale securities included as a separate component of stockholders' equity before tax totaled $2,498,291 in 1995, and $(1,003,919) in 1994. Investments include the following at December 31, 1995 and 1994:
1995 1994 ---------- ---------- Cash surrender value--officers' life insurance........ $ 128,194 $ 101,472 Stock--Smokey Hill Cellular, Inc...................... 6,282 6,282 Stock--Rural Telephone Bank........................... 5,000 5,000 Stock--U.S. Intelco Networks, Inc..................... 6,196 6,196 Stock--U.S. West, Inc. ............................... 5,505,808 5,505,808 Stock--U.S. West Media Group.......................... 1,796,431 -- U.S. Savings Bonds.................................... 20,000 20,000 ---------- ---------- $7,467,911 $5,644,758 ========== ==========
F-95 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6.CELLULAR ACTIVITIES The Company has a 29.78% interest in a company involved in cellular activities in Colorado. The total investment is $6,282. In late 1995, the Company entered into an agreement to sell its interest in this company. The proceeds of the sale are expected to be approximately $283,700. 7.RETIREMENT PLAN The Company has a non-contributory defined benefit plan covering most employees. The multi-employer retirement program is with the National Telephone Cooperative Association (NTCA) and has been approved by the Internal Revenue Service. Pension cost, expensed and capitalized, for 1995 and 1994 was $29,183 and $27,820, respectively. The Company makes annual contributions to the plan equal to amounts accrued for pension expense. 8.FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the following information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The amounts disclosed represent management's best estimate of fair value. In accordance with SFAS 107, the Company has excluded certain financial instruments and all other nonfinancial instruments from its disclosure. Accordingly, the aggregate fair value amounts presented are not intended to, and do not, represent the underlying fair value of the Company. The methods and assumptions used to estimate fair value are as follows: CASH AND SHORT-TERM INVESTMENTS The carrying amount approximates fair value because of the short maturity of those instruments. LONG-TERM INVESTMENTS The fair value of some investments are estimated based on quoted market prices for those or similar investments, and other information available to management. For investments totaling $11,196, there are no quoted market prices. Due to the excessive costs that would be incurred, management does not believe it is practicable to provide a current estimate of fair value. LONG-TERM DEBT The fair value of the Company's long-term debt was estimated based on the current rates available to the Company for debt with similar remaining maturities. The carrying amount and estimated fair value of the Company's financial instruments are as follows:
1995 --------------------- CARRYING FAIR AMOUNT VALUE ---------- ---------- Cash and temporary investments........................ $1,939,678 $1,939,678 Long-term investments for which it is: Practicable to estimate fair value.................. 7,328,521 7,625,439 Not practicable..................................... 11,196 Long-term debt........................................ 2,417,581 2,081,000
F-96 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 9.DEFERRED COMPENSATION AGREEMENT The Company entered into a deferred compensation agreement, dated July 1, 1992, with a retired officer and former shareholder. The agreement provides for 60 monthly payments of $4,166.67, totaling $250,000, beginning July 1, 1992. The Company's annual obligation for reduction of the liability of $68,715 at December 31, 1995, for the next two years is as follows: 1996...................................... $46,098 1997...................................... 22,617
10.CONCENTRATIONS OF CREDIT RISK The Company grants credit to local service customers, all of whom are located in the franchised service area, and telecommunications intrastate and interstate long distance carriers. The Company may be subject to competition for telecommunications services, including telecommunications exchange services, in the franchised area. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and temporary cash investments. The Company limits the amount of credit exposure in any one financial institution by placing its temporary cash investments in several financial institutions. Of the Company's cash and cash equivalents, $37,204 and $17,828 at December 31, 1995 and 1994, respectively, are maintained in financial institutions in excess of amounts insured by an agency of the Federal Government. 11.CONTINGENCIES In January, 1996, the Company entered into an Asset Purchase Agreement providing for the sale of all of its assets and rights used in the operations of its telecommunications and cable television business activities. The sale is subject to certain regulatory agency approvals, and is expected to be consummated by mid-1996. If consummated, the sale would result in a substantial gain to the Company. F-97 BIG SANDY TELECOMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) 12.SEGMENT INFORMATION The Company currently operates within industry segments related to telecommunications and cable television services. Financial information by industry segments for the years ending December 31, 1995 and 1994 is summarized as follows:
1995 1994 ----------- ---------- Operating Revenues Telecommunications operations...................... $ 797,019 $ 756,538 Cable television operations........................ 104,594 99,710 ----------- ---------- $ 901,613 $ 856,248 =========== ========== Operating Income Telecommunications operations...................... $ 138,287 $ 161,945 Cable television operations........................ 5,716 10,182 ----------- ---------- $ 144,033 $ 172,127 =========== ========== Identifiable Assets Telecommunications operations...................... $10,656,219 $7,836,106 Cable television operations........................ 66,317 75,273 ----------- ---------- $10,722,536 $7,911,379 =========== ========== Depreciation and Amortization Telecommunications operations...................... $ 163,736 $ 148,669 Cable television operations........................ 12,215 12,749 ----------- ---------- $ 175,951 $ 161,418 =========== ========== Capital Expenditures Telecommunications operations...................... $ 55,978 $ 220,707 Cable television operations........................ 1,717 2,845 ----------- ---------- $ 57,695 $ 223,552 =========== ==========
F-98 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma consolidated statement of operations for the year ended December 31, 1997 is based on historical results of MJD Communications, Inc. and subsidiaries (the "Company"); the acquisition of Taconic Telephone Corp. ("Taconic") on March 30, 1998; the acquisition of Ellensburg Telephone Company ("Ellensburg") on April 30, 1998; the acquisition of Chouteau Telephone Company ("Chouteau") on June 1, 1998; and the probable acquisition of Utilities, Inc. and its subsidiaries except for Seacoast Cellular and Western Maine Cellular ("Utilities"). The pro forma consolidated statement of operations also gives affect to the results of Kadoka Telephone Company, Columbine Telephone Company, Chautauqua & Erie Telephone Corporation, and C-R Communications, Inc. (the "1997 Acquisitions") for preacquisition operations from January 1, 1997 to the date of the respective acquisition. The 1997 Acquisitions, Taconic acquisition, Ellensburg acquisition and Chouteau acquisition (the "Completed Acquisitions") and the Utilities acquisition (the "Pending Acquisition") are accounted for under the purchase method of accounting. Pro forma adjustments, and the assumptions on which they are based are described in the accompanying notes to the pro forma consolidated financial statements. The accompanying pro forma consolidated statement of operations for the year ended December 31, 1997 contain those pro forma adjustments necessary to reflect the Completed Acquisitions and the Pending Acquisition as if the purchase of the respective company was consummated on January 1, 1997 and to reflect the use of proceeds from the New Credit Facility and the sale of notes related to the Offering as if it was consummated on January 1, 1997. The following unaudited pro forma consolidated balance sheet and consolidated statement of operations as of and for the six months ended June 30, 1998 are based on historical results of the Company; the acquisition of Taconic on March 30, 1998; the acquisition of Ellensburg on April 30, 1998; the acquisition of Chouteau on June 1, 1998; and the probable acquisition of Utilities. The acquisitions are accounted for under the purchase method of accounting. Pro forma adjustments, and the assumptions on which they are based are described in the accompanying notes to the pro forma consolidated financial statements. The accompanying pro forma consolidated balance sheet as of June 30, 1998 contains those pro forma adjustments necessary to reflect the purchase of Utilities as if it was consummated on that date. The accompanying pro forma consolidated statement of operations for the six months ended June 30, 1998 contain those pro forma adjustments necessary to reflect Taconic, Ellensburg, Chouteau and Utilities Inc. as if the purchase of the respective company was consummated on January 1, 1997 and to reflect the use of proceeds from the New Credit Facility and the sale of notes related to the Offering as if it was consummated on January 1, 1997. The pro forma consolidated financial statements may not be indicative of the actual financial position or results of operations as of the date and for the periods presented, respectively, nor are the results indicative of the Company's future results of operations. P-1 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
COMPLETED ACQUISITIONS PRO FORMA FOR COMPLETED MJD ACQUISITIONS, COMMUNICATIONS INC. 1997 PRO FORMA NEW CREDIT FACILITY HISTORICAL ACQUISITIONS(1) TACONIC ELLENSBURG CHOUTEAU ADJUSTMENTS AND OFFERING(2) ------------------- --------------- ---------- ---------- --------- ----------- ------------------- Operating revenues: Switched services....... $39,257,363 5,004,866 15,005,994 13,300,800 4,182,391 -- 76,751,414 Other........... 3,714,955 1,027,604 5,391,068 1,357,900 148,181 -- 11,639,708 ----------- --------- ---------- ---------- --------- ----------- ----------- Total operating revenues........ 42,972,318 6,032,470 20,397,062 14,658,700 4,330,572 -- 88,391,122 ----------- --------- ---------- ---------- --------- ----------- ----------- Operating expenses: Plant operations..... 6,856,901 1,196,507 4,006,019 2,638,600 893,926 -- 15,591,953 Corporate and customer services....... 11,580,804 1,972,690 6,092,195 3,052,200 1,984,740 (1,322,053)(a) 23,360,576 Depreciation and amortization... 8,777,103 968,371 3,401,706 3,601,100 584,731 3,043,961 (b) 20,376,972 Other........... 3,318,258 866,000 3,121,714 484,300 122,501 -- 7,912,773 ----------- --------- ---------- ---------- --------- ----------- ----------- Total operating expenses........ 30,533,066 5,003,568 16,621,634 9,776,200 3,585,898 1,721,908 67,242,274 ----------- --------- ---------- ---------- --------- ----------- ----------- Income from operations...... 12,439,252 1,028,902 3,775,428 4,882,500 744,674 (1,721,908) 21,148,848 ----------- --------- ---------- ---------- --------- ----------- ----------- Other income (expense): Net gain (loss) on sale of investments and other assets... (19,229) 10,349 -- -- -- -- (8,880) Interest income......... 212,035 139,775 -- 242,800 -- -- 594,610 Dividend income......... 1,182,124 -- -- -- -- -- 1,182,124 Interest expense........ (9,293,104) (372,625) (891,437) (100) (219,319) 11,071,085 (c) (29,704,427) (28,269,892)(c) (1,729,035)(d) Other nonoperating, net............ 139,972 (361,557) 656,645 811,600 145,466 -- 1,392,126 ----------- --------- ---------- ---------- --------- ----------- ----------- Total other income (expense)....... (7,778,202) (584,058) (234,792) 1,054,300 (73,853) (18,927,842) (26,544,447) ----------- --------- ---------- ---------- --------- ----------- ----------- Earnings (loss) before income taxes and extraordinary item............ 4,661,050 444,844 3,540,636 5,936,800 670,821 (20,649,750) (5,395,599) Income tax (expense) benefit......... (1,875,634) (172,911) (1,281,007) (1,923,200) (148,069) 6,314,903 (e) 914,082 ----------- --------- ---------- ---------- --------- ----------- ----------- Earnings (loss) before extraordinary item............ $ 2,785,416 271,933 2,259,629 4,013,600 522,752 (14,334,847) (4,481,517) =========== ========= ========== ========== ========= =========== ===========
P-2 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
PRO FORMA FOR UTILITIES COMPLETED PRO FORMA FOR ----------------------------------------------- ACQUISITIONS, COMPLETED AS ADJUSTED FOR NEW CREDIT FACILITY ACQUISITIONS, SEACOAST CELLULAR SEACOAST CELLULAR OFFERING AND NEW CREDIT FACILITY, AND WESTERN MAINE AND WESTERN MAINE PRO FORMA PENDING AND OFFERING(2) HISTORICAL CELLULAR CELLULAR(3) ADJUSTMENTS ACQUISITION(4) -------------------- ---------- ----------------- ----------------- ----------- ------------------- Operating revenues: Switched services........ $ 76,751,414 14,837,926 -- 14,837,926 -- 91,589,340 Other............ 11,639,708 2,992,940 1,615,534 1,377,406 -- 13,017,114 ------------ ---------- ---------- ---------- ---------- ----------- Total operating revenues......... 88,391,122 17,830,866 1,615,534 16,215,332 -- 104,606,454 ------------ ---------- ---------- ---------- ---------- ----------- Operating expenses: Plant operations...... 15,591,953 4,649,168 -- 4,649,168 -- 20,241,121 Corporate and customer service......... 23,360,576 4,197,665 825,296 3,372,369 (693,313)(f) 26,039,632 Depreciation and amortization.... 20,376,972 3,515,918 210,001 3,305,917 986,637 (g) 25,119,526 450,000 (h) Other............ 7,912,773 1,470,740 879,040 591,700 -- 8,504,473 ------------ ---------- ---------- ---------- ---------- ----------- Total operating expenses......... 67,242,274 13,833,491 1,914,337 11,919,154 743,324 79,904,752 ------------ ---------- ---------- ---------- ---------- ----------- Income from operations....... 21,148,848 3,997,375 (298,803) 4,296,178 (743,324) 24,701,702 ------------ ---------- ---------- ---------- ---------- ----------- Other income (expense): Net gain (loss) on sale of investments and other assets.... (8,880) (282,994) (282,994) -- -- (8,880) Interest income.. 594,610 -- -- -- -- 594,610 Dividend income.. 1,182,124 215,578 16,350 199,228 -- 1,381,352 Interest expense......... (29,704,427) (2,187,849) (280,055) (1,907,794) 1,907,794 (i) (35,646,252) (5,941,825)(i) Other nonoperating, net............. 1,392,126 4,528,867 4,500,000 28,867 -- 1,420,993 ------------ ---------- ---------- ---------- ---------- ----------- Total other income (expense)........ (26,544,447) 2,273,602 3,953,301 (1,679,699) (4,034,031) (32,258,177) ------------ ---------- ---------- ---------- ---------- ----------- Earnings (loss) before income taxes and extraordinary item............. (5,395,599) 6,270,977 3,654,498 2,616,479 (4,777,355) (7,556,475) Income tax (expense) benefit.......... 914,082 (2,461,076) (1,484,000) (977,076) 1,433,502 (e) 1,370,508 ------------ ---------- ---------- ---------- ---------- ----------- Earnings (loss) before extraordinary item............. $ (4,481,517) 3,809,901 2,170,498 1,639,403 (3,343,853) (6,185,967) ============ ========== ========== ========== ========== ===========
P-3 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (UNAUDITED) The unaudited pro forma consolidated statement of operations reflects various stages of pro forma information as follows: FOR PURPOSES OF THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS: (1) The "1997 Acquisitions" column reflects the results of the 1997 Acquisitions from January 1, 1997 to the acquisition date of the respective company. Results of operations from the date of acquisition to December 31, 1997 for the 1997 Acquisitions are included in the historical results of the Company. (2) The "Pro Forma for Completed Acquisitions, New Credit Facility and Offering" column reflects the historical results of operations of the Company for the year ended December 31, 1997, with pro forma adjustments as if the purchase of the 1997 Acquisitions, Taconic, Ellensburg and Chouteau, the refinancing of debt utilizing the New Credit Facility and sale of notes from the Offering were consummated on January 1, 1997. (3) The "As Adjusted for Seacoast Cellular and Western Maine Cellular" column reflects the financial operations of Utilities without Seacoast Cellular and Western Maine Cellular as these subsidiaries will not be included in the purchase of Utilities. (4) The "Pro Forma for Completed Acquisitions, New Credit Facility, Offering and Pending Acquisition" column reflects the results of operations of the "Pro Forma for Completed Acquisitions, New Credit Facility and Offering" column for the year ended December 31, 1997 with further pro forma adjustments as if the purchase of Utilities was consummated on January 1, 1997. THE PRO FORMA ADJUSTMENTS ARE AS FOLLOWS: (a) Reflects the elimination of corporate expenses of $1,322,053 of Taconic, Ellensburg and Chouteau related to specifically identified duplicative employees' salaries and related benefits. The adjustment relates to owners/senior executives who will not be retained following consummation of the business combinations. The adjustment is directly attributed to the transactions and is expected to have a continuing impact on the results of operations. (b) Reflects the amortization of goodwill created from the acquisitions of Taconic, Ellensburg and Chouteau over the estimated useful life of 40 years. (c) Reflects the interest expense on the New Credit Facility, the Offering and existing acquisition debt calculated as follows:
OUTSTANDING ANNUAL DEBT COMPONENT BALANCE RATE INTEREST -------------- ------------ ----- ----------- 9 1/2% Senior Subordinated Notes.......... $125,000,000 9.50% $11,875,000 Floating Rate Callable Securities......... 50,000,000 10.00% 5,000,000 Floating Rate Callable Securities......... 25,000,000 9.95% 2,488,125 New Credit Facility Tranche B............. 13,263,000 8.41% 1,114,928 New Credit Facility Tranche B............. 1,500,000 8.47% 127,050 New Credit Facility Tranche C............. 51,500,000 8.66% 4,457,995 New Credit Facility Tranche C............. 23,500,000 8.72% 2,049,200 Chouteau Seller Financed Debt............. 7,000,000 7.00% 490,000 Taconic Rural Utilities Service Debt...... 4,700,770 8.72% 409,907 Taconic Rural Utilities Service Debt...... 2,274,230 10.78% 245,207 Existing C-R Debt......................... 156,000 8.00% 12,480 ------------ ----------- Annual expense.......................... $303,894,000 $28,269,892 ============ ===========
P-4 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) To calculate the interest expense on the variable rate debt, interest rates in effect at June 30, 1998 were utilized. The impact of a 1/8% variance on the above variable rate debt would result in an approximate $90,000 difference in interest expense. The Company entered into interest rate swap agreements on certain variable portions of the Floating Rate Callable Securities and Tranche B and Tranche C of the New Credit Facility. The swap agreements are for terms of 2 to 3 years and exchange the stated variable rate for a fixed rate. By exchanging the variable rates for fixed rates, the Company limits its exposure to interest rate risk. Also reflects the elimination of historical interest expense due to the retirement of substantially all of the existing debt obligations. (d) Reflects the amortization of loan origination costs over the term of the New Credit Facility ($9,140,895 over 8-9 years) and Offering ($6,925,000 over 10 years). (e) Reflects the adjustment of the provision for the income tax benefit to an effective rate of 38.87% before the amortization of goodwill created from the acquisitions which is not deductible for income tax purposes. (f) Reflects the elimination of corporate expenses related to specifically identified duplicative employees' salaries and related benefits of $642,313 and specifically identified cost savings of $51,000 for the elimination of directors fees at Utilities. The adjustment relates to owners/senior executives who will not be retained following consummation of the business combinations. Also, due to the fact that the Company has not historically paid fees to directors of its subsidiaries and does not intend to do so in the future, the adjustment eliminates historical expenses related to directors fees for Utilities. The adjustment is directly attributed to the transactions and is expected to have a continuing impact on the results of operations. (g) Reflects the amortization of goodwill created from the acquisition of Utilities over the estimated useful life of 40 years. (h) Reflects the amortization of the non-compete agreement over the estimated useful life of 5 years. (i) Reflects the interest expense on the additional New Credit Facility debt utilized to purchase Utilities and existing acquisition debt calculated as follows:
OUTSTANDING ANNUAL DEBT COMPONENT BALANCE RATE INTEREST -------------- ----------- ---- ---------- New Credit Facility Tranche B................. $57,995,000 8.41% $4,875,234 Utilities RTFC Debt........................... 2,500,800 6.65% 166,303 Utilities Bank Debt........................... 5,001,600 9.20% 460,147 Utilities Bank Debt........................... 5,001,600 8.80% 440,141 ----------- ---------- Annual expense.............................. $70,499,000 $5,941,825 =========== ==========
Also reflects the elimination of historical interest expense of $1,907,794 due to the retirement of Utilities debt assumed from the purchase. P-5 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) OTHER EFFECTS FROM ACQUISITIONS Concurrent with the closings of the acquisitions of Taconic, Ellensburg and Chouteau, certain employees of the acquired companies, whose positions and responsibilities were either redundant with those of existing employees of the Company or were replaceable with lower cost, outsourced functions, were terminated. The effects of the reductions in work force for the completed acquisitions did not have a significant effect on the quality of customer service or upon the level of revenues generated by these acquired businesses. The Company has similar plans for reductions in work force related to the pending acquisition of Utilities. The historical payroll and benefit expenses of those employees are included in the accompanying pro forma statement of operations for the year ended December 31, 1997. If such reductions in work force had occurred on January 1, 1997, the effects of eliminating such historical expenses on pro forma net earnings (loss) before income taxes would have been as follows:
PRO FORMA FOR PRO FORMA FOR COMPLETED COMPLETED ACQUISITION, ACQUISITION, NEW CREDIT FACILITY, NEW CREDIT FACILITY OFFERING AND AND OFFERING PENDING ACQUISITION ------------------- -------------------- Costs of duplicative employees and functions, net of incremental costs of outsourcing certain functions-- Duplicative supervisory employees..................... $324,072 $416,936 Duplicative staff-level employees..................... 143,616 154,325 Outsourced functions, net...... 174,999 --
If these employees had been eliminated effective January 1, 1997, the Company believes that the synergies of the acquisitions would have allowed the Company to avoid the historical employee payroll and benefit costs of $642,687 for completed acquisitions and $571,261 for the pending acquisition, with no significant effect on the revenues obtained from these acquired companies. P-6 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1998 (UNAUDITED)
UTILITIES -------------------------------------- AS ADJUSTED SEACOAST FOR SEACOAST MJD CELLULAR AND CELLULAR AND PRO FORMA COMMUNICATIONS INC. WESTERN MAINE WESTERN MAINE PRO FORMA FOR PENDING HISTORICAL HISTORICAL CELLULAR CELLULAR(1) ADJUSTMENTS ACQUISITION(2) ------------------- ---------- ------------- ------------- ----------- -------------- ASSETS Current assets: Cash and cash $ 14,045,260 3,863,729 43,001 3,820,728 57,995,000 (a) 15,456,456 equivalents........... (51,000,000)(b) (9,404,532)(c) Temporary investments.. -- -- -- -- -- -- Accounts receivable, net of allowance for doubtful accounts..... 23,204,075 3,435,891 186,426 3,249,465 -- 26,453,540 Prepaid and other assets................ 3,914,452 655,413 32,327 623,086 -- 4,537,538 Deferred income taxes.. -- -- -- -- -- -- Income tax recoverable........... 3,242,328 -- -- -- -- 3,242,328 ------------ ---------- --------- ---------- ----------- ----------- Total current assets.... 44,406,115 7,955,033 261,754 7,693,279 (2,409,532) 49,689,862 ------------ ---------- --------- ---------- ----------- ----------- Property, plant and equipment, net......... 122,590,187 22,327,627 589,745 21,737,882 -- 144,328,069 ------------ ---------- --------- ---------- ----------- ----------- Other assets Investments............ 17,227,421 4,359,022 2,498,509 1,860,513 -- 19,087,934 Goodwill, net of amortization.......... 168,618,491 8,020,497 -- 8,020,497 39,325,265 (b) 215,964,253 Loan origination costs, net of amortization... 15,651,360 -- -- -- -- 15,651,360 Covenant not to compete, net of amortization.......... 875,000 -- -- -- 2,250,000 (b) 3,125,000 Other.................. 1,345,502 1,605,525 30,788 1,574,737 -- 2,920,239 ------------ ---------- --------- ---------- ----------- ----------- Total other assets...... 203,717,774 13,985,044 2,529,297 11,455,747 41,575,265 256,748,786 ------------ ---------- --------- ---------- ----------- ----------- Total assets............ $370,714,076 44,267,704 3,380,796 40,886,908 39,165,733 450,766,717 ============ ========== ========= ========== =========== ===========
P-7 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET JUNE 30, 1998 (UNAUDITED)
UTILITIES --------------------------------------- AS ADJUSTED SEACOAST FOR SEACOAST MJD CELLULAR AND CELLULAR AND PRO FORMA COMMUNICATIONS INC. WESTERN MAINE WESTERN MAINE PRO FORMA FOR PENDING HISTORICAL HISTORICAL CELLULAR CELLULAR(1) ADJUSTMENTS ACQUISITION(2) ------------------- ---------- ------------- ------------- ----------- -------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable....... $ 8,413,431 1,937,726 108,339 1,829,387 -- 10,242,818 Current portion of long-term debt........ 1,996,639 1,960,439 348,600 1,611,839 959,595 (a) 4,568,073 Demand notes payable... 814,500 -- -- -- -- 814,500 Current portion of capital lease obligations........... 52,182 -- -- -- -- 52,182 Current portion of early retirement benefits.............. 14,283 -- -- -- -- 14,283 Current portion of covenant not to compete............... 256,250 -- -- -- 500,000 (b) 756,250 Accrued interest payable............... 9,659,477 -- -- -- -- 9,659,477 Other accrued liabilities........... 4,433,167 1,016,486 65,214 951,272 -- 5,384,439 Income taxes payable... -- 147,558 -- 147,558 -- 147,558 Dividends payable...... -- 82,522 -- 82,522 -- 82,522 ------------ ---------- --------- ---------- ----------- ----------- Total current liabilities............ 25,639,929 5,144,731 522,153 4,622,578 1,459,595 31,722,102 ------------ ---------- --------- ---------- ----------- ----------- Long-term liabilities Long-term debt, net of current portion....... 300,390,421 22,969,336 2,672,643 20,296,693 57,035,405 (a) 368,317,987 (9,404,532)(c) Put warrant -- obligation............ 3,625,688 -- -- -- 3,625,688 Long-term capital lease obligation, net of current portion....... 132,511 -- -- -- -- 132,511 Early retirement benefits payable, net of current portion.... 14,465 -- -- -- -- 14,465 Covenant not to compete, net of current portion....... 612,500 -- -- -- 1,750,000 (b) 2,362,500 Deferred income taxes.. 16,808,984 3,237,631 186,000 3,051,631 -- 19,860,615 Unamortized investment tax credits........... 618,887 119,583 -- 119,583 -- 738,470 Other.................. 3,690,644 1,088,688 -- 1,088,688 -- 4,779,332 ------------ ---------- --------- ---------- ----------- ----------- Total long-term liabilities............ 325,894,100 27,415,238 2,858,643 24,556,595 49,380,873 399,831,568 ------------ ---------- --------- ---------- ----------- ----------- Minority interest....... 396,624 33,000 -- 33,000 -- 429,624 ------------ ---------- --------- ---------- ----------- ----------- Redeemable preferred stock.................. -- -- -- -- -- -- ------------ ---------- --------- ---------- ----------- ----------- Common stock subject to put option............. -- -- -- -- 3,000,000 (j) 3,000,000 ------------ ---------- --------- ---------- ----------- ----------- Stockholders' equity (deficit): Common stock........... 1,811 815,205 -- 815,205 (815,205) 1,811 Preferred stock........ -- -- -- -- -- Treasury stock......... -- (72,470) -- (72,470) 72,470 -- Additional paid-in capital............... 48,747,262 -- -- 3,000,000 (j) 45,747,262 Retained earnings (deficit)............. (30,202,170) 10,932,000 -- 10,932,000 (10,932,000) (30,202,170) Unrealized gain on marketable securities............ 236,520 -- -- -- -- 236,520 ------------ ---------- --------- ---------- ----------- ----------- Total stockholders' equity (deficit)....... 18,783,423 11,674,735 -- 11,674,735 (11,674,735) 15,783,423 ------------ ---------- --------- ---------- ----------- ----------- Total liabilities and stockholders' equity (deficit).............. $370,714,076 44,267,704 3,380,796 40,886,908 39,165,733 450,766,717 ------------ ---------- --------- ---------- ----------- -----------
P-8 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
UTILITIES -------------------------------------------- AS ADJUSTED FOR SEACOAST SEACOAST MJD CELLULAR AND CELLULAR AND COMMUNICATIONS INC. COMPLETED WESTERN WESTERN PRO FORMA HISTORICAL ACQUISITIONS(3) HISTORICAL MAINE CELLULAR MAINE CELLULAR(4) ADJUSTMENTS ------------------- --------------- ---------- -------------- ----------------- ----------- Operating revenues: Switched services....... $29,485,512 10,395,612 7,599,066 -- 7,599,066 -- Other........... 5,776,332 2,065,246 1,468,185 756,463 711,722 -- ----------- ---------- ---------- -------- --------- ----------- Total operating revenues........ 35,261,844 12,460,858 9,067,251 756,463 8,310,788 -- ----------- ---------- ---------- -------- --------- ----------- Operating expenses: Plant operations..... 5,731,047 3,114,938 2,836,788 -- 2,836,788 -- Corporate and customer service........ 8,762,269 3,513,191 1,875,789 343,641 1,532,148 (847,241)(d) Depreciation and amortization... 7,299,909 2,100,311 1,851,943 94,152 1,757,791 1,423,411 (e) 225,000 (f) Other........... 3,926,595 2,317,437 749,699 408,209 341,490 -- ----------- ---------- ---------- -------- --------- ----------- Total operating expenses........ 25,719,820 11,045,877 7,314,219 846,002 6,468,217 801,170 ----------- ---------- ---------- -------- --------- ----------- Income from operations...... 9,542,024 1,414,981 1,753,032 (89,539) 1,842,571 (801,170) ----------- ---------- ---------- -------- --------- ----------- Other income (expense): Net gain (loss) on sale of investments and other assets... 389,693 39,877 (89,539) (89,539) -- -- Interest income......... 126,471 13,854 -- -- -- -- Dividend income......... 44,895 2,368 133,215 -- 133,215 -- Interest expense........ (9,706,729) (278,237) (1,030,863) (125,930) (904,933) 10,719,711 (g) (17,038,131)(g) (835,479)(h) Other nonoperating, net............ 198,203 (845,570) (12,435) -- (12,435) -- ----------- ---------- ---------- -------- --------- ----------- Total other income (expense)....... (8,947,467) (1,067,708) (999,622) (215,469) (784,153) (7,153,899) ----------- ---------- ---------- -------- --------- ----------- Earnings (loss) before income taxes........... 594,557 347,273 753,410 (305,008) 1,058,418 (7,955,069) Income tax (expense) benefit......... (389,152) (361,188) (277,183) 123,062 (400,245) 2,911,944 ----------- ---------- ---------- -------- --------- ----------- Earnings (loss) before minority interest........ 205,405 (13,915) 476,227 (181,946) 658,173 (5,043,125) Minority interest in income of subsidiaries.... (36,523) -- (1,500) -- (1,500) -- ----------- ---------- ---------- -------- --------- ----------- Net earnings (loss).......... $ 168,882 (13,915) 474,727 (181,946) 656,673 (5,043,125) =========== ========== ========== ======== ========= =========== PRO FORMA FOR COMPLETED ACQUISITIONS, NEW CREDIT FACILITY, OFFERING AND UTILITIES(5) -------------------- Operating revenues: Switched services....... 47,480,190 Other........... 8,553,300 -------------------- Total operating revenues........ 56,033,490 -------------------- Operating expenses: Plant operations..... 11,682,773 Corporate and customer service........ 12,960,367 Depreciation and amortization... 12,806,422 Other........... 6,585,522 -------------------- Total operating expenses........ 44,035,084 -------------------- Income from operations...... 11,998,406 -------------------- Other income (expense): Net gain (loss) on sale of investments and other assets... 429,570 Interest income......... 140,325 Dividend income......... 180,478 Interest expense........ (18,043,798) Other nonoperating, net............ (659,802) -------------------- Total other income (expense)....... (17,953,227) -------------------- Earnings (loss) before income taxes........... (5,954,821) Income tax (expense) benefit......... 1,761,359 -------------------- Earnings (loss) before minority interest........ (4,193,462) Minority interest in income of subsidiaries.... (38,023) -------------------- Net earnings (loss).......... (4,231,485) ====================
P-9 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) The unaudited pro forma consolidated balance sheet and statement of operations reflect various stages of pro forma information as follows: FOR PURPOSES OF THE PRO FORMA CONSOLIDATED BALANCE SHEET: (1) The "As Adjusted for Seacoast Cellular and Western Maine Cellular" column reflects the balance sheet of Utilities without Seacoast Cellular and Western Maine Cellular as these subsidiaries will not be included in the purchase of Utilities. (2) The "Pro Forma for Pending Acquisition" column reflects the historical financial position of the Company at June 30, 1998, with pro forma adjustments as if the purchase of Utilities was consummated on June 30, 1998. The "Pro Forma for Pending Acquisition" column also reflects the reclassification of equity for common shares which are anticipated to be subject to a put option following execution of a share purchase agreement by the Company. FOR PURPOSES OF THE PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS: (3) The "Completed Acquisitions" column reflects the results of the Completed Acquisitions from January 1, 1998 to the acquisition date of the respective company. Results of operations from the date of acquisition to June 30, 1998 for the Completed Acquisitions are included in the historical results of the Company. (4) The "As Adjusted for Seacoast Cellular and Western Maine Cellular" column reflects the financial operations of Utilities without Seacoast Cellular and Western Maine Cellular as these subsidiaries will not be included in the purchase of Utilities. (5) The "Pro Forma for Completed Acquisitions, New Credit Facility, Offering and Pending Acquisition" column reflects the historical results of operations of the Company for the six months ended June 30, 1998, with pro forma adjustments as if the purchase of the Completed Acquisitions, the refinancing of debt utilizing the New Credit Facility and the sale of notes from the Offering were consummated on January 1, 1997. THE PRO FORMA ADJUSTMENTS ARE AS FOLLOWS: (a) Reflects the proceeds of $57,995,000 received from the New Credit Facility in connection with the acquisition of Utilities. Proceeds used in connection with the purchase of Utilities which is anticipated to occur in the fourth quarter of 1998. (b) Reflects the acquisition of Utilities as follows and the elimination of $11,674,735 historical equity. Purchase Price: Cash.......................................................... $50,000,000 Covenant not to compete....................................... 2,250,000 ----------- Total consideration......................................... 52,250,000 Acquisition costs............................................. 1,000,000 Covenant not to compete....................................... (2,250,000) Fair value of net assets acquired............................. (11,674,735) ----------- Excess of cost over fair value................................ $39,325,265 ===========
P-10 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) JUNE 30, 1998 (UNAUDITED) The covenant not to compete is recorded as an asset at fair value and is being amortized over the term of the agreement (5 years). (c) Reflects the payment of $9,404,532 of various existing components of Utilities debt. It is anticipated these debt payments will occur in conjunction with the purchase of Utilities in the third or fourth quarter of 1998. (d) Reflects the elimination of corporate expenses related to specifically identified duplicative employees' salaries and related benefits of $821,741 as a result of the acquisitions of Taconic, Ellensburg, Chouteau and Utilities and $25,500 for the elimination of directors fees at Utilities. The adjustment relates to owners/senior executives who will not be retained following consummation of the business combinations. Also, due to the fact that the Company has not historically paid fees to directors of its subsidiaries and does not intend to do so in the future, the adjustment eliminates historical expenses related to directors fees for Utilities. The adjustment is directly attributed to the transactions and is expected to have a continuing impact on the results of operations. (e) Reflects the amortization of goodwill created from the acquisition of Taconic, Ellensburg, Chouteau and Utilities. (f) Reflects the amortization of the non-compete agreement over the estimated useful life of 5 years. (g) Reflects the interest expense on the New Credit Facility, the Offering and existing acquisition debt calculated as follows:
OUTSTANDING ANNUAL DEBT COMPONENT BALANCE RATE INTEREST - ------------------------------------------------ ------------ ------ ----------- 9 1/2% Senior Subordinated Notes................ $125,000,000 9.50% $11,875,000 Floating Rate Callable Securities............... 50,000,000 10.00% 5,000,000 Floating Rate Callable Securities............... 25,000,000 9.95% 2,488,125 New Credit Facility Tranche B................... 70,460,000 8.41% 5,923,079 New Credit Facility Tranche B................... 1,500,000 8.47% 127,050 New Credit Facility Tranche C................... 50,826,060 8.66% 4,399,656 New Credit Facility Tranche C................... 23,500,000 8.72% 2,049,200 Chouteau Seller Financed Debt................... 7,282,000 7.00% 509,740 Taconic Rural Utilities Service Debt............ 4,487,129 8.72% 391,278 Taconic Rural Utilities Service Debt............ 2,170,871 10.78% 234,063 Utilities RTFC Debt............................. 2,500,800 6.65% 166,303 Utilities Bank Debt............................. 5,001,600 9.20% 460,147 Utilities Bank Debt............................. 5,001,600 8.80% 440,141 Existing C-R Debt............................... 156,000 8.00% 12,480 ------------ ----------- Annual expense................................. $372,886,060 $34,076,262 ============ =========== Semi-annual expense............................ $17,038,131 ===========
To calculate the interest expense on the variable rate debt, interest rates in effect at June 30, 1998 were utilized. The impact of a 1/8% percent variance on the above variable rate would result in an approximate $45,000 difference in interest expense. The Company entered into interest rate swap agreements on certain variable portions of the Floating Rate Callable Securities and Tranche B and Tranche C of the New Credit Facility. The swap agreements are for terms of 2 to 3 years and exchange the stated variable rate for a fixed rate. By exchanging the variable rates for fixed rates, the Company limits their exposure to interest rate risk. P-11 MJD COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) JUNE 30, 1998 (UNAUDITED) Also reflects the elimination of historical interest expense due to the retirement of substantially all of the existing debt obligations. (h) Reflects the amortization of respective loan origination costs over the term of the New Credit Facility ($9,140,895 over 8-9 years) and the Offering ($6,925,000 over 10 years) (i) Reflects the adjustment of the provision for the income tax benefit to an effective rate of 38.87 percent before the amortization of goodwill created from the acquisitions which is not deductible for income tax purposes. (j) Reflects the reclassification of $3,000,000 of equity to temporary equity for the value of the Company's possible obligation under a share purchase agreement with a third party. The Company expects to enter into the share purchase agreement in October 1998. The Company may be required to purchase shares that will be pledged by certain shareholders of the Company as collateral for private borrowings in the event of default on such borrowings. OTHER EFFECTS FROM ACQUISITIONS Concurrent with the closings of the acquisitions of Taconic, Ellensburg and Chouteau, certain employees of the acquired companies, whose positions and responsibilities were either redundant with those of existing employees of the Company or were replaceable with lower cost, outsourced functions, were terminated. The effects of the reductions in work force for the completed acquisitions did not have a significant effect on the quality of customer service or upon the level of revenues generated by these acquired businesses. The Company has similar plans for reductions in work force related to the pending acquisition of Utilities. The historical payroll and benefit expenses of those employees are included in the accompanying pro forma statement of operations for the six months ended June 30, 1998. If such reductions in work force had occurred on January 1, 1997, the effects of eliminating such historical expenses on pro forma net earnings (loss) before income taxes would have been as follows:
PRO FORMA FOR COMPLETED ACQUISITIONS, NEW CREDIT FACILITY, OFFERING AND UTILITIES ------------- Costs of duplicative employees and functions, net of incremental costs of outsourcing certain functions-- Duplicative supervisory employees.......................... $289,486 Duplicative staff-level employees.......................... 125,041 Outsourced functions, net.................................. 58,333
If these employees had been eliminated effective January 1, 1997, the Company believes that the synergies of the acquisitions would have allowed the Company to avoid the historical employee payroll and benefit costs of $187,229 for completed acquisitions and $285,631 for the pending acquisition, with no significant effect on the revenues obtained from these acquired companies. P-12 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ----------- TABLE OF CONTENTS
PAGE ---- Available Information.................................................... i Summary.................................................................. 1 Risk Factors............................................................. 13 Use of Proceeds.......................................................... 21 Capitalization........................................................... 22 Selected Consolidated Financial and Operating Data....................... 23 The Exchange Offer....................................................... 25 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 32 Business................................................................. 40 Regulation............................................................... 52 Management............................................................... 59 Executive Compensation................................................... 61 Security Ownership of Certain Beneficial Owners and Management........... 63 Certain Relationships and Related Transactions........................... 65 Description of New Credit Facility....................................... 67 Description of Notes..................................................... 70 Certain Federal Tax Consequences......................................... 102 Plan of Distribution..................................................... 103 Legal Matters............................................................ 103 Experts.................................................................. 104 Glossary................................................................. 105 Index to Financial Statements............................................ F-1 Unaudited Pro Forma Consolidated Financial Statements.................... P-1
UNTIL , 1998 (40 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- $200,000,000 MJD COMMUNICATIONS, INC. OFFER TO EXCHANGE ITS 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008, SERIES B AND FLOATING RATE CALLABLE SECURITIES DUE 2008, SERIES B, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OF ITS OUTSTANDING 9 1/2% SENIOR SUBORDINATED NOTES DUE 2008 AND FLOATING RATE CALLABLE SECURITIES DUE 2008, RESPECTIVELY LOGO ------- PROSPECTUS DATED , 1998 ------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS MJD Communications, Inc.'s Certificate of Incorporation, as amended and restated, indemnifies its officers and directors to the fullest extent permitted by the Delaware General Corporation Law (the "DGCL"). Under Section 145 of the DGCL, a corporation may indemnify its directors, officers, employees and agents and its former directors, officers, employees and agents and those who serve, at the corporation's request, in such capacities with another enterprise, against expenses (including attorneys' fees), as well as judgments, fines and settlements in nonderivative lawsuits, actually and reasonably incurred in connection with the defense of any action, suit or proceeding in which they or any of them were or are made parties or are threatened to be made parties by reason of their serving or having served in such capacity. The DGCL provides, however, that such person must have acted in good faith and in a manner such person reasonably believed to be in (or not opposed to) the best interests of the corporation and, in the case of a criminal action, such person must have had no reasonable cause to be believe his or her conduct was unlawful. In addition, the DGCL does not permit indemnification in an action or suit by or in the right of the corporation, where such person has been adjudged liable to the corporation, unless, and only to the extent that, a court determines that such person fairly and reasonably is entitled to indemnity for costs the court deems proper in light of liability adjudication. Indemnity is mandatory to the extent a claim, issue or matter has been successfully defended. The Certificate of Incorporation, as amended and restated, and the DGCL also prohibit limitations on officer or director liability for acts or omissions which resulted in a violation of a statute prohibiting certain dividend declarations, certain payments to stockholders after dissolution and particular types of loans. The effect of these provisions is to eliminate the rights of MJD Communications, Inc. and its stockholders (through stockholders' derivative suits on behalf of MJD Communications, Inc. to recover monetary damages against an officer or director for breach of fiduciary duty as an officer or director (including breaches resulting from grossly negligent behavior), except in the situations described above. These provisions will not limit the liability of directors or officers under the federal securities laws of the United States. The foregoing summary of MJD Communications, Inc.'s Certificate of Incorporation, as amended and restated, is qualified in its entirety by reference to the relevant provisions thereof (incorporated as Exhibit 3.1). The Company will maintain officers' and directors' liability insurance of $5 million which will insure against liabilities that officers and directors of the Company may incur in such capacities. See Item 22 for a statement of the Company's undertaking as to the Commission's position respecting indemnification arising under the Securities Act. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. A. EXHIBITS
EXHIBIT PAGE NUMBER DESCRIPTION NO. ------- ----------- ---- 2.1 Stock Purchase Agreement, dated March 6, 1997 among the Company, MJD Partners, L.P. Carousel Capital Partners, L.P., Kelso Investment Associates V, L.P. and Kelso Equity Partners, V, L.P., as amended* 2.2 Stock Purchase Agreement dated as of March 28, 1996 among MJD Services Corp., Rick A. Moore, Tom D. Moore, Penta-Gen Investments, Inc., and Odin Telephone Exchange, Inc.* 2.3 Agreement and Plan of Merger dated as of March 27, 1998 by and among MJD Ventures, Inc., Utilities Acquisition Corp. and Utilities, Inc.* 2.4 Agreement and Plan of Merger, dated as of August 6, 1996 among MJD Holdings Corp., C&E Acquisitions Corp. and Chatauqua and Erie Telephone Corporation* 2.5 Stock Purchase Agreement, dated as of September 24, 1996 among MJD Holdings Corp., Kadoka Telephone Co., Bruce G. Conlee and Virginia L. Conlee*
II-1
EXHIBIT PAGE NUMBER DESCRIPTION NO. ------- ----------- ---- 2.6 Stock Purchase Agreement, dated as of June 24, 1997 among MJD Ventures, Inc., Gary Porter, Virginia M. Porter, Renee Porter, C-R Communications, Inc., C-R Telephone Company and certain stockholders* 2.7 Agreement and Plan of Merger, dated as of September 2, 1997 among MJD Holdings Corp., Taconic Acquisition Corp. and Taconic Telephone Corp.* 2.8 Agreement and Plan of Merger, dated December 31, 1997 among MJD Ventures, Inc., Ellensburg Acquisition Corp. and Ellensburg Telephone Company* 2.9 Agreement and Plan of Merger, dated as of March 12, 1998 among MJD Communications, Inc., Chouteau Acquisitions Corp., Chouteau Telephone Company and certain shareholders of Chouteau Telephone Company* 3.1 Amended and Restated Certificate of Incorporation of the Company* 3.2 Amended and Restated By-Laws of the Company* 4.1 Indenture, dated as of May 5, 1998, between the Company and United States Trust Company of New York, as trustee, relating to the Company's $125,000,000 9 1/2% Senior Subordinated Notes due 2008 and $75,000,000 Floating Rate Callable Securities due 2008* 4.2 Form of Initial Fixed Rate Security* 4.3 Form of Initial Floating Rate Security* 4.4 Form of Exchange Fixed Rate Security* 4.5 Form of Exchange Floating Rate Security* 4.6 Form of Purchase Agreement dated as of April 30, 1998 between the Company and the Initial Purchasers named therein* 4.7 Registration Agreement dated as of April 30, 1998 between the Company and the Initial Purchasers named therein* 5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP* 10.1 Credit Agreement dated as of March 30, 1998 among the Company, various lending institutions, NationsBanc of Texas, N.A. and Bankers Trust Company 10.2 Form of B Term Note* 10.3 Form of C Term Note--Floating Rate* 10.4 Form of C Term Note--Fixed Rate* 10.5 Form of RF Note* 10.6 Form of AF Note* 10.7 Subsidiary Guarantee, dated as of March 30, 1998, by MJD Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. for the benefit of Bankers Trust Company* 10.8 Pledge Agreement, dated as of March 30, 1998 among MJD Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., as pledgors, and Bankers Trust Company, as collateral agent and pledgee* 10.9 Capital Contribution Agreement, dated as of March 27, 1998 among Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners, L.P., MJD Communications, Inc. and Bankers Trust Company* 10.10 Stockholder's Agreement, dated as of July 31, 1997 among Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners V, L.P., the Company and MJD Partners, L.P. 10.11 Registration Rights Agreement, dated as of July 31, 1997 among Kelso Investment Associates V, L.P., Kelso Equity Partners, L.P., the Company and MJD Partners, L.P.* 10.12 Financial Advisory Agreements, dated as of July 31, 1997 among the Company, MJD Holdings Corp. and affiliates of each of Kelso Investment Associates V, L.P., Kelso Equity Partners, L.P. and Carousel Capital Partners, L.P.* 10.13 Share Exchange Agreement, dated as of July 31, 1997 between the Company and MJD Partners, L.P.* 10.14 Contribution Agreement, dated as of July 31, 1997 between Meyer Haberman, Jack H. Thomas, Eugene R. Johnson and Bugger Associates, Inc. and MJD Partners, L.P.*
II-2
EXHIBIT PAGE NUMBER DESCRIPTION NO. ------- ----------- ---- 10.15 Contribution Agreement, dated as of July 31, 1997 between MJD Partners, L.P. and the Company* 10.16 Amended and Restated Class A Voting Common Stock Purchase Warrants of the Company* 10.17 Consulting Agreement, dated as of July 31, 1997 between MJD Partners, Inc. and Bugger Associates, Inc.* 10.18 Severance Agreement, dated as of July 31, 1997 between ST Enterprises, LTD and John P. Duda* 10.19 Severance Agreement, dated as of July 31, 1997 among the Company, MJD Partners, Inc. and Eugene B. Johnson* 10.20 Severance Agreement, dated as of July 31, 1997 between the Company and Walter E. Leach, Jr.* 10.21 Severance Agreement, dated as of July 31, 1997 among the Company, MJD Partners, Inc. and Jack H. Thomas* 10.22 Amendment to Credit Agreement dated as of July 30, 1998, among the Company, various lending institutions, NationsBanc of Texas, N.A. and Bankers Trust Company* 10.23 Form of Purchase Agreement and Subordination Agreement between Bankers Trust Company and the Company 12 Ratio of Earnings to fixed charges calculation (filed herewith) 21 Subsidiaries of the Company* 23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1)* 23.2 Consent of Moss Adams, LLP, Independent Auditors 23.3 Consent of Ernst & Young LLP, Independent Auditors 23.4 Consent of Kiesling Associates LLP 23.5 Consent of Berry, Dunn, McNeil & Parker 23.6 Consent of KPMG Peat Marwick 24.1 Power of Attorney (included in Part II of this Registration Statement) 25.1 Statement of Eligibility of United States Trust Company of New York, as Trustee, on Form T-1* 27 Financial Data Schedule 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery*
- -------- * Previously filed. B. FINANCIAL STATEMENT SCHEDULES Schedule II Opinion to Schedule III Schedule III Valuation and Qualifying Accounts
ITEM 22. UNDERTAKINGS (1) The undersigned registrant hereby undertakes: a. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. II-3 b. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. c. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (2) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (a) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (b) For the purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (4) The undersigned registrants hereby undertake to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHARLOTTE, STATE OF NORTH CAROLINA ON THE 1ST DAY OF OCTOBER, 1998. MJD Communications, Inc. /s/ Walter E. Leach, Jr. By: __________________________________ WALTER E. LEACH, JR. SENIOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----- ---- * Director - ------------------------------------ October 1, 1998 DANIEL G. BERGSTEIN * Director - ------------------------------------ October 1, 1998 MEYER HABERMAN * Director, Chairman - ------------------------------------ of the Board of October 1, 1998 JACK H. THOMAS Directors, President and Chief Executive Officer * Director, Vice - ------------------------------------ Chairman of the October 1, 1998 EUGENE B. JOHNSON Board of Directors, Executive Vice President * Director - ------------------------------------ October 1, 1998 GEORGE E. MATELICH * Director - ------------------------------------ October 1, 1998 REID G. LEGGETT * Director - ------------------------------------ October 1, 1998 NELSON SCHWAB, III * Director - ------------------------------------ October 1, 1998 FRANK K. BYNUM, JR. * Senior Vice - ------------------------------------ President, Chief October 1, 1998 WALTER E. LEACH Financial Officer and Secretary (Principal Financial Officer) * Controller - ------------------------------------ (Principal October 1, 1998 LISA HOOD Accounting Officer) /s/ Walter E. Leach, Jr. *By: _______________________________ ATTORNEY-IN-FACT II-5 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE The Board of Directors MJD Communications, Inc.: Under date of February 27, 1998, except the last two paragraphs of note 2 and note 16 which are as of April 2, 1998 and note 17 which is as of April 8, 1998, we reported on the consolidated balance sheets of MJD Communications, Inc. as of December 31, 1996 and 1997, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1997, which are included in the Registration Statement on Form S-4. In connection with our audits of the aforementioned financial statements, we also audited the related financial statement schedule in the Registration Statement on Form S-4. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Lincoln, Nebraska February 27, 1998 MID COMMUNICATIONS, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT WRITE-OFFS, BALANCE BEGINNING BAD DEBT NET-OF AT END OF YEAR EXPENSE RECOVERIES OF YEAR ---------- -------- ----------- ------- Allowance for doubtful accounts: Year ended December 31, 1995......... $735,598 165,167 646,912 253,853 ======== ======= ======= ======= Year ended December 31, 1996......... $253,853 4,812 200,931 57,734 ======== ======= ======= ======= Year ended December 31, 1997......... $ 57,734 -- 8,530 49,204 ======== ======= ======= =======
See accompanying independent auditors' report. EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION NO. ------- ----------- ---- 2.1 Stock Purchase Agreement, dated March 6, 1997 among the Company, MJD Partners, L.P. Carousel Capital Partners, L.P., Kelso Investment Associates V, L.P. and Kelso Equity Partners, V, L.P., as amended* 2.2 Stock Purchase Agreement dated as of March 28, 1996 among MJD Services Corp., Rick A. Moore, Tom D. Moore, Penta-Gen Investments, Inc., and Odin Telephone Exchange, Inc.* 2.3 Agreement and Plan of Merger dated as of March 27, 1998 by and among MJD Ventures, Inc., Utilities Acquisition Corp. and Utilities, Inc.* 2.4 Agreement and Plan of Merger, dated as of August 6, 1996 among MJD Holdings Corp., C&E Acquisitions Corp. and Chatauqua and Erie Telephone Corporation* 2.5 Stock Purchase Agreement, dated as of September 24, 1996 among MJD Holdings Corp., Kadoka Telephone Co., Bruce G. Conlee and Virginia L. Conlee* 2.6 Stock Purchase Agreement, dated as of June 24, 1997 among MJD Ventures, Inc., Gary Porter, Virginia M. Porter, Renee Porter, C-R Communications, Inc., C-R Telephone Company and certain stockholders* 2.7 Agreement and Plan of Merger, dated as of September 2, 1997 among MJD Holdings Corp., Taconic Acquisition Corp. and Taconic Telephone Corp.* 2.8 Agreement and Plan of Merger, dated December 31, 1997 among MJD Ventures, Inc., Ellensburg Acquisition Corp. and Ellensburg Telephone Company* 2.9 Agreement and Plan of Merger, dated as of March 12, 1998 among MJD Communications, Inc., Chouteau Acquisitions Corp., Chouteau Telephone Company and certain shareholders of Chouteau Telephone Company* 3.1 Amended and Restated Certificate of Incorporation of the Company* 3.2 Amended and Restated By-Laws of the Company* 4.1 Indenture, dated as of May 5, 1998, between the Company and United States Trust Company of New York, as trustee, relating to the Company's $125,000,000 9 1/2% Senior Subordinated Notes due 2008 and $75,000,000 Floating Rate Callable Securities due 2008* 4.2 Form of Initial Fixed Rate Security* 4.3 Form of Initial Floating Rate Security* 4.4 Form of Exchange Fixed Rate Security* 4.5 Form of Exchange Floating Rate Security* 4.6 Form of Purchase Agreement dated as of April 30, 1998 between the Company and the Initial Purchasers named therein* 4.7 Registration Agreement dated as of April 30, 1998 between the Company and the Initial Purchasers named therein* 5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP* 10.1 Credit Agreement dated as of March 30, 1998 among the Company, various lending institutions, NationsBanc of Texas, N.A. and Bankers Trust Company 10.2 Form of B Term Note* 10.3 Form of C Term Note--Floating Rate* 10.4 Form of C Term Note--Fixed Rate* 10.5 Form of RF Note* 10.6 Form of AF Note* 10.7 Subsidiary Guarantee, dated as of March 30, 1998, by MJD Holdings Corp., MJD Ventures, Inc., MJD Services Corp., ST Enterprises, Ltd. for the benefit of Bankers Trust Company* 10.8 Pledge Agreement, dated as of March 30, 1998 among MJD Communications, Inc., ST Enterprises, Ltd., MJD Holdings Corp., MJD Services Corp., MJD Ventures, Inc., C-R Communications, Inc., as pledgors, and Bankers Trust Company, as collateral agent and pledgee*
EXHIBIT PAGE NUMBER DESCRIPTION NO. ------- ----------- ---- 10.9 Capital Contribution Agreement, dated as of March 27, 1998 among Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners, L.P., MJD Communications, Inc. and Bankers Trust Company* 10.10 Stockholder's Agreement, dated as of July 31, 1997 among Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P., Carousel Capital Partners V, L.P., the Company and MJD Partners, L.P. 10.11 Registration Rights Agreement, dated as of July 31, 1997 among Kelso Investment Associates V, L.P., Kelso Equity Partners, L.P., the Company and MJD Partners, L.P.* 10.12 Financial Advisory Agreements, dated as of July 31, 1997 among the Company, MJD Holdings Corp. and affiliates of each of Kelso Investment Associates V, L.P., Kelso Equity Partners, L.P. and Carousel Capital Partners, L.P.* 10.13 Share Exchange Agreement, dated as of July 31, 1997 between the Company and MJD Partners, L.P.* 10.14 Contribution Agreement, dated as of July 31, 1997 between Meyer Haberman, Jack H. Thomas, Eugene R. Johnson and Bugger Associates, Inc. and MJD Partners, L.P.* 10.15 Contribution Agreement, dated as of July 31, 1997 between MJD Partners, L.P. and the Company* 10.16 Amended and Restated Class A Voting Common Stock Purchase Warrants of the Company* 10.17 Consulting Agreement, dated as of July 31, 1997 between MJD Partners, Inc. and Bugger Associates, Inc.* 10.18 Severance Agreement, dated as of July 31, 1997 between ST Enterprises, LTD and John P. Duda* 10.19 Severance Agreement, dated as of July 31, 1997 among the Company, MJD Partners, Inc. and Eugene B. Johnson* 10.20 Severance Agreement, dated as of July 31, 1997 between the Company and Walter E. Leach, Jr.* 10.21 Severance Agreement, dated as of July 31, 1997 among the Company, MJD Partners, Inc. and Jack H. Thomas* 10.22 Amendment to Credit Agreement dated as of July 30, 1998, among the Company, various lending institutions, NationsBanc of Texas, N.A. and Bankers Trust Company* 10.23 Form of Purchase Agreement and Subordination Agreement between Bankers Trust Company and the Company 12 Ratio of Earnings to fixed charges calculation (filed herewith) 21 Subsidiaries of the Company* 23.1 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1)* 23.2 Consent of Moss Adams, LLP, Independent Auditors 23.3 Consent of Ernst & Young LLP, Independent Auditors 23.4 Consent of Kiesling Associates LLP 23.5 Consent of Berry, Dunn, McNeil & Parker 23.6 Consent of KPMG Peat Marwick 24.1 Power of Attorney (included in Part II of this Registration Statement) 25.1 Statement of Eligibility of United States Trust Company of New York, as Trustee, on Form T-1* 27 Financial Data Schedule 99.1 Form of Letter of Transmittal* 99.2 Form of Notice of Guaranteed Delivery*
- -------- * Previously filed. EX-10.1 2 CREDIT AGREEMENT EXHIBIT 10.1 [CONFORMED COPY WITH EXHIBITS F AND G CONFORMED AS EXECUTED] ================================================================================ CREDIT AGREEMENT among MJD COMMUNICATIONS, INC., VARIOUS LENDING INSTITUTIONS, NATIONSBANK OF TEXAS, N.A., as SYNDICATION AGENT and BANKERS TRUST COMPANY, as ADMINISTRATIVE AGENT ____________________________________ Dated as of March 30, 1998 ____________________________________ $315,000,000 ================================================================================ TABLE OF CONTENTS -----------------
Page ---- SECTION 1. Amount and Terms of Credit............................. 1 1.01 Commitment............................................. 1 1.02 Minimum Borrowing Amounts, etc......................... 3 1.03 Notice of Borrowing.................................... 3 1.04 Disbursement of Funds.................................. 3 1.05 Notes.................................................. 4 1.06 Conversions............................................ 6 1.07 Pro Rata Borrowings.................................... 7 1.08 Interest............................................... 7 1.09 Interest Periods....................................... 8 1.10 Increased Costs, Illegality, etc....................... 9 1.11 Compensation........................................... 11 1.12 Change of Lending Office............................... 12 1.13 Replacement of Lenders................................. 12 SECTION 2. Fees................................................... 13 2.01 Fees................................................... 13 2.02 Voluntary Reduction of Commitments..................... 14 2.03 Mandatory Adjustments of Commitments, etc.............. 14 SECTION 3. Payments............................................... 16 3.01 Voluntary Prepayments.................................. 16 3.02 Mandatory Prepayments.................................. 17 3.03 Method and Place of Payment............................ 22 3.04 Net Payments........................................... 22 SECTION 4. Conditions Precedent................................... 24 4.01 Conditions Precedent to Closing Date................... 24 4.02 Conditions Precedent to Term Loans and RF Loans........ 28 4.03 Conditions Precedent to All Loans...................... 30 SECTION 5. Representations, Warranties and Agreements............. 31 5.01 Corporate Status....................................... 31 5.02 Corporate Power and Authority.......................... 31 5.03 No Violation........................................... 31 5.04 Litigation............................................. 31 5.05 Use of Proceeds; Margin Regulations.................... 32 5.06 Governmental Approvals................................. 32
(i)
Page ---- 5.07 Investment Company Act................................. 33 5.08 Public Utility Holding Company Act..................... 33 5.09 True and Complete Disclosure........................... 33 5.10 Financial Condition; Financial Statements.............. 33 5.11 Security Interests..................................... 34 5.12 Acquisitions........................................... 35 5.13 Tax Returns and Payments............................... 35 5.14 Compliance with ERISA.................................. 35 5.15 Subsidiaries........................................... 36 5.16 Intellectual Property.................................. 37 5.17 Environmental Matters.................................. 37 5.18 Labor Relations........................................ 37 5.19 Compliance with Statutes, etc.......................... 37 SECTION 6. Affirmative Covenants.................................. 38 6.01 Information Covenants.................................. 38 6.02 Books, Records and Inspections......................... 39 6.03 Insurance.............................................. 40 6.04 Payment of Taxes....................................... 40 6.05 Corporate Franchises................................... 40 6.06 Compliance with Statutes, etc.......................... 40 6.07 ERISA.................................................. 40 6.08 Good Repair............................................ 42 6.09 End of Fiscal Years; Fiscal Quarters................... 42 6.10 Interest Rate Agreement................................ 42 6.11 Approvals.............................................. 42 6.12 CoBank Capital......................................... 42 SECTION 7. Negative Covenants..................................... 43 7.01 Changes in Business.................................... 43 7.02 Consolidation, Merger, Sale or Purchase of Assets, etc. 43 7.03 Liens.................................................. 45 7.04 Indebtedness........................................... 47 7.05 Capital Expenditures................................... 49 7.06 Advances, Investments and Loans........................ 49 7.07 Limitation on Creation of Subsidiaries................. 50 7.08 Modifications.......................................... 51 7.09 Dividends, etc......................................... 51 7.10 Transactions with Affiliates........................... 53
(ii)
Page ---- 7.11 Interest Coverage Ratio................................ 53 7.12 Leverage Ratio......................................... 54 7.13 Senior Leverage Ratio.................................. 55 7.14 Limitation On Issuance of Stock........................ 56 7.15 Designated Senior Debt................................. 56 SECTION 8. Events of Default...................................... 56 8.01 Payments............................................... 56 8.02 Representations, etc................................... 56 8.03 Covenants.............................................. 56 8.04 Default Under Other Agreements......................... 57 8.05 Bankruptcy, etc........................................ 57 8.06 ERISA.................................................. 57 8.07 Pledge Agreement....................................... 58 8.08 Subsidiary Guaranty.................................... 58 8.09 Judgments.............................................. 58 SECTION 9. Definitions............................................ 59 SECTION 10. The Agents............................................ 87 10.01 Appointment........................................... 87 10.02 Nature of Duties...................................... 88 10.03 Lack of Reliance on the Agents........................ 88 10.04 Certain Rights of the Administrative Agent............ 88 10.05 Reliance.............................................. 89 10.06 Indemnification....................................... 89 10.07 Each Agent in its Individual Capacity................. 89 10.08 Holders............................................... 89 10.09 Resignation by the Administrative Agent............... 90 SECTION 11. Miscellaneous......................................... 90 11.01 Payment of Expenses, etc.............................. 90 11.02 Right of Setoff....................................... 91 11.03 Notices............................................... 92 11.04 Benefit of Agreement.................................. 92 11.05 No Waiver; Remedies Cumulative........................ 94 11.06 Payments Pro Rata..................................... 95 11.07 Calculations; Computations............................ 95 11.08 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial........................... 96
(iii)
Page ---- 11.09 Counterparts.......................................... 96 11.10 Effectiveness......................................... 96 11.11 Headings Descriptive.................................. 97 11.12 Amendment or Waiver................................... 97 11.13 Survival.............................................. 98 11.14 Domicile of Loans..................................... 98 11.15 Confidentiality....................................... 98 11.16 Lender Register....................................... 98
ANNEX I -- Commitments ANNEX II -- Addresses ANNEX III -- Subsidiaries ANNEX IV -- ERISA ANNEX V -- Existing Liens ANNEX VI -- Existing Indebtedness ANNEX VII -- Existing Investments ANNEX VIII -- Governmental Approvals ANNEX IX -- Affiliate Transactions EXHIBIT A -- Form of Notice of Borrowing EXHIBIT B-1 -- Form of B Term Note EXHIBIT B-2 -- Form of C Term Note-Floating Rate EXHIBIT B-3 -- Form of C Term Note-Fixed Rate EXHIBIT B-4 -- Form of RF Note EXHIBIT B-5 -- Form of AF Note EXHIBIT C -- Form of Section 3.04 Certificate EXHIBIT D-1 -- Form of Opinion of Paul, Hastings, Janofsky & Walker LLP EXHIBIT D-2 -- Form of Opinion of White & Case LLP EXHIBIT E -- Form of Officers' Certificate EXHIBIT F -- Form of Subsidiary Guaranty EXHIBIT G -- Form of Pledge Agreement EXHIBIT H -- Form of Solvency Certificate EXHIBIT I -- Form of Capital Contribution Agreement EXHIBIT J -- Form of Consent Letter EXHIBIT K -- Form of Assignment Agreement (iv) CREDIT AGREEMENT, dated as of March 30, 1998, among MJD COMMUNICATIONS, INC., a Delaware corporation, the lenders from time to time party hereto (each, a "Lender" and, collectively, the "Lenders"), NATIONSBANK OF TEXAS, N.A., as Syndication Agent (the "Syndication Agent"), and BANKERS TRUST COMPANY, as Administrative Agent (the "Administrative Agent" and together with the Syndication Agent, collectively, the "Agents"). Unless otherwise defined herein, all capitalized terms used herein and defined in Section 9 are used herein as so defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS, subject to and upon the terms and conditions herein set forth, the Lenders are willing to make available to the Borrower the credit facilities provided for herein; NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. -------------------------- 1.01 Commitment. Subject to and upon the terms and conditions ---------- herein set forth, each Lender severally agrees to make a loan or loans (each, a "Loan" and, collectively, the "Loans") to the Borrower, which Loans shall be drawn, to the extent such Lender has a commitment under such Facility, under the B Term Facility, the C Term Facility, the Revolving Facility and the Acquisition Facility, as set forth below: (a) Loans under the B Term Facility (each, a "B Term Loan" and, collectively, the "B Term Loans") (i) shall be made to the Borrower pursuant to one or more drawings on and after the Closing Date and prior to the B Termination Date, provided that B Term Loans incurred pursuant to B Term Commitments created pursuant to a B Term Commitment Renewal shall not be subject to the foregoing but shall be made within the time frame specified in the definition of B Term Commitment Renewal, (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all B Term Loans made as part of the same Borrowing shall, unless specifically provided herein, consist of Loans of the same Type and (iii) shall not exceed in aggregate principal amount for any Lender in respect of any incurrence of B Term Loans the B Term Commitment, if any, of such Lender as in effect immediately prior to such incurrence. Once repaid, B Term Loans may not be reborrowed, provided that B Term Loans may be subsequently incurred to the extent of the B Term Commitments created pursuant to the B Term Commitment Renewal. (b) Loans under the C Term Facility shall be made pursuant to the Total C Term Commitment (each, a "C Term Loan-Floating Rate" and, collectively, the "C Term Loans-Floating Rate") and pursuant to the CoBank Commitment (each, a "C Term Loan-Fixed Rate" and, collectively, the "C Term Loans-Fixed Rate"), with (A) the C Term Loans-Floating Rate (i) to be made to the Borrower pursuant to a single drawing on the Closing Date (and not thereafter), (ii) except as hereinafter provided, and, in any event, at the option of the Borrower, to be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all C Term Loans-Floating Rate made as part of the same Borrowing shall, unless specifically provided herein, consist of Loans of the same Type and (iii) not to exceed in aggregate principal amount for any Lender at the time of incurrence of C Term Loans-Floating Rate the C Term Commitment, if any, of such Lender as in effect on such date immediately prior to such incurrence and (B) the C Term Loans-Fixed Rate to be made to the Borrower by CoBank on the Closing Date (and not thereafter) by converting the CoBank Continuing Loans into C Term Loans-Fixed Rate in the aggregate amount of the CoBank Commitment. Once repaid, C Term Loans-Floating Rate and C-Term Loans- Fixed Rate may not be reborrowed. (c) Loans under the Revolving Facility (each, an "RF Loan" and, collectively, the "RF Loans") (i) shall be made to the Borrower at any time and from time to time on and after the Closing Date and prior to the AF/RF Maturity Date, (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all RF Loans made as part of the same Borrowing shall, unless otherwise specifically provided herein, consist of Loans of the same Type, (iii) may be repaid and reborrowed in accordance with the provisions hereof, and (iv) shall not exceed (giving effect to any incurrence thereof and the use of the proceeds of such incurrence) for any Lender in aggregate principal amount at any time outstanding the Revolving Commitment, if any, of such Lender at such time. (d) Loans under the Acquisition Facility (each, an "AF Loan" and, collectively, the "AF Loans") (i) shall be made to the Borrower at any time and from time to time on and after the B Utilization Date and prior to the AF/RF Maturity Date, (ii) except as hereinafter provided, may, at the option of the Borrower, be incurred and maintained as, and/or converted into, Base Rate Loans or Eurodollar Loans, provided that all AF Loans made as part of the same Borrowing shall, unless otherwise specifically provided herein, consist of Loans of the same Type, (iii) may be repaid and reborrowed in accordance with the provisions hereof, and (iv) shall not exceed (giving effect to any incurrence thereof and the use of the proceeds of such incurrence) for any Lender at any time outstanding in aggregate principal amount the Acquisition Commitment, if any, of such Lender at such time. -2- 1.02 Minimum Borrowing Amounts, etc. The aggregate principal amount ------------------------------- of each Borrowing shall not be less than the Minimum Borrowing Amount. More than one Borrowing may be incurred on any day, provided that at no time shall there be outstanding more than eight Borrowings of Eurodollar Loans. 1.03 Notice of Borrowing. (a) Whenever the Borrower desires to ------------------- incur Loans under any Facility, it shall give the Administrative Agent at its Notice Office, (x) prior to 12:00 Noon (New York time), at least three Business Days' prior written notice (or telephonic notice promptly confirmed in writing) of each proposed incurrence of Eurodollar Loans and (y) prior to 11:00 A.M. (New York time) on the proposed date thereof, written notice (or telephonic notice promptly confirmed in writing) of each proposed incurrence of Base Rate Loans and Fixed Rate Loans. Each such notice (each, a "Notice of Borrowing") shall be in the form of Exhibit A and shall be irrevocable and shall specify (i) the Facility pursuant to which such incurrence is being made, (ii) the aggregate principal amount of the Loans to be made pursuant to such incurrence, (iii) the date of incurrence (which shall be a Business Day) and (iv) whether the respective Borrowing shall consist of Base Rate Loans, Eurodollar Loans or Fixed Rate Loans and, if Eurodollar Loans, the Interest Period to be initially applicable thereto. The Administrative Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed incurrence of Loans of such Lender's proportionate share thereof and of the other matters covered by the Notice of Borrowing. (b) Without in any way limiting the obligation of the Borrower to confirm in writing any telephonic notice permitted to be given hereunder, the Administrative Agent, prior to receipt of written confirmation may act without liability upon the basis of and consistent with such telephonic notice, believed by the Administrative Agent in good faith to be from an Authorized Officer of the Borrower. In each such case, the Borrower hereby waives the right to dispute the Administrative Agent's record of the terms of such telephonic notice, unless such record reflects gross negligence or willful misconduct on the part of the Administrative Agent. 1.04 Disbursement of Funds. (a) No later than 1:00 P.M. (New York --------------------- time) (2:00 P.M. (New York time) in the case of Base Rate Loans made pursuant to same day notice) on the date specified in each Notice of Borrowing, each Lender with a Commitment under the respective Facility will make available its pro rata --- ---- share of each Borrowing requested to be made on such date, provided that no proceeds of the C Term Loans-Fixed Rate will be made available to the Borrower, with the C Term Loans-Fixed Rate to constitute the conversion of the outstanding CoBank Continuing Loans. All such amounts shall be made available to the Administrative Agent in Dollars and immediately available funds at the Payment Office and the Administrative Agent promptly will make available to the Borrower by depositing to its account at the Payment Office or as otherwise directed in the applicable -3- Notice of Borrowing the aggregate of the amounts so made available in the type of funds received. Unless the Administrative Agent shall have been notified by any Lender prior to the date of the proposed incurrence that such Lender does not intend to make available to the Administrative Agent its portion of the Borrowing or Borrowings to be made on such date, the Administrative Agent may assume that such Lender has made such amount avail able to the Administrative Agent on such date, and the Administrative Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Administrative Agent by such Lender and the Administrative Agent has made available same to the Borrower, the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent's demand therefor, the Administrative Agent may notify the Borrower, and, upon receipt of such notice, the Borrower shall promptly pay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover on demand from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to (x) if paid by such Lender, the overnight Federal Funds Effective Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.08, for the respective Loans. (b) Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights which the Borrower may have against any Lender as a result of any default by such Lender hereunder. 1.05 Notes. (a) The Borrower's obligation to pay the principal of, ----- and interest on, the Loans made to it by each Lender shall be evidenced (i) if B Term Loans, by a promissory note substantially in the form of Exhibit B-1 with blanks appropriately completed in conformity herewith (each, a "B Term Note" and, collectively, the "B Term Notes"), (ii) if C Term Loans-Floating Rate, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed in conformity herewith (each, a "C Term Note-Floating Rate" and, collectively, the "C Term Notes-Floating Rate"), (iii) if C Term Loans-Fixed Rate, by promissory notes substantially in the form of Exhibit B-3 (the "C Term Notes-Fixed Rate"), (iv) if RF Loans, by a promissory note substantially in the form of Exhibit B-4 with blanks appropriately completed in conformity herewith (each, an "RF Note" and, collectively, the "RF Notes") and (v) if AF Loans, by a promissory note substantially in the form of Exhibit B-5, with blanks appropriately completed in conformity herewith (each, an "AF Note" and, collectively, the "AF Notes"). -4- (b) The B Term Note issued to each Lender that makes any B Term Loan shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender and be dated the Closing Date, (iii) be in a stated principal amount equal to the B Term Commitment of such Lender on the Closing Date (or in the case of a new B Term Note issued pursuant to Section 1.13 or 11.04, the B Term Loans and B Term Commitment then being assigned) and be payable in the principal amount of B Term Loans evidenced thereby, (iv) mature on the B Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to mandatory repayment as provided in Section 3.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (c) The C Term Note-Floating Rate issued to each Lender that makes any C Term Loan-Floating Rate shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender and be dated the Closing Date, (iii) be in a stated principal amount equal to the C Term Loans-Floating Rate made by such Lender on the Closing Date (or in the case of a new C Term Note-Floating Rate issued pursuant to Section 1.13 or 11.04, the respective C Term Loans-Floating Rate evidenced thereby at the time of issuance) and be payable in the principal amount of C Term Loans-Floating Rate evidenced thereby, (iv) mature on the C Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to mandatory repayment as provided in Section 3.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (d) The C Term Note-Fixed Rate issued to each Lender that makes or acquires any C Term Loan-Fixed Rate shall (i) be executed by the Borrower, (ii) be payable to the order of such Lender and be dated the Closing Date, (iii) be in a stated principal amount equal to the relevant C Term Loans- Fixed Rate continued by CoBank on the Closing Date (or in the case of a new C Term Note-Fixed Rate issued pursuant to Section 1.13 or 11.04, the respective C Term Loans Fixed Rate evidenced thereby at the time of issuance) and be payable in the principal amount of C Term Loans-Fixed Rate evidenced thereby, (iv) mature on the C Maturity Date, (v) bear interest as provided in Section 1.08(c) in respect of the Fixed Rate Loans evidenced thereby, (vi) be subject to mandatory repayment as provided in Section 3.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (e) The RF Note issued to each RF Lender shall (i) be executed by the Borrower, (ii) be payable to the order of such RF Lender and be dated the Closing Date, (iii) be in a stated principal amount equal to the Revolving Commitment of such RF Lender and be payable in the principal amount of the RF Loans evidenced thereby, (iv) mature on the AF/RF Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced -5- thereby, (vi) be subject to mandatory repayment as provided in Section 3.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (f) The AF Note issued to each AF Lender shall (i) be executed by the Borrower, (ii) be payable to the order of such AF Lender and be dated the Initial AF Borrowing Date, (iii) be payable in the principal amount of the AF Loans evidenced thereby, (iv) mature on the AF/RF Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case may be, evidenced thereby, (vi) be subject to mandatory repayment as provided in Section 3.02 and (vii) be entitled to the benefits of this Agreement and the other Credit Documents. (g) Each Lender will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will, prior to any transfer of any of its Notes, endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation shall not affect the Borrower's obligations in respect of such Loans. 1.06 Conversions. The Borrower shall have the option to convert on ----------- any Business Day all or a portion at least equal to the applicable Minimum Borrowing Amount of the outstanding principal amount of the Loans owing pursuant to a single Facility into a Borrowing or Borrowings pursuant to such Facility of another Type of Loan provided that (i) no partial conversion of a Borrowing of Eurodollar Loans shall reduce the outstanding principal amount of the Eurodollar Loans made pursuant to such Borrowing to less than the Minimum Borrowing Amount applicable thereto, (ii) Base Rate Loans and C Term Loans-Fixed Rate may not be converted into Eurodollar Loans when a Default under Section 8.01 or an Event of Default is in existence on the date of the proposed conversion if the Administrative Agent or the Required Lenders shall have determined in its or their sole discretion not to permit such conversion, (iii) Borrowings of Eurodollar Loans resulting from this Section 1.06 shall be limited in number as provided in Section 1.02 and (iv) no conversion of any C Term Loan-Fixed Rate shall be made pursuant to this Section 1.06 until the FRE Date applicable thereto, at which time such Loans shall be converted into Eurodollar Loans and/or Base Rate Loans as elected by the Borrower in the absence of giving any such notice, shall be automatically converted into Base Rate Loans) and such resulting Eurodollar Loans and Base Rate Loans shall thereafter be subject to conversion as provided in this Section 1.06. Each such con version shall be effected by the Borrower giving the Administrative Agent at its Notice Office, prior to 12:00 Noon (New York time), at least three Business Days' (or one Business Day's, in the case of a conversion into Base Rate Loans) prior written notice (or telephonic notice promptly confirmed in writing) (each, a "Notice of Conversion") specifying the Loans to be so converted (including the relevant Facility), the Type of Loans to be converted into and, if to be converted into a Borrowing of Eurodollar Loans, the Interest Period to be initially applicable there to. The Administrative -6- Agent shall give each Lender prompt notice of any such proposed conversion affecting any of its Loans. 1.07 Pro Rata Borrowings. All Loans under this Agreement (other ------------------- than C Term Loans-Fixed Rate) shall be made by the Lenders pro rata on the basis --- ---- of their B Term Commitments, C Term Commitments, Revolving Commitments or Acquisition Commitments, as the case may be, if any. It is understood that no Lender shall be responsible for any default by any other Lender in its obligation to make Loans hereunder and that each Lender shall be obligated to make the Loans provided to be made by it hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder. 1.08 Interest. (a) The unpaid principal amount of each Base Rate -------- Loan shall bear interest from the date of the Borrowing thereof until the earlier of repayment or conversion thereof and maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Base Rate Margin plus the Base Rate in effect from time to time. (b) The unpaid principal amount of each Eurodollar Loan shall bear interest from the date of the Borrowing thereof until the earlier of repayment or conversion thereof and maturity (whether by acceleration or otherwise) at a rate per annum which shall at all times be the Applicable Eurodollar Margin plus the relevant Eurodollar Rate. (c) The unpaid principal amount of each C Term Loan-Fixed Rate shall bear interest until maturity (whether by acceleration or otherwise) as provided in the C Term Notes-Fixed Rate. (d) Interest in respect of any overdue amount payable hereunder shall accrue at a rate per annum equal to the Base Rate in effect from time to time plus the sum of (i) 2% and (ii) the Applicable Base Rate Margin, provided that principal in respect of Eurodollar Loans and C Term Loans-Fixed Rate (prior to the applicable FRE Date) shall bear interest from the date the same becomes due (whether by acceleration or otherwise) until (x) in the case of Eurodollar Loans, the end of the Interest Period then applicable to such Eurodollar Loan and (y) in the case of C Term Loans-Fixed Rate until paid in full, at a rate per annum no less than one which is equal to 2% in excess of the rate of interest applicable thereto on such date. (e) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof and shall be payable (i) in respect of each Base Rate Loan, quarterly in arrears on the last Business Day of each March, June, September and December commencing on June 30, 1998, (ii) in respect of each Eurodollar Loan, on the last day of each Interest Period applicable thereto and, in the case of an Interest Period in excess -7- of three months, on each date occurring at three month intervals after the first day of such Interest Period, (iii) in respect of each such Loan, on any prepayment or conversion (on the amount prepaid or converted), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand and (iv) in respect of the C Term Loans-Fixed Rate, as provided in the relevant C Term Note-Fixed Rate. (f) All computations of interest hereunder shall be made in accordance with Section 11.07(b). (g) The Administrative Agent, upon determining the interest rate for any Borrowing of Eurodollar Loans for any Interest Period, shall promptly notify the Borrower and the Lenders thereof. 1.09 Interest Periods. (a) At the time the Borrower gives a Notice ---------------- of Borrowing or Notice of Conversion in respect of the making of, or conversion into, a Borrowing of Eurodollar Loans (in the case of the initial Interest Period applicable thereto) or prior to 12:00 Noon (New York time) on the third Business Day prior to the expiration of an Interest Period applicable to a Borrowing of Eurodollar Loans, it shall have the right to elect by giving the Administrative Agent written notice (or telephonic notice promptly confirmed in writing) of the Interest Period applicable to such Borrowing, which Interest Period shall, at the option of the Borrower, be a one, two, three, six or, to the extent available to all Lenders with a Commitment and/or outstanding Loans under the respective Facility, nine or twelve month period. Notwithstanding anything to the contrary contained above: (i) the initial Interest Period for any Borrowing of Eurodollar Loans shall commence on the date of such Borrowing (including the date of any conversion from a Borrowing of Base Rate Loans) and each Interest Period occurring thereafter in respect of such Borrowing shall commence on the day on which the next preceding Interest Period expires; (ii) if any Interest Period begins on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period, such Interest Period shall end on the last Business Day of such calendar month; (iii) if any Interest Period would otherwise expire on a day which is not a Business Day, such Interest Period shall expire on the next succeeding Business Day, provided that if any Interest Period would otherwise expire on a day which is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; -8- (iv) no Interest Period with respect to a Borrowing of RF Loans or AF Loans shall extend beyond the AF/RF Maturity Date; (v) no Interest Period with respect to any B Term Loans, C Term Loans-Floating Rate or C Term Loans-Fixed Rate outstanding as Eurodollar Loans may be elected that would extend beyond any date upon which a Scheduled Repayment is required to be made in respect of such Loans if, after giving effect to the selection of such Interest Period, the aggregate principal amount of B Term Loans or C Term Loans-Floating Rate or C Term Loans-Fixed Rate outstanding as Eurodollar Loans, respectively, maintained as Eurodollar Loans with Interest Periods ending after such date would exceed the aggregate principal amount of B Term Loans, C Term Loans-Floating Rate or C Term Loans-Fixed Rate outstanding as Eurodollar Loans, as the case may be, permitted to be outstanding after such Scheduled Repayment; and (vi) no Interest Period may be elected at any time when a Default under Section 8.01 or an Event of Default is then in existence if the Administrative Agent or the Required Lenders shall have determined in its or their sole discretion not to permit such election. (b) If upon the expiration of any Interest Period, the Borrower has failed to (or may not) elect a new Interest Period to be applicable to the respective Borrowing of Eurodollar Loans as provided above, the Borrower shall be deemed to have elected to convert such Borrowing into a Borrowing of Base Rate Loans effective as of such expiration. 1.10 Increased Costs, Illegality, etc. (a) In the event that (x) --------------------------------- in the case of clause (i) below, the Administrative Agent or (y) in the case of clauses (ii) and (iii) below, any Lender shall have determined (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto): (i) on any date for determining the Eurodollar Rate for any Interest Period that, by reason of any changes arising after the date of this Agreement affecting the interbank Eurodollar market, adequate and fair means do not exist for ascertaining the applicable interest rate on the basis provided for in the definition of Eurodollar Rate or the making or continuance of any Eurodollar Loan has become impracticable as a result of a contingency occurring after the Effective Date which materially and adversely affects the interbank Eurodollar market; (ii) at any time, that such Lender shall incur increased costs or reductions in the amounts received or receivable hereunder with respect to any Eurodollar Loans (other than taxes covered by Section 3.04 and any increased cost or reduction in the amount received or receivable resulting from the imposition of or a change in the rate -9- of taxes or similar charges) because of (x) any change since the Effective Date in any applicable law, governmental rule, regulation, guideline or order (or in the interpretation or administration thereof and including the introduction of any new law or governmental rule, regulation, guideline or order) (such as, for example, but not limited to, a change in official reserve requirements, but, in all events, excluding reserves required under Regulation D to the extent included in the computation of the Eurodollar Rate) and/or (y) other circumstances affecting the interbank Eurodollar market or the position of such Lender in such market; or (iii) at any time, that the making or continuance of any Eurodollar Loan has become unlawful by compliance by such Lender in good faith with any law, governmental rule, regulation, guideline or order (or would conflict with any such governmental rule, regulation, guideline or order not having the force of law but with which such Lender customarily complies even though the failure to comply therewith would not be unlawful); then, and in any such event, such Lender (or the Administrative Agent in the case of clause (i) above) shall (x) on such date and (y) within ten Business Days of the date on which such event no longer exists give notice (by telephone confirmed in writing) to the Borrower and to the Administrative Agent of such determination (which notice the Administrative Agent shall promptly transmit to each of the other Lenders). Thereafter (x) in the case of clause (i) above, Eurodollar Loans shall no longer be available until such time as the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice by the Administrative Agent no longer exist, and any Notice of Borrowing or Notice of Con version given by the Borrower with respect to Eurodollar Loans which have not yet been incurred shall be deemed rescinded by the Borrower, (y) in the case of clause (ii) above, the Borrower shall pay to such Lender, within 10 Business Days after the Borrower's receipt of written demand therefor, such additional amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its reasonable discretion shall determine after consultation with the Borrower) as shall be required to compensate such Lender for such increased costs or reductions in amounts receivable here under (a written notice as to the additional amounts owed to such Lender, describing the basis for such increased costs and showing the calculation thereof, submitted to the Borrower by such Lender shall, absent manifest error, be final and conclusive and binding upon all parties hereto) and (z) in the case of clause (iii) above, the Borrower shall take one of the actions specified in Section 1.10(b) as promptly as possible and, in any event, within the time period required by law. (b) At any time that any Eurodollar Loan is affected by the circumstances described in Section 1.10(a)(ii), the Borrower may (and in the case of a Eurodollar Loan affected pursuant to Section 1.10(a)(iii), the Borrower shall within the time period required -10- by law) either (x) if the affected Eurodollar Loan is then being made pursuant to a Borrowing, cancel said Borrowing by giving the Administrative Agent telephonic notice (confirmed promptly in writing) thereof on the same date that the Borrower was notified by a Lender pursuant to Section 1.10(a)(ii) or (iii), or (y) if the affected Eurodollar Loan is then outstanding, upon at least three Business Days' notice to the Administrative Agent, require the affected Lender to convert each such Eurodollar Loan into a Base Rate Loan (which conversion, in the case of the circumstances described in Section 1.10(a)(iii), shall occur no later than the last day of the Interest Period then applicable to such Eurodollar Loan (or such earlier date as shall be required by applicable law)); provided, that if more than one Lender is affected at any time, then all - -------- affected Lenders must be treated the same pursuant to this Section 1.10(b). (c) If any Lender shall have determined that the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, in each case after the Effective Date, or compliance by such Lender or its parent corporation with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency first made after the Effective Date, has or would have the effect of reducing the rate of return on such Lender's or its parent corporation's capital or assets as a consequence of its commitments or obligations hereunder to a level below that which such Lender or its parent corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's or its parent corporation's policies with respect to capital adequacy), then from time to time, within 10 Business Days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or its parent corporation for such reduction. Each Lender, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.10(c), will give prompt written notice thereof to the Borrower, which notice shall describe the basis for such claim and set forth in reasonable detail the calculation of such additional amounts, although the failure to give any such notice shall not release or diminish any of the Borrower's obligations to pay additional amounts pursuant to this Section 1.10(c) upon the subsequent receipt of such notice. 1.11 Compensation. (a) The Borrower shall, without duplication, ------------ compensate each Lender, upon its written request (which request shall set forth the basis for requesting such compensation and reasonably detailed calculations thereof), for all reasonable losses, expenses and liabilities (including, without limitation, any loss, expense or liability incurred by reason of the liquidation or reemployment of deposits or other funds required by such Lender to fund its Eurodollar Loans but excluding in any event the loss of anticipated profits) which such Lender may sustain: (i) if for any reason (other than a default by any -11- Lender or the Administrative Agent) a Borrowing of Eurodollar Loans by the Borrower does not occur on a date specified therefor in a Notice of Borrowing or Notice of Conversion (whether or not withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii) if any prepayment, repayment or conversion of any of its Eurodollar Loans occurs on a date which is not the last day of an Interest Period applicable thereto; (iii) if any prepayment of any of its Eurodollar Loans is not made on any date specified in a notice of prepayment given by the Borrower; or (iv) as a consequence of (x) any other default by the Borrower to repay its Eurodollar Loans when required by the terms of this Agreement or (y) an election made pursuant to Section 1.10(b). (b) Notwithstanding anything in this Agreement to the contrary, to the extent any notice or request required by Section 1.10, 1.11 or 3.04 of this Agreement is given by any Lender more than 120 days after such Lender obtained, or reasonably should have obtained, knowledge of the occurrence of the event giving rise to the additional costs, reductions in amounts, losses, taxes or other additional amounts of the type described in such Section, such Lender shall not be entitled to compensation under Section 1.10, 1.11 or 3.04 of this Agreement for any amounts incurred or accruing prior to the giving of such notice to the Borrower. 1.12 Change of Lending Office. Each Lender agrees that, upon the ------------------------ occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or (iii), 1.10(c) or 3.04 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event, provided that such designation is made on such terms that such Lender -------- and its lending office suffer no material economic, legal or regulatory disadvantage, with the object of avoiding the consequence of the event giving rise to the operation of any such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Lender provided in Section 1.10 or 3.04. 1.13 Replacement of Lenders. (x) Upon the occurrence of any event ---------------------- giving rise to the operation of Section 1.10(a)(ii) or (iii), Section 1.10(c) or Section 3.04 with respect to any Lender which results in such Lender charging to the Borrower increased costs materially in excess of those being charged generally by the Lenders, (y) if a Lender becomes a Defaulting Lender and/or (z) in the case of a refusal by a Lender to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Required AF/RF Lenders and the Required TF Lenders, the Borrower shall have the right, if no Default under Section 8.01 or Event of Default then exists, to replace such Lender (the "Replaced Lender") with one or more other Eligible Transferee or Transferees, none of whom shall constitute a Defaulting Lender at the time of such replacement (collectively, the "Replacement Lender") reasonably acceptable to the Administrative Agent, provided that (i) at the time of any replacement pursuant to this -12- Section 1.13, the Replacement Lender shall enter into one or more Assignment Agreements pursuant to Section 11.04(b) (and with all fees payable pursuant to said Section 11.04(b) to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the Commitments and outstanding Loans of the Replaced Lender and, in connection therewith, shall pay to the Replaced Lender an amount equal to the sum of (A) an amount equal to the principal of, and all accrued and unpaid interest on, all outstanding Loans of the Replaced Lender and an amount equal to all accrued and unpaid Fees owing to the Replaced Lender pursuant to Section 2.01, and (ii) all obligations of the Borrower owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid) shall be paid in full to such Replaced Lender by the Borrower concurrently with such replacement. Upon the execution of the respective Assignment Agreements, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Lender, delivery to the Replacement Lender of the appropriate Note or Notes executed by the Borrower, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder, except with respect to indemnification provisions applicable to the Replaced Lender under this Agreement, which shall survive as to such Replaced Lender. SECTION 2. Fees. ---- 2.01 Fees. (a) The Borrower agrees to pay to the Administrative ---- Agent a commitment commission (the "TF Commitment Commission") for the account of each Lender with a B Term Commitment that is a Non-Defaulting Lender for any period on and after the Closing Date during which any B Term Commitments are outstanding, computed for each day at a rate per annum equal to the Applicable CC Percentage for such day on the B Term Commitment on such day of such Lender. Such TF Commitment Commission shall be due and payable in arrears on the last Business Day of each calendar quarter and on the B Termination Date. (b) The Borrower agrees to pay to the Administrative Agent a commitment commission (the "RF Commitment Commission") for the account of each RF Lender that is a Non-Defaulting Lender for the period from and including the Closing Date to but not including the date upon which the Total Revolving Commitment has been terminated, computed for each day at the rate per annum equal to the Applicable CC Percentage for such day on the unutilized Revolving Commitment on such day of such Lender. Such RF Commitment Commission shall be due and payable in arrears on the last Business Day of each calendar quarter and on the date upon which the Total Revolving Commitment is terminated. (c) The Borrower agrees to pay to the Administrative Agent a commitment commission (the "AF Commitment Commission") for the account of each AF Lender that is -13- a Non-Defaulting Lender for the period during which any Acquisition Commitments are outstanding, computed for each day at the rate per annum equal to the Applicable CC Percentage for such day on the unutilized Acquisition Commitment on such day of such Lender. Such AF Commitment Commission shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter and upon the date on which the Total Acquisition Commitment is terminated. (d) The Borrower shall pay to (x) each Agent on the Closing Date, for its own account and/or for distribution to the Lenders, such fees as heretofore agreed by the Borrower and the Agents, (y) the Administrative Agent, for its own account, such other fees as agreed to between the Borrower and the Administrative Agent, when and as due and (z) CoBank, for its own account, on the Closing Date, such fees as heretofore agreed by the Borrower and CoBank. (e) All computations of Fees shall be made in accordance with Section 11.07(b). 2.02 Voluntary Reduction of Commitments. (a) Upon at least one ---------------------------------- Business Day's prior written notice (or telephonic notice confirmed in writing) to the Administrative Agent at its Notice Office (which notice shall be deemed to be given on a certain day only if given before 2:00 P.M. (New York time) on such day and shall be promptly transmitted by the Administrative Agent to each of the Lenders), the Borrower shall have the right, without premium or penalty, to reduce, in whole or in part, the unutilized Total Revolving Commitment or unutilized Total Acquisition Commitment, as the case may be, provided that (w) any such partial reduction shall apply to proportionately and permanently reduce the Revolving Commitment or Acquisition Commitment, as the case may be, of each Lender with such a Commitment, (x) no such reduction shall reduce any Non- Defaulting Lender's Revolving Commitment or Acquisition Commitment, as the case may be, in an amount greater than the then unutilized Revolving Commitment or Acquisition Commitment, as the case may be, of such Lender, (y) any reduction of the Total Revolving Commitment or Total Acquisition Commitment, as the case may be, pursuant to this Section 2.02(a) shall reduce the then remaining Scheduled Reductions applicable thereto pro rata and (z) any partial reduction pursuant to --- ---- this Section 2.02 shall be in the amount of at least $1,000,000. (b) At any time after the Closing Date and prior to the B Termination Date upon at least one Business Day's prior written notice (or telephone notice promptly confirmed in writing) to the Administrative Agent at its Notice Office (which notice the Administrative Agent shall promptly transmit to each of the Lenders), the Borrower shall have the right, without premium or penalty, to reduce, in whole or in part, the remaining Total B Term Commitment. The amount of any reduction of the Total B Term Commitment effected -14- pursuant to this Section 2.02(b) and/or Section 2.03(b)(ii), (iii) and/or (iv) shall be applied to reduce pro rata the remaining Scheduled --- ---- Repayments of B Term Loans. 2.03 Mandatory Adjustments of Commitments, etc. (a) The Total ------------------------------------------ Commitment (and the Commitment of each Lender) shall terminate in its entirety on the Expiration Date unless the Closing Date has occurred on or before such date. (b) The Total B Term Commitment shall (i) be reduced on the date any B Term Loans are incurred in an amount equal to the aggregate principal amount of B Term Loans so incurred, (ii) terminate in its entirety (to the extent not theretofore terminated) at 5:00 P.M. (New York time) on the B Termination Date, whether or not any B Term Loans are incurred on such date, (iii) until terminated in full, be reduced on each day on which Term Loans, if still outstanding, would be required to be repaid pursuant to Sections 3.02(A)(c), (e) and (f) by the amount, if any, by which the amount required to be applied pursuant to said Sections to repay B Term Loans (determined as if an unlimited amount of Term Loans were actually outstanding) exceeds the aggregate principal amount of B Term Loans being repaid, (iv) terminate in its entirety (to the extent not theretofore terminated) on the date of the initial issuance of any Permitted Subordinated Debt, (v) terminate in its entirety on the day on which a Change of Control occurs and (vi) be increased after any B Term Loans have been mandatorily repaid pursuant to Section 3.02 or the Total B Term Loan Commitment has been reduced pursuant to clause (iii) or (iv) above in the aggregate amount of such repayment and/or reduction to the extent new B Term Commitments are provided pursuant to a B Term Commitment Renewal. (c) The Total C Term Commitment shall terminate in its entirety on the Closing Date (after giving effect to the making of C Term Loans-Floating Rate on such date). (d) The Total Revolving Commitment shall be reduced on June 30, 2001 and on each successive three-month anniversary of such date in an aggregate amount equal to 1/13th of Total Revolving Commitment outstanding on June 30, 2001 (each such reduction, together with each reduction of the Total Acquisition Commitment required by Section 2.03(e), as the same may be reduced as provided in Section 2.02 and, in the case of the Total Acquisition Commitment, Section 2.03(f), a "Scheduled Reduction"). (e) The Total Acquisition Commitment shall be reduced on each of March 31, 2002 and each successive three-month anniversary of such date in an aggregate amount equal to 1/10th of the Total Acquisition Commitment outstanding on March 31, 2002. (f) The Total Revolving Commitment and Total Acquisition Commitment (to the extent outstanding) shall each be reduced on each date on which (x) no Term Loans or Term Commitments are outstanding (after giving effect to the application on or prior to such -15- date of the provisions of Sections 3.02(A) and 2.03(b)) and (y) Term Loans, if still outstanding, would be required to be repaid pursuant to Sections 3.02(A)(c), (d), (e), (f) or (g) by the amount, if any, by which the amount required to be applied pursuant to said Sections as a result of the events described therein (determined as if an unlimited amount of Term Loans were actually outstanding) exceeds the aggregate principal amount of Term Loans being repaid and the B Term Commitments being reduced as a result of such events, with any commitment reduction pursuant to this Section 2.03(f) to apply pro rata --- ---- between the Total Revolving Commitment and the Total Acquisition Commitment. (g) Each of the Total Revolving Commitment and the Total Acquisition Commitment shall terminate in its entirety on the earlier of (x) the AF/RF Maturity Date and (y) the date on which a Change of Control occurs. (h) Each partial reduction of the Commitments under a Facility pursuant to this Section 2.03 shall apply proportionately to the Commitment under such Facility of each Lender. SECTION 3. Payments. -------- 3.01 Voluntary Prepayments. The Borrower shall have the right to --------------------- prepay Loans (other than C Term Loans-Fixed Rate, with any prepayment in respect thereof to be as set forth in the C Term Notes-Fixed Rate) in whole or in part, without premium or penalty, from time to time on the following terms and conditions: (i) the Borrower shall give the Administrative Agent at the Payment Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay the Loans, whether such Loans are B Term Loans, C Term Loans-Floating Rate, RF Loans or AF Loans, the amount of such pre payment and (in the case of Eurodollar Loans) the specific Borrowing(s) pursuant to which made, which notice shall be given by the Borrower prior to 12:00 Noon (New York time) on the Business Day prior to the date of such prepayment, and which notice shall promptly be transmitted by the Administrative Agent to each of the Lenders; (ii) each partial prepayment of any Borrowing shall be in an aggregate principal amount of at least $1,000,000, provided that no partial prepayment of Eurodollar Loans made pursuant to a Borrowing shall reduce the aggregate principal amount of the Loans outstanding pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount applicable thereto; (iii) each prepayment in respect of any Loans made pursuant to a Borrowing shall be applied pro rata among such Loans provided that at the Borrower's election in connection - --- ---- with any prepayment of RF Loans or AF Loans pursuant to this Section 3.01, such prepayment shall not be applied to any RF Loans or AF Loans, as the case may be, of a Defaulting Lender; and (iv) each prepayment of Term Loans pursuant to this Section 3.01 shall be applied to B Term Loans (in an amount equal to the B TF Percentage of such prepayment) and C Term Loans (in an amount equal to the C TF Percentage of such prepayment) and shall reduce the remaining -16- Scheduled Repayments of each of the B Term Loans and the C Term Loans (x) first, in direct order of maturity to those Scheduled Repayments which will be due and payable within twelve months after the date of the respective payment and (y) second, to the extent in excess thereof, on a pro rata basis (based upon the --- ---- then remaining principal amount of each such Scheduled Repayment). 3.02 Mandatory Prepayments. --------------------- (A) Requirements: ------------ (a) (i) If on any date (and after giving effect to all other repayments on such date) the aggregate outstanding principal amount of RF Loans made by Non-Defaulting Lenders exceeds the Adjusted Total Revolving Commitment as then in effect, the Borrower shall repay on such date the principal of outstanding RF Loans of Non-Defaulting Lenders in an aggregate amount equal to such excess. (ii) If on any date (and after giving effect to all other repayments on such date) the aggregate outstanding principal amount of AF Loans made by Non-Defaulting Lenders exceeds the Adjusted Total Acquisition Commitment then in effect, the Borrower shall repay on such date the principal of outstanding AF Loans of Non-Defaulting Lenders in an aggregate amount equal to such excess. (iii) If on any date prior to the first anniversary of the Closing Date the Borrower issues Permitted Subordinated Debt at any time that the Senior Leverage Ratio exceeds 4.0 to 1.0, the proceeds (net of underwriting discounts and commissions, private placement and/or initial purchaser fees and other reasonable fees and expenses associated therewith) of such issuance shall be applied as a mandatory repayment of RF Loans (to the extent outstanding) to the extent necessary to reduce the Senior Leverage Ratio to 4.0 to 1.0. (b) (i) On each date set forth below, the Borrower shall repay the principal amount of B Term Loans set forth opposite such date (each such repayment, together with each repayment of C Term Loans required by clause (b)(ii) below, as the same may be reduced as provided in Sections 2.02(b) and 3.02(B), a "Scheduled Repayment"):
Date Amount ---- ------ June 30, 1998 $ 387,500 September 30, 1998 $ 387,500 December 31, 1998 $ 387,500 March 31, 1999 $ 387,500
-17- June 30, 1999 $ 387,500 September 30, 1999 $ 387,500 December 31, 1999 $ 387,500 March 31, 2000 $ 387,500 June 30, 2000 $ 387,500 September 30, 2000 $ 387,500 December 31, 2000 $ 387,500 March 31, 2001 $ 387,500 June 30, 2001 $ 387,500 September 30, 2001 $ 387,500 December 31, 2001 $ 387,500 March 31, 2002 $ 387,500 June 30, 2002 $ 387,500 September 30, 2002 $ 387,500 December 31, 2002 $ 387,500 March 31, 2003 $ 387,500 June 30, 2003 $ 387,500 September 30, 2003 $ 387,500 December 31, 2003 $ 387,500 March 31, 2004 $ 387,500 June 30, 2004 $ 387,500 September 30, 2004 $ 387,500 December 31, 2004 $24,154,167 March 31, 2005 $24,154,167 June 30, 2005 $24,154,167 September 30, 2005 $24,154,167 December 31, 2005 $24,154,167 B Maturity Date $24,154,167
, provided that any increase in the Total B Term Commitment pursuant to a B Term Commitment Renewal shall be applied pro rata to increase the then remaining --- ---- Scheduled Repayments set forth above. -18- (ii) On each date set forth below, the Borrower shall repay the principal amount of C Term Loans-Floating Rate and C Term Loans-Fixed Rate, respectively, set forth opposite such date:
Floating Rate Fixed Rate Date Amount Amount ---- ------ ------ April 1, 1998 $ 0 $ 313,567 June 30, 1998 $ 58,734 $ 301,638 September 30, 1998 $ 58,734 $ 307,321 December 31, 1998 $ 58,734 $ 330,617 March 31, 1999 $ 58,734 $ 336,530 June 30, 1999 $ 58,734 $ 342,560 September 30, 1999 $ 58,734 $ 348,712 December 31, 1999 $ 58,734 $ 363,736 March 31, 2000 $ 58,734 $ 370,135 June 30, 2000 $ 58,734 $ 376,663 September 30, 2000 $ 58,734 $ 383,321 December 31, 2000 $ 58,734 $ 402,613 March 31, 2001 $ 58,734 $ 409,540 June 30, 2001 $ 58,734 $ 416,606 September 30, 2001 $ 58,734 $ 515,704 December 31, 2001 $ 58,734 $ 529,893 March 31, 2002 $ 58,734 $ 539,266 June 30, 2002 $ 58,734 $ 548,826 September 30, 2002 $ 58,734 $ 521,965 December 31, 2002 $ 58,734 $ 531,665 March 31, 2003 $ 58,734 $ 541,567 June 30, 2003 $ 58,734 $ 551,674 September 30, 2003 $ 58,734 $ 561,990 December 31, 2003 $ 58,734 $ 572,520 March 31, 2004 $ 58,734 $ 583,267 June 30, 2004 $ 58,734 $ 594,237 September 30, 2004 $ 58,734 $ 49,807 December 31, 2004 $ 58,734 $ 49,807 March 31, 2005 $ 58,734 $ 49,807
-19- June 30, 2005 $2,731,131 $4,970,106 September 30, 2005 $2,731,131 $4,970,106 December 31, 2005 $2,731,131 $4,970,106 March 31, 2006 $2,731,131 $4,970,106 June 30, 2006 $2,731,131 $4,970,106 September 30, 2006 $2,731,131 $4,970,106 December 31, 2006 $2,731,131 $4,970,106 C Maturity Date $2,731,131 $4,970,106
(c) On the fifth Business Day following the date of receipt thereof by the Borrower and/or any of its Subsidiaries of the Net Cash Proceeds from any Asset Sale, an amount equal to 100% of the Net Cash Proceeds from such Asset Sale shall be applied as a mandatory repayment of principal of the then outstanding Term Loans and if no Term Loans are then outstanding, to the RF Loans and the AF Loans, pro rata, among such Loans, provided that up to 100% of --- ---- -------- the Net Cash Proceeds from Asset Sales shall not be required to be used to so repay Loans to the extent the Borrower elects, as hereinafter provided, to cause such Net Cash Proceeds to be used within 180 days to finance an Acquisition or Acquisitions or Permitted Acquisitions (a "Reinvestment Election"). The Borrower may exercise its Reinvestment Election with respect to an Asset Sale if (x) no Default or Event of Default exists and (y) the Borrower delivers a Reinvestment Notice to the Administrative Agent no later than five Business Days following the date of the consummation of the respective Asset Sale, with such Reinvestment Election being effective with respect to the Net Cash Proceeds of such Asset Sale equal to the Anticipated Reinvestment Amount specified in such Reinvestment Notice. (d) On the Business Day following the receipt thereof by the Borrower, if at the time of such receipt the Senior Leverage Ratio exceeds 4.0 to 1.0, an amount equal to 100% of the proceeds (net of underwriting discounts and commissions, private placement and/or initial purchaser fees and other reasonable fees and expenses associated therewith and of any repayment of RF Loans required by Section 3.02(A)(a)(iii)) from the issuance of Permitted Subordinated Debt by the Borrower shall be applied as a mandatory repayment of principal of the then outstanding Term Loans to the extent necessary to reduce the Senior Leverage Ratio to 4.0 to 1.0, provided that if any such Permitted Subordinated Debt is issued prior to the consummation of the Ellensberg Acquisition, then up to $74.0 million of such proceeds that, pursuant to Section 3.02(B)(a), would be required to be used to repay Term Loans shall not be required to be so applied to the extent that the Borrower elects, as hereinafter provided, to cause such proceeds to be used within 45 days to finance the Ellensberg Acquisition or to effect the Permitted PSD Repurchase (a "Special PSD Election"). The Borrower may exercise its Special PSD Election if it delivers a Special PSD -20- Notice to the Administrative Agent not later than one Business Day following the date of any issuance of Permitted Subordinated Debt. (e) On the date of the receipt thereof by the Borrower, if at the time of such receipt the Senior Leverage Ratio exceeds 4.0 to 1.0, an amount equal to 100% of the proceeds (net of underwriting discounts and commissions, private placement and/or initial purchaser fees and other reasonable fees and expenses associated therewith) of any sale or issuance of its equity or of any equity contribution (other than equity issued to management and other employees of the Borrower and its Subsidiaries) shall be applied as a mandatory repayment of principal of the then outstanding Term Loans to the extent necessary to reduce the Senior Leverage Ratio to 4.0 to 1.0. (f) On the Reinvestment Prepayment Date with respect to a Reinvestment Election, an amount equal to the Reinvestment Prepayment Amount, if any, for such Reinvestment Election shall be applied as a repayment of the principal amount of the then outstanding Term Loans. (g) On the date occurring 45 days after the date of a Special PSD Election, an amount equal to the related Special PSD Prepayment Amount, if any, shall be applied as a repayment of the principal amount of the then outstanding Term Loans. (h) To the extent not theretofore repaid pursuant to the provisions of this Agreement, (i) all outstanding RF Loans and AF Loans, respectively, shall be repaid in full upon the termination of the Total Revolving Commitment or the Total Acquisition Commitment, as the case may be, and (ii) all outstanding Term Loans shall be repaid in full on the date a Change in Control occurs. (B) Application: ----------- (a) Each mandatory repayment of Term Loans required to be made pursuant to Section 3.02(A) shall be applied (i) in the case of any mandatory repayment required pursuant to Section 3.02(A)(d) or (g), first, to the ----- outstanding B Term Loans, if any, in an amount equal to the lesser of the amount of such prepayment and the then outstanding principal amount of B Term Loans and, second, commencing on the first anniversary of the Closing Date, if the ------ amount of such repayment exceeds the then outstanding principal amount of B Term Loans, if any, to the outstanding C Term Loans, if any, (ii) in the case of any mandatory repayment required pursuant to Section 3.02(A)(c),(e) or (f), to the outstanding B Term Loans, if any, in an amount equal to the B TF Percentage of such prepayment and to the outstanding C Term Loans, if any, in an amount equal to the C TF Percentage of such prepayment and (iii) to reduce pro rata the then --- ---- remaining Scheduled Repayments of the respective Facility. -21- (b) With respect to each prepayment of Loans required by Section 3.02(A), (other than C Term Loans-Fixed Rate to the extent provided in the relevant C Term Note-Fixed Rate), the Borrower may designate the Types of Loans which are to be prepaid and the specific Borrowing(s) under the affected Facility pursuant to which made provided that (i) if any prepayment of -------- Eurodollar Loans made pursuant to a single Borrowing shall reduce the outstanding Loans made pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount for such Borrowing, such Borrowing shall be immediately converted into Base Rate Loans; (ii) each prepayment of any Loans under a Facility shall be applied pro rata among such Loans; and (iii) except for the --- ---- differing treatments of Defaulting Lenders and Non-Defaulting Lenders as expressly provided in Section 3.02(A)(a), each prepayment of any Eurodollar Loans made pursuant to a Borrowing shall be applied pro rata among such --- ---- Eurodollar Loans. In the absence of a designation by the Borrower as described in the preceding sentence, the Administrative Agent shall, subject to the above, make such designation in its sole discretion with a view, but no obligation, to minimize breakage costs owing under Section 1.11. 3.03 Method and Place of Payment. Except as otherwise specifically --------------------------- provided herein, all payments under this Agreement shall be made to the Administrative Agent for the ratable account of the Lenders entitled thereto, not later than 1:00 P.M. (New York time) on the date when due and shall be made in immediately available funds and in Dollars at the Payment Office, it being understood that written notice by the Borrower to the Administrative Agent to make a payment from the funds in the Borrower's account at the Payment Office shall constitute the making of such payment to the extent of such funds held in such account. Any payments under this Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. 3.04 Net Payments. (a) All payments made by the Borrower hereunder ------------ and/or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 3.04(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax imposed on or measured by the net income or net profits of a Lender pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Lender is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect to such non-excluded taxes, levies, -22- imposts, duties, fees, assessments or other charges (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement and/or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or therein. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each Lender, upon the written request of such Lender, for taxes imposed on or measured by the net income or net profits of such Lender pursuant to the laws of the jurisdiction in which such Lender is organized or in which the principal office or applicable lending office of such Lender is located or under the laws of any political subdivision or taxing authority of any such jurisdiction in which such Lender is organized or in which the principal office or applicable lending office of such Lender is located and for any withholding of taxes as such Lender shall determine are payable by, or withheld from, such Lender, in respect of such amounts so paid to or on behalf of such Lender pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Lender pursuant to this sentence. The Borrower will furnish to the Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Lender, and reimburse such Lender upon its written request, for the amount of any Taxes so levied or imposed and paid by such Lender. (b) Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes agrees to deliver to the Borrower and the Agent on or prior to the Effective Date, or in the case of a Lender that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.13 or 11.04 (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Lender, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit C (any such certificate, a "Section 3.04 Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W- 8 (or successor form) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Lender agrees that from time to time after the Effective Date, when a lapse of time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower and the -23- Administrative Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 3.04 Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or it shall immediately notify the Borrower and the Administrative Agent of its inability to deliver any such Form or Certificate, in which case such Lender shall not be required to deliver any such Form or Certificate pursuant to this Section 3.04(b). Notwithstanding anything to the contrary contained in Section 3.04(a), but subject to Section 11.04(b) and the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political sub division or taxing authority thereof or therein) from interest, Fees or other amounts payable by it hereunder for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Lender has not provided to the Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 3.04(a) hereof to gross-up payments to be made by it to a Lender in respect of income or similar taxes imposed by the United States if (I) such Lender has not provided to the Borrower the Internal Revenue Service Forms required to be provided to the Borrower pursuant to this Section 3.04(b) or (II) in the case of a payment, other than interest, to a Lender described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 3.04 and except as set forth in Section 11.04(b), the Borrower agrees to pay any additional amounts and to indemnify each Lender in the manner set forth in Section 3.04(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any Taxes deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of such Taxes. (c) If the Borrower pays any additional amount under this Section 3.04 to a Lender and such Lender determines in its sole discretion that it has actually received or realized in connection therewith any refund or any reduction of, or credit against, its Tax liabilities in or with respect to the taxable year in which the additional amount is paid, such Lender shall pay to the Borrower an amount that the Lender shall, in its sole discretion, determine is equal to the net benefit, after tax, which was obtained by the Lender in such year as a consequence of such refund, reduction or credit. -24- SECTION 4. Conditions Precedent. -------------------- 4.01 Conditions Precedent to Closing Date. The obligation of the ------------------------------------ Lenders to make Loans on the Closing Date is subject to the satisfaction of each of the following conditions at such time: (a) Effectiveness; Notes. (i) The Effective Date shall have occurred -------------------- and (ii) there shall have been delivered to the Administrative Agent for the account of each Lender the appropriate Note or Notes executed by the Borrower, in each case, in the amount, maturity and as otherwise provided herein. (b) Opinions of Counsel. The Administrative Agent shall have received ------------------- opinions, addressed to each Agent and each of the Lenders and dated the Closing Date, from (i) Paul, Hastings, Janofsky & Walker LLP (and/or other counsel reasonably acceptable to the Agents), special counsel to the Credit Parties, which opinion shall cover the matters contained in Exhibit D-1 hereto (except to the extent relating to any Acquisition not consummated on the Closing Date and to any Person not a Subsidiary on the Closing Date), and (ii) White & Case LLP, special counsel to the Agents, which opinion shall cover the matters contained in Exhibit D-2 hereto, which opinions shall be in form and substance reasonably satisfactory to the Agents. (c) Corporate Proceedings. (i) The Administrative Agent shall have --------------------- received a certificate, dated the Closing Date, signed by an Authorized Officer of the Borrower in the form of Exhibit E with appropriate insertions and deletions, together with (x) copies of the certificate of incorporation, by-laws or other organizational documents of each Credit Party and (y) the resolutions of each Credit Party referred to in such certificate and all of the foregoing (including each such certificate of incorporation and by-laws) shall be reasonably satisfactory to the Administrative Agent and (z) a statement that all of the applicable conditions set forth in Section 4.03 have been satisfied as of such date. (ii) On the Closing Date, all corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this Agreement and the other Credit Documents shall be reasonably satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received all information and copies of all certificates, documents and papers, including good standing certificates and any other records of corporate proceedings and governmental approvals (other than those set forth on Annex VIII), if any, which the Agents may have reasonably requested in connection therewith, such documents and papers, where appropriate, to be certified by proper corporate or governmental authorities. -25- (d) Plans; etc. On or prior to the Closing Date, there shall have ----------- been made available to the Administrative Agent: (i) all Plans (and for each Plan that is required to file an annual report on Internal Revenue Service Form 5500-series, a copy of the most recent such report (including, to the extent required, the related financial and actuarial statements and other supporting statements, certifications, schedules and information), and for each Plan that is a "single-employer plan," as defined in Section 4001(a)(15) of ERISA, the most recently prepared actuarial valuation therefor) and any other "employee benefit plans," as defined in Section 3(3) of ERISA, and any other material agreements, plans or arrangements, with or for the benefit of current or former employees of the Borrower or any of its Subsidiaries or any ERISA Affiliate (provided that the foregoing shall apply in the case of any multiemployer plan, as defined in 4001(a)(3) of ERISA, only to the extent that any document described therein is in the possession of the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate or reasonably available thereto from the sponsor or trustee of any such plan); (ii) any collective bargaining agreements or any other similar agreement or arrangements covering the employment arrangements of the employees of the Borrower or any of its Subsidiaries; (iii) all agreements entered into by the Borrower or any Subsidiary governing the terms and relative rights of its capital stock; (iv) any material agreement with respect to the management of the Borrower or any of its Subsidiaries; (v) any material employment agreements entered into by the Borrower or any of its Subsidiaries; and (vi) any tax sharing, tax allocation and other similar agreements entered into by the Borrower and/or any of its Subsidiaries with any entity not a Credit Party; with all of the foregoing to be reasonably satisfactory to the Administrative Agent. (e) Adverse Change, etc. Since February 18, 1998, nothing shall have ------------------- occurred, and neither Agent shall have first become aware of any facts or conditions not previously known, in each case which either Agent shall reasonably determine (a) has had, or is reasonably likely to have, a material adverse effect on the rights or remedies of the Lenders or the Agents hereunder or under any other Credit Document, or on the ability of the Credit -26- Parties taken as a whole to perform their obligations under the Credit Documents or (b) has had or is reasonably likely to have a Material Adverse Effect. (f) Litigation. There shall be no actions, suits or proceedings ---------- pending or, to the knowledge of the Borrower, threatened (a) with respect to this Agreement or any other Credit Document or (b) which either Agent shall reasonably determine has had or is reasonably likely to have (i) a Material Adverse Effect or (ii) a material adverse effect on the rights or remedies of the Lenders or the Agents hereunder or under any other Credit Document or on the ability of the Credit Parties taken as a whole to perform their obligations under the Credit Documents. (g) Approvals. All necessary material governmental and third --------- party approvals (other than those set forth on Annex VIII) in connection with the Credit Documents (including, without limitation, all necessary material approvals required by the FCC and the applicable PUCs) shall have been obtained and remain in effect. (h) Subsidiary Guaranty. Each Intermediary Holding Company that ------------------- is a Subsidiary on the Closing Date shall have duly authorized, executed and delivered a Subsidiary Guaranty in the form of Exhibit F hereto (as modified, amended, amended and restated or supplemented from time to time in accordance with the terms hereof and thereof, the "Subsidiary Guaranty"), and the Subsidiary Guaranty shall be in full force and effect. (i) Pledge Agreement. The Borrower and each Parent Company that ---------------- is a Subsidiary on the Closing Date shall have each duly authorized, executed and delivered a Pledge Agreement in the form of Exhibit G (as modified, amended, amended and restated or supplemented from time to time in accordance with the terms thereof and hereof, the "Pledge Agreement") and shall have delivered to the Collateral Agent, as pledgee thereunder, all of the certificates representing the Pledged Securities owned by such Persons, endorsed in blank or accompanied by executed and undated stock powers, and the Pledge Agreement shall be in full force and effect. (j) Solvency. The Borrower shall have delivered to the -------- Administrative Agent, a solvency certificate, dated the Closing Date and in the form of Exhibit H hereto. (k) Capital Contribution Agreement. The Specified Shareholders ------------------------------ shall have duly authorized, executed and delivered an agreement (the "Capital Contribution Agreement") in the form of Exhibit I hereto and such Capital Contribution Agreement shall be in full force and effect. -27- (l) Consent Letter. The Administrative Agent shall have received -------------- a letter from CT Corporation System, substantially in the form of Exhibit J hereto, indicating its consent to its appointment by each Credit Party as its agent to receive service of process. (m) Refinancing. On the Closing Date and concurrently with the ----------- incurrence of Loans on such date, (x) the Indebtedness to be Refinanced (other than the CoBank Continuing Loans converted pursuant to Section 1.01(b)(B)) shall have been repaid in full, together with interest thereon, (y) the CoBank Continuing Loans shall have been converted into C Term Loans-Fixed Rate pursuant to Section 1.01(b)(B) and (z) the creditors under the Indebtedness to be Refinanced shall have terminated and released all security interests in and Liens on the capital stock of and/or assets owned by the Borrower or any of its Subsidiaries, and the Administrative Agent shall have received evidence (including releases) in form, scope and substance satisfactory to it that the matters set forth in this Section 4.01(m) have been satisfied at such time. (n) Fees. The Borrower shall have paid to the Agents and the ---- Lenders all Fees and expenses agreed upon by such parties to be paid on or prior to the Closing Date (for which, in the case of legal fees and expenses, the Borrower shall have received in advance a written invoice in reasonable detail). 4.02 Conditions Precedent to Term Loans and RF Loans. The ----------------------------------------------- obligation of the Lenders to make Term Loans and/or RF Loans on any date (including on the Closing Date) to finance an Acquisition is subject, at the time of such incurrence of such Loans, to the satisfaction of the following conditions: (a) Consummation of the Acquisition, etc. The Acquisition being ------------------------------------- financed with the proceeds of such Term Loans and/or RF Loans (x) shall have received all requisite board of directors and shareholder approval and (y) shall have been consummated in accordance with the Acquisition Documents relating to such Acquisition (the "Applicable Acquisition Documents") and all applicable laws, and the Administrative Agent shall have received true and correct copies of each of the Applicable Acquisition Documents, certified as such by an Authorized Officer of the Borrower, each of which shall have been duly authorized, executed and delivered by the parties thereto and shall be in full force and effect and in form and substance reasonably satisfactory to the Agents (it being agreed that the Acquisition Documents relating to the Ellensburg Acquisition and the Taconic Acquisition in the form delivered to the Agents prior to the Effective Date are satisfactory to the Agents except as modified by schedules subsequently delivered and that any increase in the purchase price under the Acquisition Documents relating to the Ellensburg Acquisition unspecified in amount shall, to the extent in excess of $5 million, be satisfactory to the Agents). On or prior to such time, all conditions precedent set forth in the Applicable Acquisition Documents shall have been satisfied, or waived or consented to with the consent of the Agents, not to be unreasonably withheld (with all conditions stated to require the approval or satisfaction -28- of, or to be acceptable to, the Borrower and/or any Subsidiary to require the approval or satisfaction of, or to be acceptable to, the Agents, not be unreasonably withheld) and all applicable waiting periods with respect thereto have expired without, in all such cases, any action being taken by any competent authority which imposes material adverse conditions upon the consummation of such Acquisition. (b) Capital Contributions. If the Acquisition being financed is --------------------- the Ellensburg Acquisition or the Taconic Acquisition, the Borrower shall have received at the time of the consummation of such Acquisition additional cash common equity investments from the Borrower's shareholders aggregating (without duplication) $15.0 million in the case of the Ellensburg Acquisition and/or $16.3 million in the case of the Taconic Acquisition, as the case may be. (c) Opinions. The Administrative Agent shall have received an -------- opinion or opinions, addressed to each Agent and each Lender, and dated the date of such Loans, from Paul, Hastings, Janofsky & Walker LLP (and/or other counsel reasonably acceptable to the Agents) covering the matters contained in Exhibit D-1 relating to the Acquisition being financed and the Persons becoming Credit Parties as a result thereof, which opinion shall be in form and substance reasonably satisfactory to the Agents. (d) Corporate Proceedings. The Administrative Agent shall have --------------------- received a certificate dated the date of such Loans, signed by an Authorized Officer of the Borrower in the form of Exhibit E hereto (but only to the extent relating to the Acquisition being financed and the new Credit Parties resulting from such Acquisition), together with all organizational documents and resolutions referred to therein, and all the foregoing shall be reasonably satisfactory to the Agents, (y) all the documentation specified in Section 4.01(d) to the extent relating to such new Credit Parties shall have been made available to the Administrative Agent and (z) each of such new Credit Parties shall have duly authorized, executed and delivered (i) a counterpart of the Subsidiary Guaranty (if an Intermediary Holding Company) and/or (ii) a counterpart of the Pledge Agreement (if a Parent Company) and, in such case, shall have delivered to the Collateral Agent, as pledgee thereunder, all of the certificates representing the Pledged Securities owned by such new Credit Parties, endorsed in blank or accompanied by executed and undated stock powers. (e) Litigation. There shall be no material actions, suits or ---------- proceedings pending or, to the knowledge of the Borrower, threatened (a) with respect to the Acquisition being financed or (b) which either Agent shall reasonably determine has had or is reasonably likely to have a Material Adverse Effect. (f) Audits and Financial Statements for Certain Acquisitions. (i) -------------------------------------------------------- If the Acquisition being financed is the El Paso Acquisition or the Chouteau Acquisition, each of the Lenders shall have received an audit of the financial statements referred to in -29- Section 5.10(b)(iii) or (iv), as the case may be, prepared by Kiesling Associates LLP (in the case of the financial statements of El Paso) and Sartain, Fischbein & Company (in the case of the financial statements of Chouteau), which accounting firm shall have delivered an unqualified opinion in respect thereof. (ii) If the Acquisition being financed is the UI Acquisition, each of the Lenders shall have received the consolidated balance sheet of UI as at December 31, 1997 and the related consolidated statements of operations and cash flows for the period ended as of said date, audited by an independent accounting firm reasonably acceptable to the Agents, who shall have delivered an unqualified opinion in respect thereof, which statements shall have been prepared in accordance with GAAP and practices consistently applied, except to the extent, if any, provided in the notes thereto and shall present fairly the consolidated financial position of UI at the date thereof and the results for the period covered thereby in accordance with GAAP, except to the extent, if any, provided in the notes thereto. (g) Refinancing. (i) Except to the extent such security interets ----------- and Liens are otherwise permitted by Section 7.03, the creditors of the Acquired Company or Companies to be acquired with the proceeds of such Loans shall have terminated and released all security interests in and Liens on the capital stock and/or assets owned by such Acquired Company or Companies to the satisfaction of the Administrative Agent, (ii) the Administrative Agent shall have received evidence (including releases) in form, scope and substance satisfactory in that the matters set forth in clause (i) above have been satisfied at such time and (iii) except in the case of any Acquisition consummated on the Closing Date, the Borrower shall have delivered to the Administrative Agent a revised Annex V, modified to include Liens on the assets of such Acquired Companies that are to remain outstanding, that is satisfactory to the Administrative Agent. 4.03 Conditions Precedent to All Loans. The obligation of each --------------------------------- Lender to make Loans (including Loans made on the Closing Date) is subject, at the time of the making of each such Loan, to the satisfaction of the following conditions: (a) Notice of Borrowing. The Administrative Agent shall have ------------------- received a Notice of Borrowing meeting the requirements of Section 1.03. (b) No Default; Representations and Warranties. At the time of ------------------------------------------ each making of Loans and also after giving effect thereto, (i) there shall exist no Default or Event of Default and (ii) all representations and warranties made by any Credit Party contained herein or in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of such Loans, except to the extent that such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date. -30- (c) Senior Leverage Ratio. No Loans may be made at any time when --------------------- the Senior Leverage Ratio is above 4.0 to 1.0 except for the incurrence of (i) Loans to finance the Specified Purposes, (ii) RF Loans in an aggregate outstanding amount not to exceed $30 million to be used solely to finance working capital purposes and (iii) RF Loans in an aggregate amount at the time of the incurrence thereof equal to an Interim Prepayment Amount outstanding at such time to the extent such RF Loans are used to fund an Acquisition or a Permitted Acquisition effected pursuant to the Reinvestment Election that created such Interim Prepayment Amount and/or to repay Term Loans as required on the Reinvestment Prepayment Date with respect to such Reinvestment Election. The acceptance of the benefits of each Loan shall constitute a representation and warranty by the Borrower that all of the applicable conditions specified in Section 4.01 (in the case of Loans on the Closing Date), 4.02 (in the case of Term Loans and/or RF Loans incurred to finance Acquisitions) and/or 4.03 (in the case of all Loans), as the case may be, have been satisfied as of that time. All of the certificates, legal opinions and other documents and papers referred to in Sections 4.01 and 4.02, unless otherwise specified, shall be delivered to the Administrative Agent for the benefit of each of the Lenders and, except for the Notes, in sufficient counterparts for each of the Lenders and shall be reasonably satisfactory in form and substance to the Agents. SECTION 5. Representations, Warranties and Agreements. In order ------------------------------------------ to induce the Lenders to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties to, and agreements with, the Lenders, all of which shall survive the execution and delivery of this Agreement and the making of the Loans: 5.01 Corporate Status. Each of the Borrower and its Subsidiaries ---------------- (i) is a duly organized and validly existing corporation and is in good standing, in each case under the laws of the jurisdiction of its organization and has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and (ii) is duly qualified and is authorized to do business and, to the extent relevant, is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified, authorized or in good standing is reasonably likely to have a Material Adverse Effect. 5.02 Corporate Power and Authority. Each Credit Party has the ----------------------------- corporate power and authority to execute, deliver and carry out the terms and provisions of the Credit Documents to which it is a party and has taken all necessary action to authorize the execution, delivery and performance of the Credit Documents to which it is a party. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Person enforceable in accordance with its terms, except to the extent that the enforceability thereof -31- may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally and general equitable principles (regardless of whether enforcement is sought in equity or at law). 5.03 No Violation. Neither the execution, delivery or performance ------------ by any Credit Party of the Credit Documents to which it is a party nor compliance with the terms and provisions thereof, (i) will contravene any applicable provision of any law, statute, rule, regulation, order, writ, injunction or decree of any court or governmental instrumentality, (ii) will (after giving effect to the Refinancing) conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Pledge Agreement) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust or other material agreement or instrument to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject or (iii) will violate any provision of the organizational documents (including by-laws) of the Borrower or any of its Subsidiaries. 5.04 Litigation. There are no actions, suits or proceedings ---------- pending or, to the knowledge of the Borrower, threatened with respect to the Borrower or any of its Subsidiaries (i) that have had, or that are reasonably likely to have, a Material Adverse Effect or (ii) that have, or that are reasonably likely to have had, a material adverse effect on the rights or remedies of the Lenders or on the ability of the Credit Parties taken as a whole to perform their obligations under the Credit Documents. 5.05 Use of Proceeds; Margin Regulations. (a) The proceeds of ----------------------------------- all Term Loans shall be utilized to finance the Acquisitions, to effect the Refinancing, to retire Existing Warrants, to repurchase outstanding shares of preferred stock of the Borrower having an aggregate liquidation preference of $130,164 for an aggregate purchase price equal to such liquidation preference plus accrued dividends of $12,131 (the "Preferred Repurchase") and to pay certain fees and expenses relating to the Transaction (all of the foregoing, collectively, the "Specified Purposes"). (b) (i) The proceeds of RF Loans may be used for working capital and capital expenditure requirements (including to finance Permitted CLEC Expenditures), to effect the Preferred Repurchase and to retire Existing Warrants and, on and after the B Utilization Date, to finance Acquisitions and Permitted Acquisitions. (c) The proceeds of AF Loans may only be used (x) to finance capital expenditure requirements and Permitted Acquisitions and/or (y) to repay RF Loans to the extent that the proceeds of such RF Loans had been used to finance capital expenditure requirements and/or Permitted Acquisitions. -32- (d) Neither the making of any Loan hereunder, nor the use of the proceeds thereof, will violate the provisions of Regulation G, T, U or X of the Board of Governors of the Federal Reserve System and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock, provided that proceeds of AF Loans may be utilized to purchase Margin Stock if (A) such purchase (x) is pursuant to a Permitted Acquisition of the Person issuing such Margin Stock and (y) is effected pursuant to a friendly transaction (as determined by the Agents) not in violation of such Regulations G, T, U or X and (B) at no time shall the market value of all Margin Stock held by the Borrower and its Subsidiaries exceed 25% of the consolidated total assets of the Borrower subject to Sections 7.02 and 7.03. 5.06 Governmental Approvals. Except for (x) such approvals set ---------------------- forth on Annex VIII as have not been obtained and (y) such consents, approvals and filings as have been obtained or made on or prior to the Closing Date and remain in full force and effect, no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority (including, without limitation, the FCC and applicable PUCs), or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. 5.07 Investment Company Act. Neither the Borrower nor any of its ---------------------- Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 5.08 Public Utility Holding Company Act. Neither the Borrower nor ---------------------------------- any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 5.09 True and Complete Disclosure. All factual information (taken ---------------------------- as a whole) heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Agents for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of any Credit Party in writing to the Lenders hereunder will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. The projections and pro --- forma financial information contained in such materials are based on good faith - ----- estimates and assumptions believed by the Borrower to be reasonable at the time made (it being recognized by the Lenders that such -33- projections as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results and that such assumptions and estimates may prove to be inaccurate). 5.10 Financial Condition; Financial Statements. (a) On and as of ----------------------------------------- the Closing Date, on a pro forma basis after giving effect to the Transaction --- ----- (determined as if each Acquisition (other than the UI Acquisition) was consummated on the Closing Date) and all Indebtedness incurred, and to be incurred (including, without limitation, the Loans and the application of the proceeds thereof), and Liens created, and to be created, by each Credit Party in connection therewith, (x) the fair valuation of all of the tangible and intangible assets of the Borrower and its Subsidiaries (on a consolidated basis) will exceed their debts, (y) the Borrower and its Subsidiaries will not have incurred or intended to incur debts beyond their ability to pay such debts as such debts mature and (z) the Borrower and its Subsidiaries will not have unreason ably small capital with which to conduct their business. For purposes of this Section 6.10, "debt" means any liability on a claim, and "claim" means (i) the right to payment whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured; or (ii) the right to an equitable remedy for breach of performance if such breach gives rise to a payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. (b) (i) The consolidated balance sheet of Ellensburg as at December 31, 1997 and the related consolidated statements of operations and cash flows for the period ended as of said date, which have been audited by Moss- Adams LLP, who delivered an unqualified opinion in respect thereof, (ii) the consolidated balance sheet of Taconic as at December 31, 1997 and the related consolidated statements of operations and cash flows for the period ended as of said date, which have been audited by KPMG Peat Marwick LLP, who delivered an unqualified opinion in respect thereof, (iii) the consolidated balance sheet of El Paso as at December 31, 1997 and the related consolidated statements of operations and cash flows for the period ended as of said date, and (iv) the consolidated balance sheet of Chouteau as at December 31, 1997 and the related consolidated statements of operations and cash flows for the period ended as of said date, copies of all of which have heretofore been furnished to each Lender, present fairly the consolidated financial position of the respective Acquired Companies at the dates of said statements and the results for the periods covered thereby in accordance with GAAP, except to the extent provided in the notes to said financial statements. All such financial statements have been prepared in accordance with GAAP and practices consistently applied except to the extent provided in the notes to said financial statements. The pro forma --- ----- consolidated balance sheet of the Borrower as of December 31, 1997, a copy of which has heretofore been furnished to each Lender, presents a good faith estimate of the consolidated pro forma financial condition of the Borrower --- ----- (after giving effect to the Transaction, including the consummation of each Acquisition (other than the UI Acquisition) -34- and all Indebtedness incurred or to be incurred in connection therewith) as at the date thereof. Nothing has occurred since December 31, 1997 that has had or is reasonably likely to have a Material Adverse Effect. (c) Except as reflected in the financial statements described in Section 5.10(b) or in the footnotes thereto, there were as of the Closing Date no liabilities or obligations with respect to the Borrower or any of its Subsidiaries (or any of the Acquired Companies) of a nature (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, is reasonably likely to be material to the Borrower and its Subsidiaries (after giving effect to each Acquisition other than the UI Acquisition) taken as a whole, except as incurred in the ordinary course of business consistent with past practices. 5.11 Security Interests. At any time on or after the Closing ------------------ Date, the Pledge Agreement creates, as security for the obligations purported to be secured thereby, a valid and enforceable Lien on all of the Collateral subject thereto at such time, at such time superior to and prior to the rights of all third Persons and subject to no other Liens (except for Liens permitted under Section 7.03(a)), in favor of the Collateral Agent for the benefit of the Secured Creditors, which Lien has been perfected under applicable law. No filings or recordings are required in order to perfect, or continue the perfection of, the Lien on the Pledged Securities created under the Pledge Agreement, except for filings or recordings required in connection with the Pledge Agreement which shall have been made on or prior to the Closing Date or as otherwise required in accordance with the terms of the Pledge Agreement. 5.12 Acquisitions. All representations and warranties by the ------------ Borrower or any Subsidiary thereof formed to effect any Acquisition set forth in the Acquisition Documents relating to Acquisitions that have been consummated and, to the knowledge of the Borrower, all representations and warranties made by all other Persons in such Acquisition Documents, were true and correct in all material respects as of the time such representations and warranties were made and shall be true and correct in all material respects as of the date Term Loans and/or RF Loans are incurred to finance such Acquisition as if such representations and warranties were made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. 5.13 Tax Returns and Payments. Each of the Borrower and its ------------------------ Subsidiaries has filed all federal income tax returns and all other material tax returns, domestic and foreign, required to be filed by it and has paid all material taxes and assessments payable by it which have become due, except for those contested in good faith and adequately disclosed and fully provided for on the financial statements of the Borrower and its Subsidiaries if and to the extent required by GAAP. Each of the Borrower and its Subsi diaries has at all times paid, or has provided adequate reserves (in the good faith judgment of the management of -35- the Borrower) for the payment of, all federal, state and foreign income taxes applicable for all prior fiscal years which are still open for audit and for the current fiscal year to date. There is no action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of the Borrower, threatened by any authority regarding any taxes relating to the Borrower or any of its Subsidiaries which is reasonably likely to have a Material Adverse Effect. 5.14 Compliance with ERISA. (i) Annex IV sets forth each Plan and --------------------- Multiemployer Plan; (ii) except as set forth on Annex IV, each Plan (and each related trust, insurance contract or fund) is in substantial compliance with its terms and with all applicable laws, including without limitation ERISA and the Code; each Plan which is intended to be qualified under Section 401(a) of the Code has received a determination letter from the Internal Revenue Service to the effect that it meets the requirements of Section 401(a) of the Code; except as set forth on Annex IV, no Reportable Event has occurred with respect to a Plan; to the knowledge of the Borrower, no Multiemployer Plan is insolvent or in reorganization; except as set forth on Annex IV, no Plan has an Unfunded Current Liability which, when added to the aggregate amount of Unfunded Current Liabilities with respect to all other Plans, exceeds $750,000; no Plan which is subject to Section 412 of the Code or Section 302 of ERISA has an accumulated funding deficiency, within the meaning of such sections of the Code or ERISA, or has applied for or received a waiver of an accumulated funding deficiency or an extension of any amortization period, within the meaning of Section 412 of the Code or Section 303 or 304 of ERISA; all contributions required to be made with respect to a Plan or a Multiemployer Plan have been timely made; neither the Borrower nor any Subsidiary nor any ERISA Affiliate has incurred any material liability (including any indirect, contingent or secondary liability) to or on account of a Plan or a Multiemployer Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or reasonably expects to incur any such liability under any of the foregoing sections with respect to any Plan or any Multiemployer Plan; no condition exists which presents a material risk to the Borrower or any Subsidiary or any ERISA Affiliate of incurring a material liability to or on account of a Plan or, to the knowledge of the Borrower, of any Multiemployer Plan pursuant to the foregoing provisions of ERISA and the Code; no proceedings have been instituted to terminate or appoint a trustee to administer any Plan which is subject to Title IV of ERISA; except as would not result in any material liability, no action, suit, proceeding, hearing, audit or investigation with respect to the administration, operation or the investment of assets of any Plan (other than routine claims for benefits) is pending, or to the best knowledge of the Borrower expected or threatened; using actuarial assumptions and computation methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of the Borrower and its Subsidiaries and its ERISA Affiliates to all Multiemployer Plans in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the date of the most recent Loan incurrence, would not exceed $15,000; except as would not result in a material liability, each group health plan (as defined -36- in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has covered employees or former employees of the Borrower, any Subsidiary or any ERISA Affiliate has at all times been operated in compliance with the provisions of Part 6 of subtitle B of Title I of ERISA and Section 4980B of the Code; no lien imposed under the Code or ERISA on the assets of the Borrower or any Subsidiary or any ERISA Affiliate exists or is reasonably likely to arise on account of any Plan; and the Borrower and its Subsidiaries do not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan the obligations with respect to which could reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement. 5.15 Subsidiaries. On and as of the Closing Date and after giving ------------ effect to the consummation of the Acquisitions effected on such date, the Borrower has no Subsidiaries other than those Subsidiaries listed on Annex III, which correctly sets forth, as of the Closing Date and after giving effect to the consummation of the Acquisitions effected on such date, the percentage ownership (direct and indirect) of the Borrower in each class of capital stock of each of its Subsidiaries and also identifies the direct owner thereof. 5.16 Intellectual Property. Each of the Borrower and its --------------------- Subsidiaries owns or holds a valid transferable license to use all the patents, trademarks, service marks, trade names, technology, know-how, copyrights, licenses, franchises and formulas or rights with respect to the foregoing, that are used in the operation of the business of the Borrower or such Subsidiary as presently conducted and are material to such business where the failure to own or hold a valid license is reasonably likely to have a Material Adverse Effect. 5.17 Environmental Matters. Each of the Borrower and its --------------------- Subsidiaries is in material compliance with all applicable Environmental Laws governing its business for which failure to comply is reasonably likely to have a Material Adverse Effect, and neither the Borrower nor any of its Subsidiaries is liable for any material penalties, fines or forfeitures for failure to comply with any of the foregoing in the manner set forth above. All licenses, permits, registrations or approvals required for the business of the Borrower and each of its Subsidiaries under any Environmental Law have been secured and each of the Borrower and its Subsidiaries is in substantial compliance therewith, except such licenses, permits, registrations or approvals the failure to secure or to comply therewith is not reasonably likely to have a Material Adverse Effect. There are no Environmental Claims pending or, to the knowledge of the Borrower threatened, against the Borrower or any of its Subsidiaries wherein any decision ruling or finding is reasonably likely to have a Material Adverse Effect. 5.18 Labor Relations. No Credit Party is engaged in any unfair labor --------------- practice that is reasonably likely to have a Material Adverse Effect. There is (i) no unfair -37- labor practice complaint pending against any Credit Party or, to the Borrower's knowledge, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against any Credit Party or, to the Borrower's knowledge, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against any Credit Party or, to the Borrower's knowledge, threatened against any Credit Party and (iii) no union representation question, to the Borrower's knowledge, existing with respect to the employees of any Credit Party and no union organizing activities, to the Borrower's knowledge, are taking place, except with respect to any matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate, such as is not reasonably likely to have a Material Adverse Effect. 5.19 Compliance with Statutes, etc. Each of the Borrower and its ------------------------------ Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the owner ship of its property, except such non-compliance as has not had, and is not reasonably likely to have, individually or in the aggregate, a Material Adverse Effect. SECTION 6. Affirmative Covenants. The Borrower hereby covenants and --------------------- agrees that until the Commitments have terminated, no Notes are outstanding and the Loans, together with interest, Fees and all other Obligations (other than any indemnities described in Section 11.13 which are not then owing) incurred hereunder, are paid in full: 6.01 Information Covenants. The Borrower will furnish to each --------------------- Lender: (a) Annual Financial Statements. Within 90 days after the close of --------------------------- each fiscal year of the Borrower, the consolidated and consolidating balance sheet of the Borrower and the Intermediary Holding Companies, as at the end of such fiscal year and the related consolidated and consolidating statements of operations and of cash flows for such fiscal year, and in each case setting forth comparative consolidated and consolidating figures for the preceding fiscal year, and (x) in the case of consolidated statements, examined by independent certified public accountants of recognized national standing whose opinion shall not be qualified as to the scope of audit and as to the status of the Borrower as a going concern or (y) in the case of consolidating statements, certified by the chief financial officer of the Borrower, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of the Borrower and the Intermediary Holding Companies, which audit was conducted in accordance with generally accepted auditing standards, no Default or Event of Default which has occurred and is continuing has come to their attention or, if such a Default or Event of Default has come to their attention a statement as to the nature thereof. -38- (b) Quarterly Financial Statements. Within 45 days after the close ------------------------------ of each of the first three quarterly accounting periods in each fiscal year commencing March 31, 1998, the consolidated and consolidating balance sheet of the Borrower and the Intermediary Holding Companies, as at the end of such quarterly period and the related consolidated and consolidating statements of operations and of cash flows for such quarterly period and for the elapsed portion of the fiscal year ended with the last day of such quarterly period, and in each case setting forth comparative consolidated and consolidating figures for the related periods in the prior fiscal year, all of which shall be in reasonable detail and certified by the chief financial officer or controller of the Borrower, subject to changes resulting from audit and normal year-end audit adjustments. (c) Monthly Reports. Commencing April 30, 1998, within 45 days after --------------- after the end of each monthly accounting period of the fiscal years ended December 31, 1998 and December 31, 1999 (other than the last monthly accounting period in any such fiscal year), the internally prepared consolidating income statements of the Borrower and the Intermediary Holding Companies for such period, all of which shall be certified by the chief financial officer or controller of the Borrower subject to changes resulting from audit and normal year-end audit adjustments. (d) Budgets; etc. Not more than 30 days after the commencement of ------------- each fiscal year of the Borrower ending after the Closing Date, consolidated and consolidating budgets of the Borrower and its Subsidiaries in reasonable detail for each of the twelve months of such fiscal year as customarily prepared by management for its internal use setting forth, with appropriate discussion, the principal assumptions upon which such budgets are based. Together with each delivery of consolidated financial statements pursuant to Sections 6.01(a), (b) and (c), a comparison of the current year-to-date consolidated financial results for the Borrower against the consolidated budget of the Borrower required to be submitted pursuant to this clause (d) shall be presented. (e) Officer's Certificates. At the time of the delivery of the ---------------------- financial statements provided for in Sections 6.01(a), (b) and (c), a certificate of the chief financial officer, controller or other Authorized Officer of the Borrower to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate in the case of the certificate delivered pursuant to Sections 6.01(a) and (b), shall set forth the calculations required to establish (I) the Leverage Ratio as at the last day of the fiscal year or fiscal quarter covered by such financial statements and (II) whether the Borrower and its Subsidiaries were in compliance with the provisions of Sections 7.11, 7.12 and 7.13 as at the end of such fiscal period. (f) Notice of Default or Litigation. Promptly, and in any event ------------------------------- within five Business Days after any officer of the Borrower obtains knowledge thereof, notice of (x) the occurrence of any event which constitutes a Default or Event of Default, which notice shall -39- specify the nature thereof, the period of existence thereof and what action the Borrower proposes to take with respect thereto and (y) the commencement of, or any significant adverse development in, any litigation or governmental proceeding pending against the Borrower or any of its Subsidiaries which has had or is reasonably likely to have a Material Adverse Effect or has had or is reasonably likely to have a material adverse effect on the ability of the Credit Parties to perform their obligations under the Credit Documents. (g) Other Information. Promptly upon transmission thereof, copies of ----------------- any filings and registrations with, and reports to, the Securities and Exchange Commission or any successor thereto (the "SEC") by the Borrower or any of its Subsidiaries, and with reasonable promptness, such other information or documents (financial or otherwise) as the Administrative Agent on its own behalf or on behalf of the Required Lenders may reasonably request from time to time. 6.02 Books, Records and Inspections. The Borrower will, and will ------------------------------ cause its Subsidiaries to, permit, upon reasonable notice to the chief financial officer, controller or any other Authorized Officer of the Borrower, officers and designated representatives of the Administrative Agent or the Required Lenders to visit and inspect any of the properties or assets of the Borrower and any of its Subsidiaries in their possession and to examine the books of account of the Borrower and any of its Subsidiaries and discuss the affairs, finances and accounts of the Borrower and of any of its Subsidiaries with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals during normal business hours and to such reasonable extent as the Administrative Agent or the Required Lenders may desire. 6.03 Insurance. The Borrower will, and will cause each of its --------- Subsidiaries to, at all times maintain in full force and effect insurance with reputable and solvent insurers in such amounts, covering such risks and liabilities and with such deductibles or self-insured retentions as are in accordance with normal industry practice. The Borrower will, and will cause each of its Subsidiaries to, furnish to the Administrative Agent on the Closing Date and thereafter annually, upon request of the Administrative Agent, a summary of the insurance carried. 6.04 Payment of Taxes. The Borrower will pay and discharge, and will ---------------- cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which penalties attach thereto, and all lawful claims which, if unpaid, would become a Lien or charge upon any material properties of the Borrower or any of its Subsidiaries, provided that neither the Borrower nor any Subsidiary shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves (in the -40- good faith judgment of the management of the Borrower) with respect thereto in accordance with GAAP. 6.05 Corporate Franchises. The Borrower will do, and will cause each -------------------- Subsidiary to do, or cause to be done, all things reasonably necessary to preserve and keep in full force and effect its existence and to preserve its material rights and franchises, other than those the failure to preserve which could not reasonably be expected to have a Material Adverse Effect, provided that any transaction permitted by Section 7.02 will not constitute a breach of this Section 6.05. 6.06 Compliance with Statutes, etc. The Borrower will, and will ------------------------------ cause each Subsidiary to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign (including all Environmental Laws), in respect of the conduct of its business and the ownership of its property other than those the non-compliance with which is not reasonably likely to have a Material Adverse Effect or have a material adverse effect on the ability of the Credit Parties to perform their obligations under the Credit Documents. 6.07 ERISA. As soon as possible and, in any event, within 10 days ----- after the Borrower knows or has reason to know of the occurrence of any of the following, the Borrower will deliver to each of the Lenders a certificate of the chief financial officer of the Borrower setting forth the full details as to such occurrence and the action, if any, that the Borrower, any Subsidiary or any ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by the Borrower, any Subsidiary, any ERISA Affiliate, the PBGC, a Plan or Multiemployer Plan participant or the Plan administrator with respect thereto: that a Reportable Event has occurred (except to the extent that the Borrower has previously delivered to the Lender a certificate and notices (if any) concerning such event pursuant to the next clause hereof); that a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA is subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof), and an event described in sub section .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 is reasonably expected to occur with respect to such Plan within the following 30 days; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may reasonably be expected to be or has been made for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that any contribution required to be made with respect to a Plan or Multiemployer Plan has not been timely made; that a Plan or Multiemployer Plan has been or may be reasonably be expected to be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability which, when added to the aggregate amount of Unfunded Current Liabilities with respect to -41- all other Plans, exceeds the aggregate amount of such Unfunded Current Liabilities that existed on the Closing Date by $100,000; that proceedings may reasonably be expected to be or have been instituted to terminate or appoint a trustee to administer a Plan which is subject to Title IV of ERISA; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Multiemployer Plan; that the Borrower, any Subsidiary or any ERISA Affiliate will or may reasonably be expected to incur any material liability (including any indirect, contingent, or secondary liability) to or on account of the termination of or withdrawal from a Plan or Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409 or 502(i) or 502(l) of ERISA or with respect to a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or that the Borrower or any Subsidiary may incur any material liability pursuant to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any Plan in addition to the liability that existed on the Closing Date pursuant to any such plan or plans. Upon request by any Lender, the Borrower will deliver to such Lender a complete copy of the annual report (on Internal Revenue Service Form 5500-series) of each Plan (including, to the extent required, the related financial and actuarial statements and opinions and other supporting statements, certifications, schedules and information) required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Lenders pursuant to the first sentence hereof, copies of any records, documents or other information required to be furnished to the PBGC, and any material notices received by the Borrower, any Subsidiary or any ERISA Affiliate with respect to any Plan or Multiemployer Plan shall be delivered to the Lender no later than 10 days after the date such records, documents and/or information has been furnished to the PBGC or such notice has been received by the Borrower, the Subsidiary or the ERISA Affiliate, as applicable. 6.08 Good Repair. The Borrower will, and will cause each of its ----------- Subsidiaries to, ensure that its material properties and equipment used or useful in its business are kept in good repair, working order and condition, normal wear and tear excepted, and, subject to Section 7.05, that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner useful or customary for companies in similar businesses. 6.09 End of Fiscal Years; Fiscal Quarters. The Borrower will, for ------------------------------------ financial reporting purposes, cause (i) each of its, and each of its Subsidiaries', fiscal years and fourth fiscal quarters to end on December 31 of each year and (ii) each of its, and each of its Subsidiaries', first three fiscal quarters to end on the last day of March, June and September of each year. -42- 6.10 Interest Rate Agreement. The Borrower will enter into Interest ----------------------- Rate Agreements reasonably satisfactory to the Agents (x) no later than the date occurring 30 days after the Closing Date, to the extent, if any, necessary so that at least 25% of the aggregate outstanding principal amount of the Consolidated Debt at the time of the entering into of any such Interest Rate Agreement has a fixed interest rate or is covered by such Interest Rate Agreements for a period of at least two years following the Closing Date and (y) no later than the date occurring nine months after the Closing Date, to the extent, if any, necessary so that at least 50% of outstanding Consolidated Debt at the time of the entering into of any such Interest Rate Agreement has a fixed interest rate or is covered by such Interest Rate Agreements for a period of at least two years following the Closing Date. 6.11 Approvals. The Borrower will use reasonable best efforts to --------- obtain as promptly as practicable after (i) the Closing Date, the approvals set forth in Annex VIII and (ii) the consummation of any Permitted Acquisition, any approvals not obtained on or prior to the date of the consummation of such Permitted Acquisition, provided that (x) it shall not be a default under this Section 6.11 if the Borrower fails to obtain any such approval, after having used reasonable best efforts to obtain same and (y) the Borrower may cease to seek to obtain any such approvals if it has been advised by counsel or the applicable governmental agency that it will not, or is not reasonably likely to, obtain such approval, provided further that, in the event the Borrower is able to obtain any approval required to be obtained in accordance with the terms of this Section 6.11, the Borrower shall use reasonable best efforts to obtain as promptly as practicable after receipt of such approval, an opinion of local counsel reasonably satisfactory to the Administrative Agent covering the regulatory aspects of the respective Acquisition or Permitted Acquistion, as the case may be, which opinion shall be in form and substance reasonably satisfactory to the Administrative Agent. 6.12 CoBank Capital. The Borrower will purchase such participation -------------- certificates in CoBank as CoBank may require from time to time in accordance with its bylaws. The Borrower hereby consents and agrees that the amount of any distributions with respect to its patronage with CoBank that are made in qualified written notices of allocation (as defined in 26 U.S.C. 1388) and that are received by the Borrower from CoBank, will be taken into account by the Borrower at their stated Dollar amounts whether the distribution be evidenced by a participation certificate or other form of written notice that such distribution has been made and recorded in the name of the Borrower on the records of CoBank. SECTION 7. Negative Covenants. The Borrower hereby covenants and ------------------ agrees that until the Commitments have terminated, no Notes are outstanding and the Loans, together with interest, Fees and all other Obligations (other than any indemnities described in Section 11.13 which are not then owing) incurred hereunder, are paid in full: 7.01 Changes in Business. The Borrower will not permit at any time ------------------- the business activities taken as a whole conducted by the Borrower and its Subsidiaries to be -43- materially different from the business activities taken as a whole (including incidental activities) conducted by the Borrower and its Subsidiaries on the Closing Date (determined as if all the Acquisitions were consummated on such date) and businesses reasonably related thereto (the "Business"). 7.02 Consolidation, Merger, Sale or Purchase of Assets, etc. The ------------------------------------------------------- Borrower will not, and will not permit any Subsidiary to, wind up, liquidate or dissolve its affairs, or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of all or any part of its property or assets (other than inventory or obsolete equipment or excess equipment no longer needed in the conduct of the business in the ordinary course of business) or purchase, lease or otherwise acquire all or any part of the property or assets of any Person (other than purchases or other acquisitions of inventory, leases, materials and equipment in the ordinary course of business) or agree to do any of the foregoing at any future time without a contingency relating to obtaining any required approval hereunder, except that the following shall be permitted: (a) (i) any Subsidiary may be merged or consolidated with or into, or be liquidated into, the Borrower or a Subsidiary Guarantor (so long as the Borrower or such Subsidiary Guarantor is the surviving corporation), or all or any part of its business, properties and assets may be conveyed, sold or transferred to the Borrower or any Subsidiary Guarantor, provided -------- that neither the Borrower nor any Subsidiary Guarantor may be a party to any merger, consolidation or liquidation otherwise permitted by this clause (a) (i) involving a Person that is not a Subsidiary except in connection with a Permitted Acquisition, (ii) any Subsidiary that is not a Subsidiary Guarantor may be merged or consolidated with or into, or convey, sell or transfer its assets to, another Subsidiary that is not a Subsidiary Guarantor, provided that if the stock of either such Person was pledged pursuant to the Pledge Agreement the stock of the surviving entity or the transferee entity, as the case may be, shall also be pledged pursuant to a Pledge Agreement and (iii) each of Chautauqua & Erie Telephone Company and ST Long Distance Corporation may transfer CLEC assets to MJD TeleChoice, so long as the aggregate fair market value of all such assets so transferred by such Persons (determined in good faith by senior management of the Borrower) on and after the Closing Date does not exceed $5,000,000, provided that no such merger or consolidation otherwise permitted above between a Pledged Subsidiary and Non-Pledged Subsidiary, and no such conveyance, sale or transfer by a Pledged Subsidiary to a Non-Pledged Subsidiary, shall be permitted unless, after giving effect thereto, the Pro Forma EBITDA Test is satisfied; (b) capital expenditures to the extent within the limitations set forth in Section 7.05 hereof; -44- (c) the investments, acquisitions and transfers or dispositions of properties permitted pursuant to Section 7.06; (d) each of the Borrower and any Subsidiary may lease (as lessee) real or personal property in the ordinary course of business (so long as such lease does not create a Capitalized Lease Obligation not otherwise permitted by Section 7.04(c)); (e) licenses or sublicenses by the Borrower and its Subsidiaries of intellectual property in the ordinary course of business, provided, that -------- such licenses or sublicenses shall not interfere with the business of the Borrower or any Subsidiary; (f) (i) sales or dispositions of Non-Core Assets to the extent that the aggregate Net Cash Proceeds received from all such sales and dispositions permitted by this clause (f)(i) shall not exceed $40,000,000 in the aggregate and $25,000,000 in any fiscal year of the Borrower and (ii) additional sales or dispositions of assets to the extent that the aggregate Net Cash Proceeds received from all such sales and dispositions permitted by this clause (f)(ii) shall not exceed $2,500,000 in any fiscal year of the Borrower, provided that (x) each such sale or disposition pursuant to this clause (f) shall be in an amount at least equal to the fair market value thereof and for proceeds consisting of at least 85% cash and (y) the Net Cash Proceeds of any such sale are applied to repay the Loans to the extent required by Section 3.02(A)(c), provided further that ---------------- the sale or disposition of the capital stock of any Subsidiary of the Borrower pursuant to this clause (f) shall be prohibited unless it is for all of the outstanding capital stock of such Subsidiary owned by the Borrower and its Subsidiaries; (g) the Acquisitions; (h) leases and subleases permitted under Section 7.03(d) and (g); and (i) Permitted Acquisitions. 7.03 Liens. The Borrower will not, and will not permit any of its ----- Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets of any kind (real or personal, tangible or intangible) of the Borrower or any such Subsidiary whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable or notes with recourse to the Borrower or any of its Subsidiaries) or assign any right to receive income, except: -45- (a) Liens for taxes not yet delinquent or Liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves (in the good faith judgment of the management of the Borrower) have been established; (b) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law which were incurred in the ordinary course of business, such as carriers', warehousemen's and mechanics' Liens, statutory landlord's Liens, and other similar Liens arising in the ordinary course of business, and (x) which do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Borrower or any of its Subsidiaries or (y) which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Lien; (c) Liens created by or pursuant to this Agreement or the other Credit Documents; (d) Liens created pursuant to (x) Capital Leases in respect of Capitalized Lease Obligations permitted by Section 7.04(c) and (y) Capital Leases securing Permitted MJD Capital Debt; (e) Liens arising from judgments, decrees or attachments and Liens securing appeal bonds arising from judgments, in each case in circumstances not constituting an Event of Default under Section 8.09; (f) Liens (other than any Lien imposed by ERISA) incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money); (g) leases or subleases granted to others not interfering in any material respect with the business of the Borrower or any of its Subsidiaries; (h) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens arising from precautionary UCC financing statement filings regarding operating leases entered into by the Borrower or any of its Subsidiaries in the -46- ordinary course of business and statutory and common law landlords' liens under leases to which the Borrower or any of its Subsidiaries is a party; (j) purchase money Liens securing payables arising from the purchase by the Borrower or any Subsidiary Guarantor of any equipment or goods in the normal course of business, provided that such payables shall not constitute Indebtedness; (k) any interest or title of a lessor under any lease permitted by this Agreement; (l) Liens in existence on, and which are to continue in effect after, the Closing Date which are listed, and the property subject thereto described in, Annex V, plus extensions and renewals of such Liens, provided that (x) the aggregate principal amount of the Indebtedness, if any, secured by such Liens does not increase from that amount outstanding at the time of any such extension or renewal and (y) any such extension or renewal does not encumber any additional assets or properties of the Borrower or any of its Subsidiaries; (m) Liens arising pursuant to purchase money mortgages or security interests securing Indebtedness representing the purchase price (or financing of the purchase price within 90 days after the respective purchase) of assets acquired by the Borrower or any Subsidiary after the Closing Date, provided that (x) any such Liens attach only to the assets so acquired, (y) the Indebtedness secured by any such Lien does not exceed 100%, nor is less than 70%, of the lesser of the fair market value or purchase price of the property being purchased at the time of the incurrence of such Indebtedness and (z) all Indebtedness secured by Liens created pursuant to this clause (m) (other than Permitted MJD Capital Debt) shall not exceed $5,000,000 at any time outstanding; (n) if (x) the Taconic Acquisition is consummated, Liens on assets of Taconic existing on the Closing Date and securing the Indebtedness of Taconic permitted by Section 7.04(f)(i); and (y) the UI Acquisition is consummated, Liens on assets of UI existing on the Closing Date and securing the Indebtedness of UI permitted by Section 7.04(f)(iii); and (o) Liens on property or assets acquired pursuant to a Permitted Acquisition, or on property or assets of a Person in existence at the time such Person is acquired pursuant to a Permitted Acquisition, in each case securing Permitted Acquired Debt, provided that (x) such Liens do not -------- attach to the capital stock of any Subsidiary of the Borrower and (y) such Liens existed prior to, and were not incurred in contemplation of, such Permitted Acquisition and do not attach to any other asset of the Borrower or any of its Subsidiaries. -47- 7.04 Indebtedness. The Borrower will not, and will not permit any ------------ of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (b) Indebtedness owing by (i) any Subsidiary Guarantor to another Subsidiary Guarantor or the Borrower, (ii) the Borrower to any Subsidiary Guarantor, (iii) any Subsidiary that is not a Subsidiary Guarantor to any other Subsidiary that is not a Subsidiary Guarantor, (iv) the Borrower or any Subsidiary Guarantor to any Subsidiary that is not a Subsidiary Guarantor, so long as such Indebtedness is subordinated to the Obligations on a basis satisfactory to the Administrative Agent and/or (v) any Subsidiary that is not a Subsidiary Guarantor to the Borrower and/or a Subsidiary Guarantor, so long as such Indebtedness constitutes a senior obligation and is evidenced by an intercompany note (which may be a grid note) pledged to the Collateral Agent pursuant to the Pledge Agreement; (c) Capitalized Lease Obligations initially incurred after the Closing Date, provided that the aggregate Capitalized Lease Obligations (exclusive of Permitted MJD Capital Debt) outstanding at any time under all Capital Leases entered into after Closing Date shall not exceed $2,000,000; (d) Indebtedness under Interest Rate Agreements to the extent entered into in compliance with Section 6.10; (e) Indebtedness incurred pursuant to purchase money mortgages permitted by Section 7.03(m); (f) if (i) the Taconic Acquisition is consummated and after giving effect thereto, up to $7 million of Indebtedness of Taconic, to the extent existing on the Closing Date, may remain outstanding after such consummation, less the aggregate amount of all repayments of principal thereon effected after the Closing Date, (ii) the Chouteau Acquisition is consummated and after giving effect thereto, up to $7 million of subordinated Indebtedness of the Borrower, in form and substance satisfactory to the Agents, that is issued in connection with such consummation less any repayments of principal made thereon and (iii) the UI Acquisition is consummated and after giving effect thereto, up to $12.51 million of Indebtedness of UI, to the extent existing on the Closing Date, may remain outstanding after such consummation, less the aggregate amount of all repayments of principal thereon effected after the Closing Date; -48- (g) Indebtedness (the "Existing Indebtedness") in existence on, and which is to continue in effect after, the Closing Date and which is listed on Annex VI hereto, without giving effect to any subsequent extension, renewal or refinancing thereof except as permitted pursuant to Section 7.04(l); (h) Indebtedness of the Borrower or any of its Subsidiaries which may be deemed to exist in connection with agreements providing for indemnification, purchase price adjustments and similar obligations in connection with Permitted Acquisitions, Acquisitions or sales of assets permitted by this Agreement (so long as any such obligations are those of the Person making the respective acquisition or sale, and are not guaranteed by any other Person); (i) Permitted Acquired Debt; (j) Permitted Subordinated Debt to the extent (I) the proceeds thereof are utilized to repay Loans to the extent required by Section 3.02(A)(a)(iii) and/or 3.02(A)(d) and (II) after giving effect to any incurrence of Permitted Subordinated Debt (and the use of the proceeds thereof), Section 7.12 shall be complied with as of the last day of the last fiscal quarter then ended (determined as if such Permitted Subordinated Debt had been issued on such last day); (k) Permitted MJD Capital Debt; (l) Permitted Refinancing Indebtedness, so long as no Default or Event of Default is in existence at the time of the incurrence thereof and immediately after giving effect thereto; (m) Indebtedness of the Borrower consisting of (i) CLEC Back-Stop Letters of Credit and reimbursement obligations with respect thereto, so long as the aggregate outstanding stated amounts of all such letters of credit and reimbursement obligations do not exceed $1,000,000 at any time and (ii) Permitted Letters of Credit and reimbursement obligations with respect thereto, so long as the aggregate outstanding stated amounts of all such letters of credit and reimbursement obligations do not exceed $1,000,000 at any time; and (n) additional unsecured Indebtedness of the Borrower and the Subsidiary Guarantors not to exceed an aggregate outstanding principal amount of $5.0 million at any time. 7.05 Capital Expenditures. (a) The Borrower will not, and will not -------------------- permit any of its Subsidiaries to, incur Consolidated Capital Expenditures, provided that the Borrower and its Subsidiaries may make (i) Permitted CLEC Expenditures and (ii) Other -49- Consolidated Capital Expenditures not to exceed in the aggregate in any fiscal year an amount equal to 30% of Consolidated EBITDA for such fiscal year. (b) In the event that the maximum amount which is permitted to be expended in respect of Other Consolidated Capital Expenditures during any fiscal year pursuant to Section 7.05(a) (without giving effect to this clause (b)) is not fully expended during such fiscal year, the maximum amount which may be expended during the immediately succeeding fiscal year pursuant to Section 7.05(a) shall be increased by such unutilized amount. 7.06 Advances, Investments and Loans. The Borrower will not, and ------------------------------- will not permit any of its Subsidiaries to, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to any Person, except: (a) the Borrower or any Subsidiary may invest in cash and Cash Equivalents; (b) the Borrower and any Subsidiary may acquire and hold receivables owing to them, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms and/or reasonable extensions thereof; (c) the intercompany Indebtedness described in Section 7.04(b) shall be permitted; (d) loans and advances to officers, directors and employees in the ordinary course of business (x) for relocation purposes and/or the purchase from the Borrower of the capital stock (or options or warrants relating thereto) of the Borrower and (y) otherwise in an aggregate principal amount not to exceed $1 million at any time outstanding shall be permitted; (e) the Borrower and each Subsidiary may acquire and own investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (f) Interest Rate Agreements entered into pursuant to Section 6.10 shall be permitted; (g) advances, loans and investments in existence on the Effective Date and listed on Annex VII, without giving effect to any additions thereto or replacements thereof, shall be permitted; -50- (h) the Borrower and each Subsidiary may make capital contributions (i) to any of their Subsidiaries to the extent a Subsidiary Guarantor and (ii) to any Subsidiary that is not a Subsidiary Guarantor, if after giving effect thereto the aggregate capital contributions (net of any return thereon) made after the Closing Date permitted pursuant to this clause (ii) shall not exceed an amount equal to 25% of the Consolidated Capital Expenditures permitted to be made by the Borrower and its Subsidiaries during the then fiscal year of the Borrower; (i) Subsidiaries may be established or created in accordance with the provisions of Section 7.07; (j) Acquisitions and Permitted Acquisitions shall be permitted; (k) investments constituting, or to be used to make, Permitted CLEC Expenditures by the Borrower and its Subsidiaries in any corporation that is (or, after giving effect to such investment, will be) directly or indirectly wholly-owned by the Borrower to the extent such corporation is engaged in no business other than the competitive local exchange carrier business (any such corporation, a "CLEC Company"); (l) loans and investments not otherwise permitted by the foregoing clauses (a) through (k), provided that the aggregate amount of the loans and investments made pursuant to this clause (l) shall not exceed $2,000,000; and (m) the Borrower and its Subsidiaries may acquire and hold investments consisting of non-cash consideration received from sales of assets effected in accordance with the requirements of Sections 7.02(f). 7.07 Limitation on Creation of Subsidiaries. The Borrower will not, -------------------------------------- and will not permit any Subsidiary to, establish, create or acquire any direct Subsidiary; provided that the Borrower and its Subsidiaries shall be permitted to establish, create or acquire Wholly-Owned Subsidiaries (or 90%-Owned Subsidiaries in the case of Telcos), so long as (i) 100% of the capital stock of such new Subsidiary (if a Parent Company) or at least 90% of the capital stock of such new Subsidiary (if a TelCo) is pledged pursuant to the Pledge Agreement (provided that the stock of any new TelCo acquired or created pursuant to a Permitted Acquisition shall not have to be pledged if, after giving effect to the acquisition or creation thereof, the Pro Forma EBITDA Test is satisfied) and the certificates representing such stock, together with stock powers duly executed in blank, are delivered to the Collateral Agent and (ii) such new Subsidiary executes a counterpart of the Subsidiary Guaranty (in the case of a new Intermediary Holding Company) and/or the Pledge Agreement (in the case of a new Parent Company), in each case on the same basis (and to the same extent) as such -51- Subsidiary would have executed such Credit Documents if it were a Credit Party on the Closing Date. 7.08 Modifications. The Borrower will not, and will not permit any ------------- of its Subsidiaries to: (a) make (or give any notice in respect thereof) any voluntary or optional payment or prepayment or redemption or acquisition for value of (including, without limitation, by way of depositing with the trustee with respect thereto money or securities before due for the purpose of paying when due) or exchange of any Permitted Acquired Debt, any Indebtedness permitted by Section 7.04(f), any Permitted Subordinated Debt, any Permitted Refinancing Indebtedness or any Existing Indebtedness, provided that (i) the respective obligor may refinance any of the foregoing Indebtedness with the proceeds of Permitted Refinancing Indebtedness so long as no Default or Event of Default is in existence at the time of the incurrence of such Permitted Refinancing Indebtedness and immediately after giving effect thereto and (ii) in the event the Borrower has made a Special PSD Election and the Ellensberg Acquisition has not been consummated prior to the date occurring 45 days after such Special PSD Election, the Borrower may effect the Permitted PSD Repurchase; (b) amend or modify (or permit the amendment or modification of) in any manner adverse to the interests of the Lenders, any provisions of any Permitted Acquired Debt, any Permitted Refinancing Indebtedness, any Indebtedness permitted by Section 7.04(f), any Permitted Subordinated Debt or any Existing Indebtedness; and/or (c) amend, modify or change in any manner adverse to the interests of the Lenders the organizational documents (including by-laws) of any Credit Party, the Existing Warrants, any agreement entered into by the Borrower with respect to its capital stock, or any Acquisition Document or enter into any new agreement in any manner adverse to the interests of the Lenders with respect to the capital stock of the Borrower. 7.09 Dividends, etc. (a) The Borrower will not, and will not permit --------------- any of its Subsidiaries to, declare or pay any dividends (other than dividends payable solely in capital stock of such Person) or return any capital to, its stockholders, members and/or other owners or authorize or make any other distribution, payment or delivery of property or cash to its stockholders, members and/or other owners as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock or other ownership interests now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares), or set aside any -52- funds for any of the foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock or other ownership interests of the Borrower or any other Subsidiary, as the case may be, now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by such Person with respect to its capital stock) (all of the foregoing "Dividends"), except that: (i) any Subsidiary may pay dividends or return capital or make distributions and other similar payments with regard to its capital stock or other membership interests to the Borrower or to another Subsidiary; (ii) the Borrower or any of its Subsidiaries may purchase the Minority Shares for an aggregate purchase price not to exceed $750,000; (iii) the Borrower, STE or Sidney Telephone may retire or redeem all the Existing Warrants on or after the Closing Date with the proceeds of Loans for the price required by the terms thereof, provided that none of the Borrower, STE or Sidney Telephone shall voluntarily agree to a price to be paid for the Existing Warrants (as opposed to a determination of such price by third parties as provided in the Existing Warrants) without the consent of the Agents (which consent shall not be unreasonably withheld); (iv) the Preferred Repurchase shall be permitted to be effected; and (v) the Borrower may redeem or repurchase its stock (or options, warrants and/or appreciation rights in respect thereof) from shareholders, officers, employees, consultants and directors (or their estates) upon the death, permanent disability, retirement or termination of employment of any such Person or otherwise in accordance with any shareholder agreement, stock option plan or any employee stock ownership plan provided that (x) no Default or Event of Default is then in existence or would arise therefrom and (y) the aggregate amount of all cash paid in respect of all such shares, options, warrants and rights so redeemed or repurchased in any calendar year, does not exceed $1 million; (b) The Borrower will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist (other than as a result of a requirement of law) any encumbrance or restriction which prohibits or otherwise restricts (A) the ability of any Subsidiary to (a) pay dividends or make other distributions or pay any Indebtedness owed to the Borrower or any Subsidiary, (b) make loans or advances to the Borrower or any Subsidiary, (c) transfer any of its properties or assets to the Borrower or any Subsidiary or (B) the ability of any Subsidiary to create, incur, assume or suffer to exist any Lien upon its property or assets to secure the Obligations, other than prohibitions or restrictions existing under or by reason of: (i) this Agreement and the other Credit Documents; (ii) applicable law; (iii) -53- customary non-assignment provisions entered into in the ordinary course of business and consistent with past practices; (iv) any restriction or encumbrance with respect to a Subsidiary imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the capital stock or assets of such Subsidiary, so long as such sale or disposition is permitted under this Agreement; (v) Liens permitted under Sections 7.03(d), (m) and/or (n) and any documents or instruments governing the terms of any Indebtedness or other obligations secured by any such Liens, provided that such prohibitions or restrictions apply only to the assets subject to such Liens and (vi) any agreement or instrument governing Permitted Acquired Debt, to the extent such restriction or encumbrance (x) is not applicable to any Person or the properties or assets of any Person (other than the Person or the properties or assets of the Person acquired pursuant to the respective Permitted Acquisition) and (y) was not created (or made more restrictive) in connection with or in anticipation of the respective Permitted Acquisition. 7.10 Transactions with Affiliates. The Borrower will not, and will ---------------------------- not permit any Subsidiary to, enter into any transaction or series of transactions after the Closing Date whether or not in the ordinary course of business, with any Affiliate other than on terms and conditions substantially as favorable to the Borrower or such Subsidiary as would be obtainable by the Borrower or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate, provided that the foregoing restrictions shall not apply to (i) transactions solely among Credit Parties and their 90%- Owned Subsidiaries, (ii) employment arrangements entered into in the ordinary course of business with officers of the Borrower and its Subsidiaries, (iii) customary fees paid to members of the Board of Directors of the Borrower and of its Subsidiaries, (iv) management fees paid to MJD Partners, Inc. during any fiscal year not in excess of 2.5% of Consolidated EBITDA for such year and, so long as no Default or Event of Default exists at the time of any such payment or would result therefrom, advisory fees paid to Kelso and Carousel during any fiscal year not in excess of 1% of Consolidated EBITDA for such year, (v) arrangements with directors, officers and employees not otherwise prohibited by this Agreement, (vi) payment of customary legal fees and expenses to Paul, Hastings, Janofsky & Walker LLP and (vii) the transactions set forth on Annex IX hereto. 7.11 Interest Coverage Ratio. (a) At any time prior to the Trigger ----------------------- Date, the Borrower will not permit the ratio of (i) Consolidated Annualized EBITDA as at the end of any fiscal quarter set forth below to (ii) Consolidated Interest Expense for the four quarters then ending to be less than the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ending: --------------------- Ratio ----- September 30, 1998
-54- through March 31, 1999 1.50 to 1.0 June 30, 1999 through September 30, 2000 1.75 to 1.0 Thereafter 2.00 to 1.0
(b) At any time on and after the Trigger Date, the Borrower will not permit the ratio of (i) Consolidated Annualized EBITDA as of the end of any fiscal quarter set forth below to (ii) Consolidated Interest Expense for the four quarters then ending to be less than the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ending: --------------------- Ratio ----- Trigger Date through September 30, 2001 1.50 to 1.0 December 31, 2001 through September 30, 2002 1.70 to 1.0 December 31, 2002 through September 30, 2003 1.80 to 1.0 Thereafter 2.00 to 1.0
7.12 Leverage Ratio. (a) At any time prior to the Trigger Date, the -------------- Borrower will not permit the Leverage Ratio determined as at the end of any fiscal quarter set forth below to be more than the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ending: --------------------- Ratio ----- June 30, 1998 through March 31, 1999 6.50 to 1.0 June 30, 1999 through September 30, 2000 5.75 to 1.0 December 31, 2000 through September 30, 2001 5.50 to 1.0 December 31, 2001 through September 30, 2002 5.25 to 1.0 December 31, 2002 through September 30, 2003 5.00 to 1.0 December 31, 2003
-55- through September 30, 2004 4.50 to 1.0 Thereafter 4.25 to 1.0
(b) At any time on and after the Trigger Date, the Borrower will not permit the Leverage Ratio determined as at the end of any fiscal quarter set forth below to be more than the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ending: --------------------- Ratio ----- Trigger Date through September 30, 2002 6.50 to 1.0 December 31, 2002 through September 30, 2003 6.00 to 1.0 Thereafter 5.50 to 1.0
7.13 Senior Leverage Ratio. (a) At any time prior to the Trigger --------------------- Date, the Borrower will not permit the Senior Leverage Ratio determined as at the end of any fiscal quarter set forth below to be more than the ratio set forth opposite such fiscal quarter:
Fiscal Quarter Ending: --------------------- Ratio ----- June 30, 1998 through March 31, 1999 6.40 to 1.0 June 30, 1999 through September 30, 2000 5.50 to 1.0 December 31, 2000 through September 30, 2001 5.25 to 1.0 December 31, 2001 through September 30, 2002 5.00 to 1.0 December 31, 2002 through September 30, 2003 4.75 to 1.0 December 31, 2003 through September 30, 2004 4.25 to 1.0 Thereafter 4.00 to 1.0
provided that if (x) a contribution has to be made to the Borrower under the Capital Contribution Agreement as of June 30, 1999 pursuant to the terms thereof, (y) the full $15 million available under the Capital Contribution Agreement is so contributed and (z) after -56- giving effect to such contribution and the concurrent repayment of Loans, the Senior Leverage Ratio on June 30, 1999 is 5.50 to 1.0 or above, then the maximum Senior Leverage Ratio permitted on June 30, 1999 shall be increased to 6.00 to 1.0 and such maximum Senior Leverage Ratio shall stay in effect until June 30, 2000, at which time the maximum Senior Leverage Ratio will decrease to 5.50 to 1.0, with the above table to be thereafter applicable. (b) At any time on and after the Trigger Date, the Borrower will not permit the Senior Leverage Ratio determined as at the end of any fiscal quarter set forth below to be more than the ratio set forth opposite such quarter:
Fiscal Quarter Ending: --------------------- Ratio ----- Trigger Date through September 30, 2001 4.00 to 1.0 December 31, 2001 through September 30, 2002 3.75 to 1.0 December 31, 2002 though September 30, 2003 3.50 to 1.0 Thereafter 3.25 to 1.0
7.14 Limitation On Issuance of Stock. The Borrower will not permit any ------------------------------- of its Subsidiaries, directly or indirectly, to issue any shares of such Subsidiary's capital stock or other securities (or warrants, rights or options to acquire shares or other equity securities), except (i) for replacements of then outstanding shares of capital stock, (ii) for stock splits, stock dividends and similar issuances which do not decrease the percentage ownership of the Borrower and its Subsidiaries taken as a whole in any class of the capital stock of such Subsidiary, (iii) for issuances to the Borrower or any of its Subsidiaries in connection with the creation of new Subsidiaries permitted under Section 7.07, (iv) to qualify directors to the extent required by applicable law and (v) for shares of STE and Sidney Telephone issued in connection with the exercise of any of the Existing Warrants. 7.15 Designated Senior Debt. The Borrower shall not designate any ---------------------- Indebtedness as Designated Senior Debt (as defined in the indenture governing Permitted Subordinated Debt). SECTION 8. Events of Default. Upon the occurrence of any of the ----------------- following specified events (each, an "Event of Default"): -57- 8.01 Payments. The Borrower shall (i) default in the payment when due of -------- any principal of the Loans or (ii) default, and such default shall continue for five or more Business Days, in the payment when due of any interest on the Loans or any Fees or any other amounts owing hereunder or under any other Credit Document; or 8.02 Representations, etc. Any representation, warranty or statement made -------------------- by any Credit Party herein or in any other Credit Document or in any statement or certificate delivered or required to be delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 8.03 Covenants. Any Credit Party shall (a) default in the due performance --------- or observance by it of any term, covenant or agreement contained in Section 6.10 or 7, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 8.01, 8.02 or clause (a) of this Section 8.03) contained in this Agreement and such default shall continue unremedied for a period of at least 30 days after written notice to the Borrower by the Administrative Agent or the Required Lenders; or 8.04 Default Under Other Agreements. (a) The Borrower or any of its ------------------------------ Subsidiaries shall (i) default in any payment with respect to any Indebtedness (other than the Obligations) beyond the period of grace, if any, applicable thereto or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, any such Indebtedness to become due prior to its stated maturity; or (b) any such Indebtedness of the Borrower or any of its Subsidiaries shall be declared to be due and payable (or shall be required to be prepaid as a result of a default thereunder or of an event of the type that constitutes an Event of Default) prior to the stated maturity thereof, provided that it shall not constitute an Event of Default pursuant to this Section 8.04 unless the aggregate principal amount of all Indebtedness referred to in clauses (a) and (b) above exceeds $3.0 million in the aggregate at any one time; or 8.05 Bankruptcy, etc. The Borrower or any Material Subsidiary shall --------------- commence a voluntary case concerning itself under Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the Borrower or any of its Material Subsidiaries and the petition is not controverted within 20 days, or is not dismissed within 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Material Subsidiaries; or the Borrower or any of its Material Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, -58- relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Material Subsidiaries; or there is commenced against the Borrower or any of its Material Subsidiaries any such proceeding which remains undismissed for a period of 60 days; or the Borrower or any of its Material Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Material Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Material Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Material Subsidiaries for the purpose of effecting any of the foregoing; or 8.06 ERISA. (a) Any Plan or Multiemployer Plan shall fail to satisfy the ----- minimum funding standard required for any plan year or part thereof under Section 412 of the Code or Section 302 of ERISA or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code or Section 303 or 304 of ERISA, a Reportable Event shall have occurred, a contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan subject to Title IV of ERISA shall be subject to the advance reporting requirement of PBGC Regulation Section 4043.61 (without regard to sub paragraph (b)(1) thereof) and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC Regulation Section 4043 shall be reasonably expected to occur with respect to such Plan within the following 30 days, any Plan which is subject to Title IV of ERISA shall have had or is likely to have a trustee appointed to administer such Plan, any Plan or Multiemployer Plan which is subject to Title IV of ERISA is, shall have been or is likely to be terminated or to be the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a contribution required to be made with respect to a Plan, Multiemployer Plan has not been timely made, the Borrower or any Subsidiary or any ERISA Affiliate has incurred or is likely to incur any liability to or on account of a Plan or Multiemployer Plan under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code or on account of a group health plan (as defined in Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code, or the Borrower or any Subsidiary has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) that provide benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or Plans; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) such lien, security interest or liability, individually, and/or in the aggregate, in the opinion of the Required Lenders, has had, or is reasonably likely to have, a Material Adverse Effect; or 8.07 Pledge Agreement. (a) Except in each case to the extent resulting from ---------------- the negligent or willful failure of the Collateral Agent to continue to hold Pledged Securities -59- under the Pledge Agreement, the Pledge Agreement shall cease to be, in any material respect, in full force and effect, or shall cease, in any material respect, to give the Collateral Agent the Liens, powers and privileges purported to be created thereby in favor of the Collateral Agent, or (b) any Credit Party shall default in the due performance or observance of any material term, covenant or agreement on its part to be performed or observed pursuant to the Pledge Agreement and such default shall continue for 15 or more days after written notice to the respective Credit Party by the Administrative Agent; or 8.08 Subsidiary Guaranty. Any Subsidiary Guaranty or any material provision ------------------- thereof shall cease to be in full force and effect, or any Subsidiary Guarantor or any Person acting by or on behalf of such Subsidiary Guarantor shall deny or disaffirm such Subsidiary Guarantor's obligations under any Subsidiary Guaranty; or 8.09 Judgments. One or more judgments or decrees shall be entered against --------- the Borrower or any of its Subsidiaries involving a liability (to the extent not paid or covered by insurance) in excess of $3.0 million in the aggregate for all such judgments and decrees for the Borrower and its Subsidiaries and all such judgments and decrees in excess of such amount shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Administrative Agent shall, upon the written request of the Required Lenders, by written notice to the Borrower, take any or all of the following actions, without prejudice to the rights of the Administrative Agent or any Lender to enforce its claims against any Subsidiary Guarantor or the Borrower, except as otherwise specifically provided for in this Agreement (provided that, if an Event of Default specified in Section 8.05 shall -------- occur with respect to the Borrower, the result which would occur upon the giving of written notice by the Administrative Agent as specified in clauses (i) and (ii) below shall occur automatically without the giving of any such notice): (i) declare the Total Commitment terminated, whereupon the Commitment of each Lender shall forthwith terminate immediately and any Fees shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Loans and all obligations owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and (iii) enforce, as Collateral Agent (or direct the Collateral Agent to enforce), any and all of the Liens and rights created pursuant the Pledge Agreement. SECTION 9. Definitions. As used herein, the following terms shall have the ----------- meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: -60- "Acquired Companies" shall mean each of the parent corporations that are acquired by the Borrower pursuant to the Acquisitions, and their respective Subsidiaries. "Acquisition Commitment" shall mean, with respect to each Lender, the amount, if any, specified by such Lender in a written notice to the Borrower and the Administrative Agent as its Acquisition Commitment in response to a written request by the Borrower to some or all of the then existing Lenders and to other Eligible Transferees acceptable to the Agents and the Borrower to provide Acquisition Commitments (or such lesser amount as is allocated to such Lender by the Agents if the aggregate Acquisition Commitments offered by all Lenders exceed the maximum Acquisition Commitments requested by the Borrower (which maximum shall not exceed $165 million) and which amount shall be set forth opposite such Lender's name in a revised Annex I prepared by the Administrative Agent directly below the column entitled "Acquisition Commitment," as the same may be (x) reduced or terminated from time to time pursuant to Section 2.02, 2.03 and/or 8 or (y) adjusted from time to time as a result of assignments to or from such Lender pursuant to Section 1.13 and/or 11.04. "Acquisition Documents" shall mean, with respect to any Acquisition, the Agreement and Plan of Merger executed by the Borrower, an Intermediary Holding Company, an acquisition Subsidiary and the respective Acquired Company (or other purchase or similar agreement) governing such Acquisition and all other material agreements and documents relating to such Acquisition, in the form delivered to the Administrative Agent pursuant to Section 4.02(a) and as same may be amended, modified, amended and restated or supplemented from time to time pursuant to the terms hereof and thereof. "Acquisition Facility" shall mean the Facility evidenced by the Total Acquisition Commitment. "Acquisitions" shall mean the Chouteau Acquisition, the Ellensburg Acquisition, the El Paso Acquisition, the Taconic Acquisition and the UI Acquisition. "Adjusted Total Acquisition Commitment" shall mean at any time the Total Acquisition Commitment less the aggregate Acquisition Commitment of all Defaulting Lenders. "Adjusted Total Revolving Commitment" shall mean at any time the Total Revolving Commitment less the aggregate Revolving Commitments of all Defaulting Lenders. "Administrative Agent" shall have the meaning provided in the first paragraph of this Agreement and shall include any successor to the Administrative Agent appointed pursuant to Section 10.09. -61- "AF Commitment Commission" shall have the meaning provided in Section 2.01(c). "AF Lender" shall mean at any time each Lender with an Acquisition Commitment or with outstanding AF Loans. "AF Loan" shall have the meaning provided in Section 1.01(d). "AF Note" shall have the meaning provided in Section 1.05(a). "AF/RF Maturity Date" shall mean September 30, 2004. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise. "Agents" shall have the meaning provided in the first paragraph of this Agreement. "Agreement" shall mean this Credit Agreement, as the same may be from time to time further modified, amended, amended and restated and/or supplemented. "Anticipated Reinvestment Amount" shall mean, with respect to any Reinvestment Election, the amount specified in the Reinvestment Notice delivered by the Borrower in connection therewith as the amount of the Net Cash Proceeds from the related Asset Sale that the Borrower intends to use to finance one or more Acquisitions or Permitted Acquisitions within 180 days. "Applicable Acquisition Documents" shall have the meaning provided in Section 4.02(a). "Applicable Base Rate Margin" shall mean (i) in the case of AF Loans and RF Loans, 1.50% less the Margin Reduction Discount, if any, (ii) in the case of B ---- Term Loans, 1.75% less the Margin Reduction Discount, if any and (iii) in the ---- case of C Term Loans-Floating Rate, 2.00% less the Margin Reduction Discount, if ---- any. -62- "Applicable CC Percentage" shall mean (i) .375% at any time the Applicable Eurodollar Margin for RF Loans is 1.50%; and (ii) .50% at all other times. "Applicable Eurodollar Margin" shall mean (i) in the case of AF Loans and RF Loans, 2.50% less the Margin Reduction Discount, if any, (ii) in the case of ---- B Term Loans, 2.75% less the Margin Reduction Discount, if any and (iii) in the ---- case of C Term Loans-Floating Rate, 3.00% less the Margin Reduction Discount, if ---- any. "Asset Sale" shall mean and include (x) the sale, transfer or other disposition by the Borrower or any Subsidiary to any Person other than the Borrower or any Subsidiary Guarantor of any asset of the Borrower or such Subsidiary (other than sales, transfers or other dispositions in the ordinary course of business of inventory and/or obsolete or excess equipment) and/or (y) the receipt by the Borrower or any Subsidiary of any insurance, condemnation or similar proceeds in connection with a casualty or taking of any of its assets in excess of the costs incurred by the Borrower and its Subsidiaries in respect of such event and of repairing or replacing the assets so damaged, destroyed or taken but in all cases only to the extent that the aggregate Net Cash Proceeds of all such sales, transfers, dispositions and receipts in any fiscal year are in excess of $1,000,000. "Assignment Agreement" shall mean the Assignment Agreement in the form of Exhibit K (appropriately completed). "Authorized Officer" shall mean any senior officer of the Borrower designated as an authorized officer in writing to the Administrative Agent by the Borrower. "B Maturity Date" shall mean March 31, 2006. "B Term Commitment" shall mean, with respect to each Lender, (A) the amount, if any, set forth opposite such Lender's name on Annex I hereto directly below the column entitled "B Term Commitment" as the same may be (x) reduced or terminated from time to time pursuant to Section 2.02, 2.03 and/or 8 and/or (y) adjusted from time to time as a result of assignments to or from such Lender pursuant to Section 1.13 and/or 11.04 plus (B) the amount, if any, of a B Term Commitment of such Lender committed to pursuant to a B Term Commitment Renewal. "B Term Commitment Renewal" shall mean the providing of additional B Term Commitments from time to time after any mandatory repayment of B Term Loans and/or mandatory reduction of B Term Commitments pursuant to Section 2.03(b)(iii) or (iv) (each, a "B Reduction Event") in an aggregate amount (the "Additional B Commitment Amount"), selected by the Borrower, not to exceed the principal amount of the B Term Loans so repaid and the B Term Commitments so reduced, with any B Term Commitment Renewal to be effected by: (i) the Borrower requesting in writing some or all of the Lenders -63- and/or other Eligible Transferees acceptable to the Agents and the Borrower to provide an additional B Term Commitment, which request shall be given within 90 days following the B Reduction Event but in any event prior to the date occurring 255 days after the Closing Date and (ii) each such Lender or Eligible Transferee who desires to do so, providing a written notice to the Borrower and the Administrative Agent in response to such request setting forth the additional B Term Commitment it will offer, with the amount so specified (or such lesser amount as is allocated to such Lender by the Agents if the aggregate offered additional B Term Commitments exceed the Additional B Commitment Amount) to be such Person's additional B Term Commitment, it being agreed that any such additional B Term Commitments shall terminate on the date occurring 270 days after the Closing Date (after giving effect to the making of B Term Loans, if any, on such date) and each such Person with an additional B Term Commitment shall be a Lender. "B Term Facility" shall mean the Facility evidenced by the Total B Term Commitment. "B Term Loan" shall have the meaning provided in Section 1.01(a). "B Term Note" shall have the meaning provided in Section 1.05(a). "B Termination Date" shall mean the date occurring 270 days after the Closing Date. "B TF Percentage" shall mean, at any time of determination thereof, a fraction (expressed as a percentage) the numerator of which is equal to the sum of (x) the aggregate principal amount of B Term Loans outstanding at such time and (y) the Total B Term Commitment at such time and the denominator of which is equal to the sum of (x) the aggregate principal amount of B Term Loans and C Term Loans outstanding at such time and (y) the Total B Term Commitment at such time. "B Utilization Date" shall mean the date on which the Total B Term Commitment is first reduced to zero (determined without giving effect to any increase to the B Term Commitment pursuant to a B Term Commitment Renewal). "Bankruptcy Code" shall have the meaning provided in Section 8.05. "Base Rate" at any time shall mean the higher of (i) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate and (ii) the Prime Lending Rate. "Base Rate Loan" shall mean each Loan (other than any C Term Loan-Fixed Rate prior to the FRE Date applicable thereto) bearing interest at the rates provided in Section 1.08(a). -64- "Borrower" shall mean MJD Communications, Inc., a Delaware corporation. "Borrowing" shall mean the incurrence of Base Rate Loans or Eurodollar Loans pursuant to a single Facility by the Borrower from the Lenders having Commitments with respect to such Facility on a pro rata basis on a given date --- ---- (or resulting from conversions on a given date), having in the case of Eurodollar Loans the same Interest Period; provided that Base Rate Loans incurred pursuant to Section 1.10(b) shall be considered part of any related Borrowing of Eurodollar Loans. "BTCo" shall mean Bankers Trust Company in its individual capacity. "Business" shall have the meaning provided in Section 7.01. "Business Day" shall mean (i) for all purposes other than as covered by clause (ii) below, any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day which is a Business Day described in clause (i) and which is also a day for trading by and between banks in Dollar deposits in the interbank Eurodollar market. "C Maturity Date" shall mean March 31, 2007. "C Term Commitment" shall mean, with respect to each Lender, the amount, if any, set forth opposite such Lender's name on Annex I hereto directly below the column entitled "C Term Commitment" as the same may be terminated pursuant to Section 2.03. "C Term Facility" shall mean the Facility evidenced by the Total C Term Commitment and the CoBank Commitment. "C Term Loan-Fixed Rate" and "C Term Loan-Floating Rate" shall each have the meaning provided in Section 1.01(b). "C Term Loans" shall mean and include the C Term Loans-Floating Rate and the C Term Loans-Fixed Rate. "C Term Notes-Fixed Rate" and "C Term Note-Floating Rate" shall each have the meaning provided in Section 1.05(a). "C Term Notes" shall mean and include the C Term Notes-Fixed Rate and the C Term Notes-Floating Rate. -65- "C TF Percentage" shall mean, at any time of determination thereof 100% less the then B TF Percentage. "Capital Contribution Agreement" shall have the meaning provided in Section 4.01(k). "Capital Lease" as applied to any Person shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of the Borrower or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Carousel" shall mean Carousel Capital Partners, L.P., a Delaware limited partnership. "Carousel Affiliate" shall mean Carousel and each investment fund controlled by Carousel. "Cash Equivalents" shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than six months from the date of acquisition, (ii) Dollar denominated time deposits, certificates of deposit and bankers' acceptances of (x) any Lender that is a domestic commercial bank of recognized standing having capital and surplus in excess of $500,000,000 or (y) any bank (or the parent company of such bank) whose short-term commercial paper rating from Standard & Poor's Ratings Services, a division of McGraw-Hill, Inc. ("S&P") is at least A-1 or the equivalent thereof or from Moody's Investors Service, Inc. ("Moody's") is at least P-1 or the equivalent thereof (any such bank, an "Approved Bank"), in each case with maturities of not more than six months from the date of acquisition, (iii) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (ii) above, (iv) commercial paper issued by any Approved Bank or by the parent company of any Approved Bank and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, or guaranteed by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, as the case may be, and in each case maturing within six months after the date of acquisition, (v) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof -66- maturing within six months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's, and (vi) investments in money market funds substantially all of whose assets are comprised of securities of the type described in clauses (i) through (v) above. "Cash Proceeds" shall mean, with respect to any Asset Sale, the aggregate cash payments (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, but only as and when so received) received by the Borrower and/or any Subsidiary from such Asset Sale. "CERCLA" shall mean the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. (S) 9601 et seq. -- ---- "Change of Control" shall mean at any time and for any reason (a) prior to a Qualified IPO, the Permitted Holders cease to be the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) on a fully diluted basis in the aggregate of at least 50.1% of the total economic and voting interest in the Borrower's capital stock, (b) on and after a Qualified IPO, (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than one or more Permitted Holders, is or becomes the "beneficial owner" (as defined in clause (a) above) on a fully diluted basis of more than 25% of the total voting interest in the capital stock of the Borrower or (ii) during any period of two consecutive years individuals who at the beginning of such period constituted the Board of Directors of the Borrower (together with any new directors whose election by such Board of Directors or whose nomination for election by the stockholders of the Borrower was approved by a vote of a majority of the directors of the Borrower then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Borrower then in office or (c) a "change of control" or similar event shall occur as provided in any other agreement governing or evidencing material Indebtedness of the Borrower. "Chouteau" shall mean Chouteau Telephone Company, an Oklahoma corporation. "Chouteau Acquisition" shall mean the acquisition by the Borrower of Chouteau pursuant to the Applicable Acquisition Documents. "CLEC" shall mean competitive local exchange carriers. "CLEC Back-Stop Letters of Credit" shall mean each standby letter of credit issued by a financial institution for the account of the Borrower in support of the -67- reimbursement obligations of MJD TeleChoice under any letter of credit issued for its account in support of obligations incurred in the ordinary course of business with respect to customer deposits and other similar statutorily mandated obligations. "CLEC Company" shall have the meaning in Section 7.06(k) and shall in any event include MJD TeleChoice. "CLEC Expenditures" shall mean expenditures with respect to the acquisition, creation and/or maintenance of any CLEC. "Closing Date" shall mean the date on which the initial Loans under this Agreement are made. "CoBank" shall mean CoBank, ACB. "CoBank Commitment" shall mean $51,506,404, as the same may be terminated pursuant to Section 2.03. "CoBank Continuing Loans" shall mean the principal amounts outstanding under the CoBank loans identified below which are accruing interest at the fixed rates identified below for periods ending on the dates identified below:
Existing Principal Interest Period End Loan No. Amount Date Current Interest Rate - -------- ------------------ ------------------- ---------------------- 000084977 $10,000,000.00 09/02/02 9.96% 000085771 $15,000,000.00 09/05/00 9.23% 000084932 $11,077,685.00 09/02/02 9.96% 574742001 $ 2,674,839.89 08/30/04 10.37% 574742002 $ 9,513,879.29 09/30/04 10.57% 000085156 $ 3,240,000.00 09/02/02 9.76%
"Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all of the Collateral as defined in the Pledge Agreement. -68- "Collateral Agent" shall mean the Administrative Agent acting as collateral agent for the Lenders. "Commitment" shall mean, with respect to each Lender, such Lender's Term Commitment, Revolving Commitment, Acquisition Commitment and/or CoBank Commitment. "Commitment Commission" shall mean the TF Commitment Commission, the RF Commitment Commission and the AF Commitment Commission. "Consolidated Annualized EBITDA" shall mean, as of the last day of any fiscal quarter, (x) Consolidated EBITDA for the six month's then ended multiplied by (y) two. "Consolidated Capital Expenditures" shall mean, for any period, the aggregate of all cash expenditures (including in all events all amounts expended under Capital Leases (other than Capital Leases evidencing MJD Capital Debt) but excluding any amount representing capitalized interest) by the Borrower and its Subsidiaries during that period that, in conformity with GAAP, are or are required to be included in the property, plant or equipment reflected in the consolidated balance sheet of the Borrower and its Subsidiaries, provided that Consolidated Capital Expenditures shall in any event (x) exclude the purchase price paid in cash in connection with the acquisition of any Person (including through the purchase of all of the capital stock or other ownership interests of such Person or through merger or consolidation) pursuant to an Acquisition or a Permitted Acquisition whether or not allocable to property, plant and equipment and (y) exclude amounts expended with insurance proceeds. "Consolidated Debt" shall mean, as of any date of determination, (i) the aggregate stated balance sheet amount of all Indebtedness of the Borrower and its Subsidiaries on a consolidated basis as determined in accordance with GAAP plus (ii) any Indebtedness for borrowed money of any other Person as to which the Borrower and/or any of its Subsidiaries has created a guarantee or other Contingent Obligation (but only to the extent of such guarantee or other Contingent Obligation). "Consolidated EBIT" shall mean, for any period, (A) the sum of the amounts for such period of (i) Consolidated Net Income, (ii) provisions for taxes based on income, (iii) Consolidated Interest Expense, (iv) amortization or write-off of deferred financing costs to the extent deducted in determining Consolidated Net Income, (v) losses on sales of assets (excluding sales in the ordinary course of business) and other extraordinary losses, (vi) non-core income relating to Non-Core Assets to the extent not included in any determination of Consolidated Net Income, (vii) to the extent Consolidated EBIT is being determined for any period that includes all or a portion of the twelve-month period ended December 31, 1997, -69- any non-recurring losses incurred during such twelve-month period associated with the start-up of ST Long Distance Corporation to the extent same do not exceed $1.4 million for the twelve-month period ended December 31, 1997, (viii) dividends paid by CoBank to the Borrower on common stock of CoBank held by the Borrower to the extent not included in any determination of Consolidated Net Income and (ix) the non-cash cash portion of any retirement or pension plan expense incurred by the Borrower or any of its Subsidiaries less (B) gains on sales of assets (excluding sales in the ordinary course of business) and other extraordinary gains and other one-time non-cash gains, all as determined on a consolidated basis in accordance with GAAP. "Consolidated EBITDA" shall mean, for any period, the sum of the amounts for such period of (i) Consolidated EBIT, (ii) depreciation expense and (iii) amortization expense including any amortization or write-off related to the write-up of any assets as a result of purchase accounting, provided that Consolidated EBITDA for any such period during which an Acquisition or a Permitted Acquisition was consummated or a disposition of a business was effected shall be determined on a pro forma basis as if such Acquisition or --- ----- Permitted Acquisition were consummated or disposition effected, as the case may be, on the first day of such period and, in the event the Borrower delivers to the Administrative Agent within 20 Business Days following the consummation of an Acquisition or a Permitted Acquisition a Cost Adjustment Certificate, as if the savings based on the cost reduction synergies set forth therein were achieved for each day during such pre-consummation period (such pro forma --- ---- determination to be made on the basis that a one day pro rata share of the cost --- ---- reduction synergies set forth in such Cost Adjustment Certificate to be achieved during the first full 12 months following such consummation will apply to each day during such pre-consummation period). "Consolidated Interest Expense" shall mean, for any period, total interest expense (including the portion that is attributable to Capital Leases in accordance with GAAP) of the Borrower and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and without duplication net costs and/or net benefits under Interest Rate Agreements, but excluding, however, amortization of deferred financing costs to the extent included in total interest expense), provided that for the purposes of determining Consolidated Interest Expense as used in Section 7.11, Consolidated Interest Expense for any date of determination prior to March 31, 1999 shall mean Consolidated Interest Expense for the period from the Closing Date to such date of determination as so determined, that is annualized. "Consolidated Net Income" shall mean for any period, the net income (or loss) of the Borrower and its Subsidiaries on a consolidated basis for such period taken as a single accounting period determined in conformity with GAAP, provided that there shall be -------- -70- excluded from the calculation thereof (without duplication) (i) the income (or loss) of any Person (other than Subsidiaries of the Borrower) in which any other Person (other than the Borrower or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries or that Person's assets are acquired by the Borrower or any of its Subsidiaries, (iii) the income of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) all one time costs and expenses paid during such period in respect of the Transaction and (v) non-cash costs arising from implementation of SFAS 106 and SFAS 109. "Contingent Obligations" shall mean as to any Person any obligation of such Person guaranteeing or intending to guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (i) for the purchase or payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof, provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated maximum of the Contingent Obligation or, if none, the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if there is no stated or determinable amount of the primary obligation, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Cost Adjustment Certificate" shall mean, with respect to an Acquisition or a Permitted Acquisition, a certificate executed by an Authorized Officer of the Borrower setting forth the factually supportable and identifiable cost reduction synergies estimated in good faith to result from such Acquisition or Permitted Acquisition, as the case may be, during the 12 months following the date of the consummation of such Acquisition or Permitted Acquisition, as the case may be, which certificate shall be in form and substance reasonably satisfactory to the Agents. -71- "Credit Documents" shall mean this Agreement, the Notes, the Pledge Agreement and the Subsidiary Guaranty. "Credit Party" shall mean the Borrower and each Subsidiary party to a Credit Document. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" shall mean any Lender with respect to which a Lender Default is in effect. "Dividends" shall have the meaning provided in Section 7.09. "Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States. "Effective Date" shall have the meaning provided in Section 11.10. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other institutional "accredited investor" as defined in SEC Regulation D. "Ellensburg" shall mean Ellensburg Telephone Company, a Washington corporation. "Ellensburg Acquisition" shall mean the acquisition of Ellensburg by the Borrower pursuant to the Applicable Acquisition Documents. "El Paso" shall mean Ravenswood Communications, Inc., an Illinois corporation. "El Paso Acquisition" shall mean the acquisition of El Paso by the Borrower pursuant to the Applicable Acquisition Documents. "Environmental Claims" means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations (other than internal reports prepared by the Borrower or any of its Subsidiaries solely in the ordinary course of such Person's business and not in response to any third party action or request of any kind) or proceedings relating to any Environmental Law or any permit issued, or any approval given, under any such Environmental Law (hereafter, "Claims"), including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions -72- or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials arising from alleged injury or threat of injury to health, safety or the environment. "Environmental Law" means any applicable federal, state, foreign or local statute, law, rule, regulation, ordinance, code and rule of common law now or hereafter in effect and in each case as amended, and any binding judicial or administrative interpretation thereof, including any binding judicial or administrative order, consent decree or judgment, relating to the environment or Hazardous Materials, including, without limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, as amended, 33 U.S.C. (S) 1251 et seq.; the -- ---- Toxic Substances Control Act, 15 U.S.C. (S) 7401 et seq.; the -- ---- Clean Air Act, 42 U.S.C. (S) 2601 et seq.; the Safe Drinking Water Act, 42 -- ---- U.S.C. (S) 300F et seq.; the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et -- ---- -- seq.; and any applicable state and local or foreign counterparts or equivalents. - ---- "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with the Borrower or a Subsidiary would be deemed to be a "single employer" within the meaning of Section 414(b) or (c) of the Code and with respect to Sections 412 and 4971 of the Code and Section 302 of ERISA, Section 414(b), (c), (m) or (o) of the Code. "Eurodollar Loans" shall mean each Loan (other than any C Term Loan- Fixed Rate prior to the FRE Date applicable thereto) bearing interest at the rates provided in Section 1.08(b). "Eurodollar Rate" shall mean with respect to each Interest Period for a Eurodollar Loan, (i) the offered quotation to first-class banks in the interbank Eurodollar market by the Administrative Agent for dollar deposits of amounts in same day funds comparable to the outstanding principal amount of the Eurodollar Loans for which an interest rate is then being determined with maturities comparable to the Interest Period to be applicable to such Eurodollar Loans, determined as of 10:00 A.M. (New York time) on the date which is two Business Days prior to the commencement of such Interest Period divided (and rounded upward to the next whole multiple of 1/16 of 1%) by (ii) a percentage equal to 100% minus the then stated maximum rate of all reserve requirements (including, without limitation, any marginal, emergency, supplemental, special or other reserves) applicable to -73- any member bank of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D). "Event of Default" shall have the meaning provided in Section 8. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Existing Indebtedness" shall have the meaning provided in Section 7.04(g). "Existing Warrants" shall mean warrants to purchase up to 12,500 shares of common stock of STE and up to 7.69 shares of common stock of Sidney Telephone, in each case as such number of shares may be adjusted pursuant to the terms of such warrants after the Closing Date, as the same may be amended, modified or supplemented after the Closing Date pursuant to the terms thereof and hereof. "Expiration Date" shall mean June 30, 1998. "Facility" shall mean any of the credit facilities established under this Agreement, i.e., the B Term Facility, the C Term Facility, the Revolving ---- Facility or the Acquisition Facility. "FCC" shall mean the Federal Communications Commission and any successor regulatory body. "Federal Funds Effective Rate" shall mean for any period, a fluctuating interest rate equal for each day during such period to 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 next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal Funds brokers of recognized standing selected by the Administrative Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 2.01. "Fixed Rate Loans" shall mean the C Term Loans-Fixed Rate. "FRE Date," with respect to any C Term Loan-Fixed Rate, shall have the meaning provided in the C Term Note-Fixed Rate evidencing such C Term Loan- Fixed Rate. -74- "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect on the date of this Agreement; it being understood and agreed that determinations in accordance with GAAP for purposes of Section 7, including defined terms as used therein, are subject (to the extent provided therein) to Section 11.07(a). "Hazardous Materials" shall mean (a) petroleum or petroleum products, radioactive materials, asbestos in any form that is friable, urea formaldehyde foam insulation, and radon gas; (b) any chemicals, materials or substance defined as or included in the definition of "hazardous substances," "hazardous waste", "hazardous materials," "extremely hazardous substances," restricted hazardous waste," "toxic substances," "toxic pollutants," "contaminants," or "pollutants," or words of similar import, under any applicable Environmental Law; and (c) any other chemical, material or substance, the release of which is prohibited, limited or regulated by any governmental authority. "Indebtedness" of any Person shall mean, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn there under, (iv) all indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such indebtedness has been assumed (to the extent of the fair market value of such property), (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, i.e., take-or-pay ---- and similar obligations, (vii) all net obligations of such Person under Interest Rate Agreements and (viii) all Contingent Obligations of such Person (other than Contingent Obligations arising from the guaranty by such Person of the obligations of the Borrower and/or its Subsidiaries to the extent such guaranteed obligations do not constitute Indebtedness and are otherwise permitted hereunder), provided that Indebtedness shall not include trade -------- payables, accrued expenses and receipt of progress and advance payments, in each case arising in the ordinary course of business. "Indebtedness to be Refinanced" shall mean Indebtedness of the Borrower and its Subsidiaries owing to CoBank (exclusive of the CoBank Continuing Loans), Rural Telephone Financing Corp. and Fleet Equity Partners in such aggregate principal amounts as are set forth in the pay-off letters delivered by such Persons to the Administrative Agent on the Closing Date. "Initial AF Borrowing Date" shall mean the date upon which the initial incurrence of AF Loans occurs. "Interest Period" with respect to any Loan shall mean the interest period applicable thereto, as determined pursuant to Section 1.09. -75- "Interim Prepayment Amount" shall mean, at any time, (i) the Anticipated Reinvestment Amount specified in a Reinvestment Notice delivered no earlier than 180 days prior to such time less (ii) the aggregate principal amount of RF Loans made after the delivery of such Reinvestment Notice and prior to such time to finance Permitted Acquisitions or Acquisitions effected pursuant to the related Reinvestment Election. "Interest Rate Agreement" shall mean any interest rate swap agreement, any interest rate cap agreement, any interest rate collar agreement or other similar agreement or arrangement designed to protect the Borrower or any Subsidiary against fluctuations in interest rates. "Intermediary Holding Company" shall mean MJD Holdings Corp., MJD Ventures, Inc., MJD Services Corp., STE and any other Subsidiary first acquired or created after the Closing Date that is not an operating company (but that owns directly or indirectly one or more operating companies) and is not subject to regulatory restrictions on borrowings or issuances of guaranties of indebtedness for borrowed money. "Kelso" shall mean Kelso Investment Associates V, L.P., a Delaware limited partnership, and Kelso Equity Partners V, L.P., a Delaware limited partnership. "Kelso Affiliate" shall mean Kelso and each investment fund controlled by Kelso. "Lender" shall have the meaning provided in the first paragraph of this Agreement. "Lender Default" shall mean (i) the refusal (which has not been retracted) or failure of a Lender to make available its portion of any incurrence of Loans or (ii) a Lender having notified the Administrative Agent and/or the Borrower that it does not intend to comply with the obligations under Section 1.01, in the case of either clause (i) or (ii) as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. "Lender Register" shall have the meaning provided in Section 11.16. "Leverage Ratio" shall mean, at any date of determination, the ratio of (x) the remainder of (i) Consolidated Debt on such date less (ii) the ---- amount, if positive, of (A) the aggregate amount of cash or Cash Equivalents held by the Borrower and its Subsidiaries on such date less (B) all overdue accounts payable of the Borrower and its Subsidiaries at such time not paid in accordance with past practice as determined as of the Closing Date to (y) Consolidated Annualized EBITDA as of the last day of the fiscal quarter then or last ended. -76- "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan" shall have the meaning provided in Section 1.01. "Management Affiliate" shall mean Messrs. Duda, Leach, Thomas, Johnson and Bergstein or (to the extent same are controlled by one or more of the foregoing Persons) Bugger Associates and MJD Partners, L.P. "Margin Reduction Discount" shall mean zero, provided that the Margin -------- Reduction Discount shall be increased to .25% per annum (in the case of B Term Loans and C Term Loans-Floating Rate) or .50%, .75% or 1.00% per annum (in the case of RF Loans and AF Loans), as specified in clauses (i), (ii), (iii) or (iv) below, as the case may be, when, and for so long as, the ratio set forth in such clause has been satisfied as at the end of the then Relevant Fiscal Quarter: (i) the Margin Reduction Discount for B Term Loans and C Term Loans- Floating Rate shall be .25% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is less than 5.00 to 1; or (ii) the Margin Reduction Discount for RF Loans and AF Loans shall be .50% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is less than 5.50 to 1 but equal to or greater than 5.00 to 1; (iii) the Margin Reduction Discount for RF Loans and AF Loans shall be .75% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is equal to or greater than 4.50 to 1 but less than 5.00 to 1; and (iv) the Margin Reduction Discount for RF Loans and AF Loans shall be 1.00% per annum in the event that as of the end of the Relevant Fiscal Quarter the Leverage Ratio is less than 4.50 to 1. The Leverage Ratio shall be determined as of the last day of the Relevant Fiscal Quarter, by delivery of an officer's certificate of the Borrower to the Lenders pursuant to Section 6.01(e), which certificate shall set forth the calculation of the Leverage Ratio. The Margin Reduction Discount so determined shall apply, except as set forth below, from the date on which such officer's certificate is delivered to the Administrative Agent to the earlier of (x) the date on which the next certificate is delivered to the Administrative Agent pursuant to Section 6.01(e) and (y) the 45th day following the end of the fiscal quarter in which such first certificate was delivered to the Administrative Agent (or the 90th day if such fiscal quarter was the last fiscal quarter of a fiscal year). Notwithstanding anything to the contrary contained above, the -77- Margin Reduction Discount shall be zero (x) if no officer's certificate has been delivered to the Lenders pursuant to Section 6.01(e) which sets forth the Leverage Ratio as of the last day of the Relevant Fiscal Quarter or the financial statements upon which any such calculations are based have not been delivered, until such a certificate and/or financial statements are delivered and (y) at all times when there shall exist a Default under Section 8.01 or an Event of Default. It is understood and agreed that the Margin Reduction Discount as provided above shall in no event be cumulative and only the Margin Reduction Discount available pursuant to any of clauses (i), (ii), (iii) or (iv) if any, contained in this definition shall be applicable. "Margin Stock" shall have the meaning provided in Regulation U. "Material Adverse Effect" shall mean a material adverse effect on the business, property, assets, liabilities or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole after giving effect to the Transaction. "Material Subsidiary" shall mean any Subsidiary having gross assets at any time with a value of at least 5% of consolidated gross assets of the Borrower and its Subsidiaries and/or gross revenues for the last four fiscal quarters of at least 5% of the consolidated gross revenues of the Borrower and its Subsidiaries. "Minimum Borrowing Amount" shall mean (i) in the case of B Term Loans, $10,000,000 (or, if the Total B Term Commitment is less than $10,000,000, the greater of the then remaining Total B Term Commitment and $1,000,000) and (ii) in the case of C Term Loans, AF Loans and RF Loans (x) maintained as Base Rate Loans, $500,000 and (y) maintained as Eurodollar Loans, $1,000,000. "Minority Shares" shall mean up to 15% of the capital stock of Odin Telephone Company held by Richfield Associates on the Closing Date and the four shares of Sunflower Telephone Inc. held on the Closing Date by Frank and Matilda Schreck and Foulston & Siefkin Trust Account for H.A. and Mary Simpson. "MJD Capital" shall mean MJD Capital Corp., a South Dakota corporation. "MJD TeleChoice" shall mean MJD TeleChoice, Inc., a Delaware corporation. "Multiemployer Plan" shall mean any multiemployer plan as defined in section 4001(a)(3) of ERISA which is contributed to by (or to which there is an obligation to contribute of) the Borrower or any of its Subsidiaries or an ERISA Affiliate and each such plan for the five year period immediately following the latest date on which the Borrower, -78- any such Subsidiary or ERISA Affiliate contributed to or had an obligation to contribute to such plan. "NationsBank" shall mean NationsBank of Texas, N.A. "Net Cash Proceeds" shall mean, with respect to any Asset Sale, the Cash Proceeds resulting therefrom net (without duplication) of expenses of sale (including payment of principal, premium and interest of Indebtedness secured by the assets the subject of the Asset Sale and required to be, and which is, repaid under the terms thereof as a result of such Asset Sale), and incremental taxes paid or payable as a result thereof. "90%-Owned Subsidiary" shall mean any Subsidiary to the extent at least 90% of the capital stock or other ownership interests in such Subsidiary is owned directly or indirectly by the Borrower. "Non-Core Assets" shall mean (i) assets of the Borrower and its Subsidiaries not used in their core business of providing local exchange carrier services (e.g., assets used in the operation of the cable television business, ---- cellular telephone business and radio stations) and (ii) the stock and/or other equity interests in any Subsidiary not primarily engaged in the core business of providing local exchange carrier services, in the case of either clause (i) or (ii) to the extent such assets are certified as non-core assets by an Authorized Officer of the Borrower in an officer's certificate delivered to the Administrative Agent. "Non-Defaulting Lender" shall mean a Lender that is not a Defaulting Lender. "Non-Pledged Subsidiary" shall mean any Subsidiary that is not a Pledged Subsidiary. "Note" shall mean and include each B Term Note, each C Term Note, each RF Note and each AF Note. "Notice of Borrowing" shall have the meaning provided in Section 1.03. "Notice of Conversion" shall have the meaning provided in Section 1.06. "Notice Office" shall mean the office of the Administrative Agent at 130 Liberty Street, New York, New York or such other office as the Administrative Agent may designate to the Borrower in writing from time to time. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to the Administrative -79- Agent, the Collateral Agent, or any Lender pursuant to the terms of this Agreement or any other Credit Document. "Other Consolidated Capital Expenditures" shall mean all Consolidated Capital Expenditures other than CLEC Expenditures. "Parent Company" shall mean at any time each Subsidiary (including each Intermediary Holding Company that is a Subsidiary at such time) that owns the capital stock of any Subsidiary that is a TelCo. "Payment Office" shall mean the office of the Administrative Agent at 130 Liberty Street, New York, New York or such other office as the Administrative Agent may designate to the Borrower and the Lenders in writing from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Permitted Acquired Debt" shall mean Indebtedness of a Subsidiary acquired after the Closing Date pursuant to a Permitted Acquisition, to the extent such Indebtedness was outstanding prior to the consummation of the Permitted Acquisition and remains outstanding as Indebtedness of the respective Subsidiary after giving effect thereto, provided that (i) such Indebtedness was not incurred in connection with or in anticipation of such Permitted Acquisition or the respective Person becoming Subsidiary of the Borrower, (ii) such Indebtedness does not constitute Indebtedness of the Borrower or any of its Subsidiaries other than the respective Subsidiary acquired pursuant to the respective Permitted Acquisition and shall not be secured by any assets of any Person other than assets of the Subsidiary so acquired serving as security therefor at the time of the respective Permitted Acquisition, (iii) no Person (other than the respective Subsidiary or a direct parent or a Subsidiary of the respective Subsidiary to the extent such parent or Subsidiary is acquired in connection with such Permitted Acquisition) shall have any liability (contingent or otherwise) with respect to any Permitted Acquired Debt and (iv) the aggregate principal amount of all such Indebtedness shall not exceed at any time outstanding more than 5% of the Senior Consolidated Debt as such time. "Permitted Acquisition" shall mean any acquisition by the Borrower or any Subsidiary Guarantor of a company, business, division or product line located in the United States if (i) immediately prior to, and after giving effect to, such acquisition all the covenants contained in this Agreement (including Sections 7.11, 7.12 and 7.13) shall be complied with on a pro forma --- ----- basis (as if the acquisition had been consummated on the first day of the six month period then last ended) and (ii) the acquired company, business, division or product line is in the Business and, after giving effect to such acquisition, constitutes a Subsidiary or -80- (in the case of a business, division or product line) is owned by a Subsidiary, provided that no Acquisition shall constitute a Permitted Acquisition. "Permitted CLEC Expenditures" shall mean CLEC Expenditures to the extent that such CLEC Expenditures shall not exceed $5 million per fiscal year ($15 million per fiscal year during any period in which the Senior Leverage Ratio is 4.0 to 1.0 or less), provided that if the aforesaid maximum amount which is permitted for CLEC Expenditures for any fiscal year is not expended then the maximum amount of Permitted CLEC Expenditures which may be expended during any year of the immediately succeeding two fiscal years shall be increased in the aggregate by such unused amount. "Permitted Holders" shall mean each Carousel Affiliate, each Kelso Affiliate and each Management Affiliate. "Permitted Letters of Credit" shall mean (i) each standby letter of credit issued by a financial institution acceptable to the Administrative Agent for the account of the Borrower or any of its Subsidiaries in support of obligations arising in the ordinary course of business of the Borrower or such Subsidiary and (ii) each trade letter of credit issued by a financial institution acceptable to the Administrative Agent for the account of the Borrower or any of its Subsidiaries and for the benefit of sellers of goods to the Borrower or such Subsidiary in support of commercial transactions of the Borrower or such Subsidiary in the ordinary course of business. "Permitted Liens" shall mean Liens described in clauses (a) through (o), inclusive, of Section 7.03. "Permitted MJD Capital Debt" shall mean Indebtedness of MJD Capital under Capital Leases and purchase money mortgages in respect of equipment acquired by MJD Capital to lease or sublease to subsidiaries of the Borrower, provided that the maximum amount of such Indebtedness incurred in any fiscal year shall not exceed $2.5 million. "Permitted PSD Repurchase" shall mean the obligation of the Borrower to repurchase Permitted Subordinated Debt issued prior to the consummation of the Ellensberg Acquisition in an aggregate principal amount not to exceed $74.0 million (i.e., the anticipated consideration required to effect the Ellensburg ----- Acquisition) if such Acquisition is not consummated within 45 days of the issuance of such Permitted Subordinated Debt in accordance with the terms of the documentation governing the same. "Permitted Refinancing Indebtedness" shall mean any Indebtedness of the Borrower and/or any Subsidiary of the Borrower issued or given in exchange for, or the proceeds of which are used to, extend, refinance, renew, replace, substitute or refund any Indebtedness of such Person permitted pursuant to Sections 7.04(f), (g), (i) and (j) or any -81- Indebtedness of such Person issued to so extend, refinance, renew, replace, substitute or refund any such Indebtedness, so long as (a) such Indebtedness has a weighted average life to maturity greater than or equal to the weighted average life to maturity of the Indebtedness being refinanced, (b) such refinancing or renewal does not (i) increase the amount of such Indebtedness outstanding immediately prior to such refinancing or renewal or (ii) add guarantors, obligors or security from that which applied to such Indebtedness being refinanced or renewed, (c) such refinancing or renewal Indebtedness has substantially the same (or, from the perspective of the Lenders, more favorable) subordination provisions, if any, as applied to the Indebtedness being renewed or refinanced, and (d) all other terms of such refinancing or renewal (including, without limitation, with respect to the amortization schedules, redemption provisions, maturities, covenants, defaults and remedies), taken as a whole, are not less favor able to the respective borrower than those previously existing with respect to the Indebtedness being refinancing or renewed. "Permitted Subordinated Debt" shall mean unsecured and unguaranteed Indebtedness of the Borrower that is fully subordinated to the payment in full of all of the Obligations, all of the terms and conditions of which shall be reasonably satisfactory to the Agents. "Person" shall mean any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Plan" shall mean any pension plan as defined in Section 3(2) of ERISA (other than a multiemployer plan as defined in Section 3(37) of ERISA), which is maintained or contributed to by (or to which there is an obligation to contribute of) the Borrower or any of its Subsidiaries or an ERISA Affiliate and that is subject to Title IV of ERISA, and each such plan for the five year period immediately following the latest date on which the Borrower any such Subsidiary of the Borrower or an ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Pledge Agreement" shall have the meaning provided in Section 4.01(i). "Pledged Securities" shall mean all the Pledged Securities as defined in the Pledge Agreement. "Pledged Subsidiary" shall mean each Subsidiary the capital stock of which is pledged pursuant to the Pledge Agreement. "Preferred Repurchase" shall have the meaning provided in Section 5.05(a). -82- "Prime Lending Rate" shall mean the rate which BTCo announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. BTCo may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Pro Forma EBITDA Test" shall be satisfied, after giving effect to any merger, consolidation, conveyance, sale or transfer referred to in Section 7.02(a) or the creation or acquisition of a new TelCo pursuant to a Permitted Acquisition the capital stock of which is not to be pledged under the Pledge Agreement, if the percentage of Consolidated EBITDA for the 12 months last ended at such time (determined in the case of the acquisition or creation of a new TelCo pursuant to a Permitted Acquisition as if such Permitted Acquisition was consummated on the first day of such 12 month period) attributable to all Non- Pledged Subsidiaries does not exceed 10%. "PUC" shall mean a public utility commission, public service commission or any similar agency or commission. "Qualified IPO" shall mean a registered initial public offering of the common stock of the Borrower generating proceeds of at least $75,000,000. "RCRA" shall mean the Resource Conservation and Recovery Act, as amended, 42 U.S.C. (S) 6901 et seq. -- ---- "Refinancing" shall mean the refinancing transactions contemplated by Section 4.01(m). "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing margin requirements. "Reinvestment Election" shall have the meaning provided in Section 3.02(A)(c). "Reinvestment Notice" shall mean a written notice signed by an Authorized Officer of the Borrower stating that the Borrower, in good faith, intends and expects that the Borrower and its Subsidiaries will use all or a specified portion of the Net Cash Proceeds of -83- an Asset Sale to finance a Permitted Acquisition or an Acquisition within 180 days following the consummation of such Asset Sale. "Reinvestment Prepayment Amount" shall mean, with respect to any Reinvestment Election, the amount, if any, on the Reinvestment Prepayment Date relating thereto by which (a) the Anticipated Reinvestment Amount in respect of such Reinvestment Election exceeds (b) the aggregate amount thereof expended by the Borrower and its Subsidiaries to finance Permitted Acquisitions. "Reinvestment Prepayment Date" shall mean, with respect to any Reinvestment Election, the earliest of (i) the date, if any, upon which the Administrative Agent, on behalf of the Required Lenders, shall have delivered a written termination notice to the Borrower, provided that such notice may only be given while an Event of Default under 8.01 exists and (ii) the date occurring 180 days after the date of the related Reinvestment Notice. "Relevant Fiscal Quarter" shall mean, at any time, the last fiscal quarter of the Borrower with respect to which an officer's certificate has been delivered to the Lenders pursuant to Section 6.01(e). "Replaced Lender" shall have the meaning provided in Section 1.13. "Replacement Lender" shall have the meaning provided in Section 1.13. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan that is subject to Title IV of ERISA other than those events as to which the 30-day notice period is waived under subsection .22, .23, .25, .27 or .28 of PBGC Regulation Section 4043. "Required AF Lenders" shall mean Non-Defaulting Lenders whose outstanding Acquisition Commitments (or, after the termination thereof, outstanding AF Loans) constitute greater than 50% of the Adjusted Total Acquisition Commitment (or, after the termination thereof, the outstanding AF Loans of Non-Defaulting Lenders). "Required AF/RF Lenders" shall mean Non-Defaulting Lenders the sum of whose outstanding Acquisition Commitments and Revolving Commitments (or, after the termination thereof, outstanding AF Loans or RF Loans, as the case may be) constitute greater than 50% of the sum of (i) the Adjusted Total Acquisition Commitment (or, after the termination thereof, the outstanding AF Loans of Non- Defaulting Lenders) and (ii) the Adjusted Total Revolving Commitment (or, after the termination thereof, the outstanding RF Loans of Non-Defaulting Lenders). -84- "Required B TF Lenders" shall mean Non-Defaulting Lenders the sum of whose outstanding B Term Loans and B Term Commitments under such Facility represents an amount greater than 50% of the sum of all outstanding B Term Loans and B Term Commitments. "Required C TF Lenders" shall mean Non-Defaulting Lenders the sum of whose outstanding C Term Loans represents an amount greater than (i) in the event that any single Lender holds outstanding C Term Loans representing an amount greater than 45% of the sum of all outstanding C Term Loans, 75% of the sum of all outstanding C Term Loans and (ii) in all other circumstances, 50% of the sum of all outstanding C Term Loans. "Required RF Lenders" shall mean Non-Defaulting Lenders whose outstanding Revolving Commitments (or, after the termination thereof, outstanding RF Loans) constitute greater than 50% of the Adjusted Total Revolving Commitment (or, after the termination thereof, the outstanding RF Loans of Non-Defaulting Lenders). "Required Lenders" shall mean Non-Defaulting Lenders the sum of whose Acquisition Commitments (or, after the termination thereof, outstanding AF Loans), Revolving Commitments (or, after the termination thereof, outstanding RF Loans), outstanding Term Loans and Term Commitments constitute greater than 50% of the sum of (i) the Adjusted Total Acquisition Commitment (or, after the termination thereof, the outstanding AF Loans of Non-Defaulting Lenders), (ii) the Adjusted Total Revolving Commitment (or, after the termination thereof, the outstanding RF Loans of Non-Defaulting Lenders), (iii) all outstanding Term Loans of Non-Defaulting Lenders and (iv) all Term Commitments of Non-Defaulting Lenders. "Required TF Lenders" shall mean Non-Defaulting Lenders the sum of whose outstanding Term Loans and Term Commitments represents an amount greater than 50% of the sum of all outstanding Term Loans and Term Commitments of Non- Defaulting Lenders. "Revolving Commitment" shall mean, with respect to each Lender, the amount set forth opposite such Lender's name in Annex I hereto directly below the column entitled "Revolving Commitment," as the same may be (x) reduced or terminated from time to time pursuant to Section 2.02, 2.03 and/or 8 or (y) adjusted from time to time as a result of assignments to or from such Lender pursuant to Section 1.13 and/or 11.04. "Revolving Facility" shall mean the Facility evidenced by the Total Revolving Commitment. "RF Commitment Commission" shall have the meaning provided in Section 2.01(b). -85- "RF Lender" shall mean at any time each Lender with a Revolving Commitment or with outstanding RF Loans. "RF Loan" shall have the meaning provided in Section 1.01(c). "RF Note" shall have the meaning provided in Section 1.05(a). "Scheduled Reduction" shall have the meaning provided in Section 2.03(d). "Scheduled Repayment" shall have the meaning provided in Section 3.02(A)(b). "SEC" shall have the meaning provided in Section 6.01(g). "SEC Regulation D" shall mean Regulation D as promulgated under the Securities Act of 1933, as amended, as the same may be in effect from time to time. "Section 3.04 Certificate" shall have the meaning provided in Section 3.04(b)(ii). "Secured Creditor" shall mean and include any Secured Creditor as defined in the Pledge Agreement. "Senior Consolidated Debt" shall mean, at any time, (i) Consolidated Debt at such time less (ii) any such Consolidated Debt that constitutes Permitted Subordinated Debt, Indebtedness permitted by Section 7.04(f)(ii) and/or Permitted Refinancing Indebtedness incurred to refinance the foregoing types of Indebtedness. "Senior Leverage Ratio" shall mean, at any date of determination, the ratio of (x) the remainder of (i) Senior Consolidated Debt on such date less ---- (ii) the amount, if positive, of (A) the aggregate amount of all cash and Cash Equivalents held by the Borrower and its Subsidiaries at such time less (B) all overdue accounts payable of the Borrower and its Subsidiaries at such time not paid in accordance with past practice as determined as of the Closing Date to (y) Consolidated Annualized EBITDA as of the last day of the fiscal quarter then or last ended. "Sidney Telephone" shall mean Sidney Telephone Company, a Maine corporation. "Special PSD Election" shall have the meaning provided in Section 3.02(A)(d). -86- "Special PSD Notice" shall mean a written notice signed by an Authorized Officer of the Borrower stating that the Borrower, in good faith, intends and expects that the Borrower and its Subsidiaries will use $74.0 million to finance the Ellensburg Acquisition within 45 days following the incurrence of the Permitted Subordinated Debt or will apply such amount pursuant to the Permitted PSD Repurchase if such Acquisition is not so consummated. "Special PSD Prepayment Amount" shall mean the amount, if any, on the date occurring 45 days after the Special PSD Election by which (a) $74.0 million exceeds (b) the aggregate amounts expended by the Borrower and its Subsidiaries to finance the Ellensburg Acquisition and/or to effect the Permitted PSD Repurchase. "Specified Purposes" shall have the meaning provided in Section 5.05(a). "Specified Shareholders" shall mean Kelso and Carousel. "STE" shall mean ST Enterprises, Ltd., a Kansas corporation. "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity in which such Person directly or indirectly through Subsidiaries, has more than a 50% equity interest at the time, provided that, except for purposes of Sections 5.04, 5.13, 5.14, 6.01(f), 6.04, 6.07, 6.09, 7.10, 8.05, 8.06 and 8.09, neither MJD TeleChoice nor any other CLEC Company shall constitute a Subsidiary. Unless otherwise expressly provided, all references herein to "Subsidiary" shall mean a Subsidiary of the Borrower. "Subsidiary Guarantors" shall mean each Subsidiary party to the Subsidiary Guaranty. "Subsidiary Guaranty" shall have the meaning provided in Section 4.01(h). "Syndication Agent" shall have the meaning provided in the first paragraph of this Agreement. "Taconic" shall mean Taconic Telephone Corp., a New York corporation. "Taconic Acquisition" shall mean the acquisition of Taconic by the Borrower pursuant to the Applicable Acquisition Documents. -87- "Taxes" shall have the meaning provided in Section 3.04(a). "TelCo" shall mean any Subsidiary that is an operating company (except to the extent same is a Non-Core Asset). "Term Commitment" shall mean for any Lender the sum of its B Term Commitment and its C Term Commitment. "Term Loans" shall mean, collectively, the B Term Loans and the C Term Loans. "TF Commitment Commission" shall have the meaning provided in Section 2.01(a). "Total Acquisition Commitment" shall mean the sum of the Acquisition Commitments of each of the Lenders, provided that the Total Acquisition Commitment shall not at any time exceed $165 million. "Total B Term Commitment" shall mean the sum of the B Term Commitments of each of the Lenders. "Total C Term Commitment" shall mean the sum of the C Term Commitments of each of the Lenders. "Total Commitment" shall mean the sum of the Total B Term Commitment, the Total C Term Commitment, the Total Revolving Commitment, the Total Acquisition Commitment and the CoBank Commitment. "Total Revolving Commitment" shall mean the sum of the Revolving Commitments of each of the Lenders. "Total Term Commitment" shall mean, at any time, the sum of the Total B Term Commitment and Total C Term Commitment. "Transaction" shall mean (i) the consummation of the Acquisitions, (ii) the repayment of all Indebtedness of the Acquired Companies except as permitted by Section 7.04 and (iii) the incurrence of Term Loans on the Closing Date. "Trigger Date" shall mean the date, which shall be the last day of a fiscal quarter ending after the Closing Date, as of which the Senior Leverage Ratio is first determined to be 4.00 to 1.0 or less. -88- "Type" shall mean any type of Loan determined with respect to the interest option applicable thereto, i.e., a Base Rate Loan or Eurodollar Loan. ---- "UCC" shall mean the Uniform Commercial Code as in effect from time to time in New York. "UI" shall mean Utilities, Inc., a Maine corporation. "UI Acquisition" shall mean the acquisition by the Borrower of UI pursuant to the Applicable Acquisition Documents. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the actuarial present value of the accumulated plan benefits under the Plan as of the close of its most recent plan year, determined in accordance with actuarial assumptions at such time consistent with Statement of Financial Accounting Standards No. 87, exceeds the market value of the assets allocable thereto. "U.S." shall mean the United States of America. "Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of such Person to the extent all of the capital stock or other ownership interests in such Subsidiary, other than directors' qualifying shares, is owned directly or indirectly by such Person. "Written" or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile transmission, telegraph or cable. SECTION 10. The Agents. ---------- 10.01 Appointment. The Lenders hereby designate BTCo as ----------- Administrative Agent (for purposes of this Section 10, the terms "Administrative Agent" shall include BTCo in its capacity as Collateral Agent pursuant to the Pledge Agreement) and NationsBank as Syndication Agent to act as specified herein and in the other Credit Documents. Each Lender hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the respective Agents to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the respective Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The respective Agent may perform any of its duties hereunder by or through their respective officers, directors, agents, employees or affiliates. -89- 10.02 Nature of Duties. The respective Agent shall not have any ---------------- duties or responsibilities except those expressly set forth in this Agreement and the other Credit Documents. Neither the respective Agent nor or any of its respective officers, directors, agents, employees or affiliates shall be liable for any action taken or omitted by them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by their gross negligence or willful misconduct. The duties of the respective Agent shall be mechanical and administrative in nature; the respective Agent shall not have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Lender or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein. 10.03 Lack of Reliance on the Agents. Independently and without ------------------------------ reliance upon either Agent, each Lender and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrower and its Subsidiaries in connection with the making and the continuance of the Loans and the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrower and its Subsidiaries and, except as expressly provided in this Agreement, neither Agent shall have any duty or responsibility, either initially or on a continuing basis, to provide any Lender or the holder of any Note with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. Neither Agent shall be responsible to any Lender or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectibility, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrower and its Subsidiaries or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrower and its Subsidiaries or the existence or possible existence of any Default or Event of Default. 10.04 Certain Rights of the Administrative Agent. If the ------------------------------------------ Administrative Agent shall request instructions from the Required Lenders with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, the Administrative Agent shall be entitled to refrain from such act or taking such action unless and until the Administrative Agent shall have received instructions from the Required Lenders; and the Administrative Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, neither any Lender nor the holder of any Note shall have any right of action whatsoever against the Administrative Agent as a result of the -90- Administrative Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Required Lenders. 10.05 Reliance. The Administrative Agent shall be entitled to rely, -------- and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype, facsimile or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that the Administrative Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by the Administrative Agent. 10.06 Indemnification. To the extent an Agent is not reimbursed and --------------- indemnified by the Borrower, each Defaulting Lender (to the extent so able) and the Non-Defaulting Lenders will reimburse and indemnify the Administrative Agent, in proportion to their respective Loans and Commitments, for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, costs, expenses or disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by such Agent in performing its respective duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document; provided 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 gross negligence or willful misconduct of an Agent. 10.07 Each Agent in its Individual Capacity. With respect to its ------------------------------------- obligation to make Loans under this Agreement, each Agent shall have the rights and powers specified herein for a "Lender" and may exercise the same rights and powers as though it were not performing the duties specified herein; and the term "Lenders," "Required Lenders," "holders of Notes" or any similar terms shall, unless the context clearly otherwise indicates, include each Agent in its individual capacity. Each Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with any Credit Party or any Affiliate of any Credit Party as if it were not performing the duties specified herein, and may accept fees and other consideration from the Borrower, or any other Credit Party for services in connection with this Agreement and otherwise without having to account for the same to the Lenders. 10.08 Holders. The Administrative Agent may deem and treat the ------- payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Administrative Agent. Any request, authority or consent of any Person who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. -91- 10.09 Resignation by the Administrative Agent. (a) The --------------------------------------- Administrative Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days' prior written notice to the Borrower and the Lenders. Such resignation shall take effect upon the appointment of a successor Administrative Agent pursuant to clauses (b) and (c) below or as otherwise provided below. (b) Upon any such notice of resignation, the Required Lenders shall appoint a successor Administrative Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower (such consent not to be unreasonably withheld). (c) If a successor Administrative Agent shall not have been so appointed within such 15 Business Day period, the Administrative Agent, with the consent of the Borrower (such consent not to be unreasonably withheld), shall then appoint a successor Administrative Agent who shall serve as Administrative Agent hereunder or thereunder until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided above. (d) If no successor Administrative Agent has been appointed pursuant to clause (b) or (c) above by the 30th Business Day after the date such notice of resignation was given by the Administrative Agent, the Administrative Agent's resignation shall become effective and the Required Lenders shall thereafter perform all the duties of the Administrative Agent hereunder and/or under any other Credit Document until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided above. (e) The Syndication Agent may resign from its duties hereunder at any time upon four Business Days' prior written notice to the Borrower and the Administrative Agent. SECTION 11. Miscellaneous. ------------- 11.01 Payment of Expenses, etc. The Borrower agrees to: (i) ------------------------- whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Agents in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein and any amendment, waiver or consent relating thereto (including, without limitation, the reasonable fees and disbursements of White & Case LLP) and of each Agent and each of the Lenders in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein (including, without limitation, the reasonable fees and disbursements of counsel for the Agents and for each of the Lenders); (ii) pay and hold each of the Lenders harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Lenders harmless from and -92- against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; and (iii) indemnify each Lender (including in its capacity as Agent), its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, (a) any investigation, litigation or other proceeding (whether or not any Agent or any Lender is a party thereto and whether or not any such investigation, litigation or other proceeding is between or among any Agent, any Lender, any Credit Party or any third Person or otherwise (except to the extent between or among any Lenders in their capacity as such)) related to the entering into and/or performance of any Credit Document or the use of the proceeds of any Loans hereunder or the Transaction or the consummation of any transactions contemplated in any Credit Document, or (b) the actual or alleged presence of Hazardous Materials in the air, surface water or ground water or on the surface or subsurface of any property owned or operated at any time by Borrower or any of its Subsidiaries or the generation, storage, transportation, handling or disposal of Hazardous Materials by the Borrower or any of its Subsidiaries at any location, or the noncompliance by the Borrower or any of its Subsidiaries with any Environmental Law or any Environmental Claim in connection with the Borrower or any of its Subsidiaries or business or operations or any property owned or operated at any time by the Borrower or any of its Subsidiaries, including, in each case, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified or of any other indemnitee who is such Person or an affiliate of such Person). 11.02 Right of Setoff. In addition to any rights now or hereafter --------------- granted under applicable law or otherwise, and not by way of limitation of any such rights, if an Event of Default then exists, each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to any Credit Party or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special but not trust accounts) and any other Indebtedness at any time held or owing by such Lender (including, without limitation, by branches and agencies of such Lender wherever located) to or for the credit or the account of any Credit Party against and on account of the Obligations and liabilities of such Credit Party to such Lender under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of such Credit Party purchased by such Lender pursuant to Section 11.06(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not such Lender shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured. -93- 11.03 Notices. Except as otherwise expressly provided herein, all ------- notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, telecopier, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, faxed, cabled or delivered, if to the Borrower at the address specified opposite its signature below, if to any Lender, at its address specified for such Lender on Annex II hereto; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telegraphed, telexed, telecopied, or cabled or sent by overnight courier, and shall be effective when received. 11.04 Benefit of Agreement. (a) This Agreement shall be binding -------------------- upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto, provided that the Borrower may not assign or -------- transfer any of its rights or obligations hereunder without the prior written consent of the Lenders. Each Lender may at any time grant participations in any of its rights hereunder or under any of the Notes to another financial institution, provided that in the case of any such participation, the participant shall not have any rights under this Agreement or any of the other Credit Documents (the participant's rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation, except that the participant shall be entitled to the benefits of Sections 1.10 and 3.04 of this Agreement to the extent that such Lender would be entitled to such benefits if the participation had not been entered into or sold, and, provided further, that no Lender shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan or Note in which such participant is participating (it being understood that any waiver of any prepayment of, or the method of any application of any prepayment to, the Loans shall not constitute an extension of the final maturity date), or reduce the rate or extend the time of payment of interest or Fees (except in connection with a waiver of the applicability of any post-default increase in interest rates), or reduce the principal amount thereof, or increase such participant's participating interest in any Commitment over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment or a mandatory prepayment shall not constitute a change in the terms of any Commitment), (ii) release all or substantially all of the Collateral or (iii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or any other Credit Document. (b) Notwithstanding the foregoing, (x) any Lender may assign all or a portion of its outstanding B Term Loans and/or C Term Loans, its B Term Commitment, Revolving Commitment and/or Acquisition Commitment and its rights and obligations hereunder (which -94- assignment does not have to be pro rata among the Facilities) to (i) one or more -------- Lenders and/or Affiliates of such Lender which are Eligible Transferees or (ii) in the case of any Lender that is a fund that invests in loans, any other fund that invests in loans and is managed and/or advised by the same investment advisor of such Lender or by an Affiliate of such investment advisor, and (y) with the consent of the Administrative Agent and, if no Default under Section 8.01 or 8.05 or Event of Default exists, the Borrower (which consents shall not be unreasonably withheld), any Lender may assign all or a portion of its outstanding B Term Loans and/or C Term Loans, its B Term Commitment, Revolving Commitment and/or Acquisition Commitment and its rights and obligations hereunder to one or more Eligible Transferees (treating any fund that invests in loans and any other fund that invests in loans and is managed and/or advised by the same investment advisor of such fund or by an Affiliate of such investment advisor of such fund or by an Affiliate of such investment advisor as a single Eligible Transferee). No assignment pursuant to the immediately preceding sentence shall to the extent such assignment represents an assignment to an institution other than one or more Lenders hereunder, be in an aggregate amount less than $5,000,000 unless the entire Commitment and Loans of the assigning Lender is so assigned. If any Lender so sells or assigns all or a part of its rights hereunder or under the Notes, any reference in this Agreement or the Notes to such assigning Lender shall thereafter refer to such Lender and to the respective assignee to the extent of their respective interests and the respective assignee shall have, to the extent of such assignment (unless otherwise provided therein), the same rights and benefits as it would if it were such assigning Lender. Each assignment pursuant to this Section 11.04(b) shall be effected by the assigning Lender and the assignee Lender executing an Assignment Agreement and giving the Administrative Agent written notice thereof. At the time of any such assignment, (i) either the assigning or the assignee Lender shall pay to the Administrative Agent a nonrefundable assignment fee of $3,500 (provided that only one assignment fee shall be payable in respect of any reasonably contemporaneous assignment by a fund that invests in loans to any one or more funds that invests in loans and are managed and/or advised by the same investment advisor of such fund or by an Affiliate of such investment advisor), (ii) Annex I shall be deemed to be amended to reflect the Commitments and Loans of the respective assignee (which shall result in a direct reduction to the Commitment of the assigning Lender) and of the other Lenders, and (iii) upon surrender of the old Notes the Borrower will, at its own expense, issue new Notes to the respective assignee and to the assigning Lender in conformity with the requirements of Section 1.05, provided further that such transfer or ---------------- assignment will not become effective until recorded by the Administrative Agent on the Lender Register pursuant to Section 11.16. To the extent of any assignment pursuant to this Section 11.04(b) to a Person which is not already a Lender hereunder and which is not a United States Person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Lender shall provide to the Borrower and the Administrative Agent the appropriate Internal Revenue Service Forms (and, if applicable, a Section 3.04 Certificate) described in Section 3.04(b). To the extent that an assignment pursuant to this Section 11.04(b) would, at the time of such assignment, result in increased costs under Section 1.10 or 3.04 from those -95- being charged by the respective assigning Lender prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective assignment). Nothing in this clause (b) shall prevent or prohibit any Lender from pledging its Notes or Loans to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank and, with the consent of the Administrative Agent and the Borrower (which consents shall not be unreasonably withheld), any Lender which is a fund may pledge all or any portion of its Loans and Notes to its trustee in support of its obligations to its trustee. (c) Notwithstanding any other provisions of this Section 11.04, no transfer or assignment of the interests or obligations of any Lender hereunder or any grant of participation therein shall be permitted if such transfer, assignment or grant would require the Borrower or any of its Subsidiaries to (i) file a registration statement with the SEC, (ii) qualify the Loans under the "Blue Sky" laws of any State or (iii) integrate such transfer or assignment with a separate securities offering of securities of the Borrower or any of its Subsidiaries. (d) Each Lender initially party to this Agreement hereby represents, and each Person that became a Lender pursuant to an assignment permitted by this Section 11 will, upon its becoming party to this Agreement, represent that it is an Eligible Transferee which makes or invests in loans in the ordinary course of its business and that it will make or acquire Loans for its own account in the ordinary course of such business, provided that subject to the preceding clauses -------- (a) and (b), the disposition of any promissory notes or other evidences of or interests in Indebtedness held by such Lender shall at all times be within its exclusive control. 11.05 No Waiver; Remedies Cumulative. No failure or delay on the ------------------------------ part of the Administrative Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Credit Party and the Administrative Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Administrative Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Administrative Agent or the Lenders to any other or further action in any circumstances without notice or demand. 11.06 Payments Pro Rata. (a) The Administrative Agent agrees that ----------------- promptly after its receipt of each payment from or on behalf of any Credit Party in respect -96- of any Obligations of such Credit Party hereunder, it shall distribute such payment to the Lenders (other than any Lender that has expressly waived its right to receive its pro rata share thereof) pro rata based upon their --- ---- respective shares, if any, of the Obligations with respect to which such payment was received. (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans or Fees, of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligation then owed and due to such Lender bears to the total of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the respective Credit Party to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount, provided that if all or any portion of such excess -------- amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. (c) Notwithstanding anything to the contrary contained herein, the provisions of the preceding Sections 11.06(a) and (b) shall be subject to the express provisions of this Agreement which require, or permit, differing payments to be made to Non-Defaulting Lenders as opposed to Defaulting Lenders. 11.07 Calculations; Computations. (a) The financial statements to -------------------------- be furnished to the Lenders pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Lenders), provided that (x) except as otherwise specifically provided herein, all computations determining compliance with Sections 7.11, 7.12 and 7.13, including definitions used therein, shall utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the December 31, 1997 historical financial statements of the Acquired Companies delivered to the Lenders pursuant to Section 5.10(b) and (y) that if at any time such computations utilize accounting principles different from those utilized in the financial statements furnished to the Lenders, such financial statements shall be accompanied by reconciliation work-sheets. (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days (365-366 days in the case of interest on Base Rate Loans). -97- 11.08 Governing Law; Submission to Jurisdiction; Venue; Waiver of ----------------------------------------------------------- Jury Trial. (a) This Agreement and the other Credit Documents and the rights - ---------- rights and obligations of the parties hereunder and thereunder shall be construed in accordance with and be governed by the law of the State of New York. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York sitting in the Borough of Manhattan or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to each Credit Party located outside New York City and by hand delivery to each Credit Party located within New York City, at its address for notices pursuant to Section 11.03, such service to become effective 30 days after such mailing. Each Credit Party hereby irrevocably designates appoints and empowers CT Corporation System, with offices on the date hereof located at 1633 Broadway, New York, New York 10019, as its agent for service of process in respect of any such action or proceeding. Nothing herein shall affect the right of the Administrative Agent, any Lender to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Credit Party in any other jurisdiction. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. (c) Each of the parties to this Agreement hereby irrevocably waives all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. 11.09 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 11.10 Effectiveness. This Agreement shall become effective on the ------------- date (the "Effective Date") on which the Borrower and each of the Lenders shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Administrative Agent at the Payment Office of the Administrative Agent or, in the case of -98- the Lenders, shall have given to the Administrative Agent telephonic (confirmed in writing), written telex or facsimile transmission notice (actually received) at such office that the same has been signed and mailed to it. The Administrative Agent will give the Borrower and each Lender prompt written notice of the occurrence of the Effective Date. 11.11 Headings Descriptive. The headings of the several sections -------------------- and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 11.12 Amendment or Waiver. Neither this Agreement nor any other ------------------- Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Borrower, the Required AF/RF Lenders and the Required TF Lenders, provided that no such change, waiver, discharge or termination shall, without the consent of each Lender (other than a Defaulting Lender) directly affected thereby, (i) extend the AF/RF Maturity Date, the B Maturity Date or the C Maturity Date (it being understood that any waiver of any prepayment of, or the method of application of any prepayment to, the Loans shall not constitute any such extension), or reduce the rate or extend the time of payment of interest (other than as a result of waiving the applicability of any post-default increase in interest rates) or Fees, or reduce the principal amount thereof, or increase the Commitment of any Lender over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Commitment shall not constitute a change in the terms of any Commitment of any Lender), (ii) amend, modify or waive any provision of this Section 11.12, (iii) reduce the percentage specified in, or (except to give effect to any additional facilities hereunder) otherwise modify, the definition of Required Lenders, (iv) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement, (v) release all or substantially all of the Collateral or (vi) release all or substantially all of the Subsidiary Guaranties; provided further, that no such change, waiver, discharge or termination shall, (t) without the consent of the Required AF/RF Lenders, reduce the percentage specified in, or otherwise modify, the definition of Required AF/RF Lenders, (u) without the consent of the Required TF Lenders, reduce the percentage specified in, or otherwise modify, the definition of Required TF Lenders, (v) without the consent of the Required AF Lenders, reduce the percentage specified in, or otherwise modify, the definition of Required AF Lenders or amend, waive or reduce any Scheduled Reduction applicable to the Acquisition Facility, (w) without the consent of the Required RF Lenders, reduce the percentage specified in, or otherwise modify, the definition of Required RF Lenders or amend, waive or reduce any Scheduled Reduction applicable to the Revolving Facility, (x) without the consent of the Required B TF Lenders, reduce the percentage specified in, or otherwise modify, the definition of Required B TF Lenders or amend, waive or reduce any Scheduled Repayment applicable to the B Term Facility, (y) without the consent of the Required C TF Lenders, reduce the percentage specified in, or otherwise modify, the definition of Required C TF Lenders or amend, waive or -99- reduce any Scheduled Repayment applicable to the C Term Facility or (z) without the consent of any Agent affected thereby, amend any provision of Section 10. 11.13 Survival. All indemnities set forth herein including, without -------- limitation, in Section 1.10, 1.11, 3.04, 10.06 or 11.01 shall survive the execution and delivery of this Agreement and the making and repayment of the Loans. 11.14 Domicile of Loans. Each Lender may transfer and carry its ----------------- Loans at, to or for the account of any branch office, subsidiary or affiliate of such Lender, provided that the Borrower shall not be responsible for costs arising under Section 1.10 or 3.04 resulting from any such transfer (other than a transfer pursuant to Section 1.12) to the extent not otherwise applicable to such Lender prior to such transfer. 11.15 Confidentiality. Each of the Lenders agrees that it will use --------------- its best efforts not to disclose without the prior consent of the Borrower (other than to its employees, auditors, counsel or other professional advisors, to affiliates or to another Lender if the Lender or such Lender's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to the Borrower or any of its Subsidiaries which is furnished pursuant to any Credit Document and which is designated by the Borrower or the Borrower to the Lenders in writing as confidential; provided, that any Lender may disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate in any report, statement or testimony sub mitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Lender or to the Federal Reserve Board or the Federal Deposit Insurance Corporation or similar organiza tions (whether in the United States or elsewhere) or their successors or to the National Association of Insurance Commissioners, (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation (notice of which will be promptly sent to the Borrower to the extent permitted by Law), (d) in order to comply with any law, order, regulation or ruling applicable to such Lender, and (e) to any prospective transferee that is an Eligible Transferee that is acceptable to the Borrower in connection with any contemplated transfer of any of the Notes or any interest therein by such Lender to the extent that such prospective transferee is notified of the confidentiality requirements relating thereto. No Lender shall be obligated or required to return any materials furnished by the Borrower or any Subsidiary. The Borrower hereby agrees that the failure of a Lender to comply with the provisions of this Section 11.15 shall not relieve the Credit Parties of any of their obligations to such Lender under this Agreement and the other Credit Documents. -100- 11.16 Lender Register. The Borrower hereby designates the --------------- Administrative Agent to serve as the Borrower's agent, solely for purposes of this Section 11.16, to maintain a register (the "Lender Register") on which it will record the Commitments from time to time of each of the Lender (including Acquisition Commitments, if effected, and any B Term Commitments resulting from a B Term Commitment Renewal), the Loans made by each of the Lenders and each repayment in respect of the principal amount of the Loans of each of the Lenders. Failure to make any such recordation, or any error in such recordation shall not affect the Borrower's obligations in respect of such Loans. With respect to any Lender, the transfer of the Commitments (or the post-Closing Date effectiveness of new Commitments) or Loans of such Lender and the rights to the principal of, and interest on, such Loans or any Loan made pursuant to such Commitments shall not be effective until such transfer is recorded on the Lender Register maintained by the Administrative Agent with respect to ownership of such Commitments and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitments and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitments and Loans shall be recorded by the Administrative Agent on the Lender Register only upon the acceptance by the Administrative Agent of a properly executed and delivered Assignment Agreement pursuant to Section 11.04(b). The Borrower agrees to indemnify the Administrative Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Administrative Agent in performing its duties under this Section 11.16 (but excluding such losses, claims, liabilities or liabilities incurred by reason of the Administrative Agent's gross negligence or willful misconduct). -101- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Agreement to be duly executed and delivered as of the date first above written. MJD COMMUNICATIONS, INC. By /s/ Walter Leach -------------------------------------- Title: Vice President, Secretary and Chief Financial Officer BANKERS TRUST COMPANY, Individually and as Administrative Agent By /s/ G. Andrew Keith -------------------------------------- Title: Vice President NATIONSBANK OF TEXAS, N.A., By /s/ Pamela S. Kurtzman -------------------------------------- Title: Vice President COBANK, ACB By /s/ Rick L. Freeman -------------------------------------- Title: Assistant Vice President FIRST UNION NATIONAL BANK By /s/ Jim Redman -------------------------------------- Title: Senior Vice President PRIME INCOME TRUST By /s/ Sheila Finnerty -------------------------------------- Title: Assistant Vice President HELLER FINANCIAL, INC. By /s/ Patrick Hayes -------------------------------------- Title: Vice President THE TRAVELERS INSURANCE COMPANY By /s/ Robert M. Mills -------------------------------------- Title: Investment Officer UNION BANK OF CALIFORNIA, N.A. By /s/ Christine P. Ball -------------------------------------- Title: Vice President CENTURA BANK By /s/ Gregory Greer -------------------------------------- Title: Corporate Banking Officer TORONTO DOMINION (TEXAS), INC. By /s/ David G. Parker -------------------------------------- Title: FLEET NATIONAL BANK By /s/ Tanya M. Crossley -------------------------------------- Title: Vice President MERRILL LYNCH SENIOR FLOATING RATE FUND, INC. By /s/ Lynn C. Baranski -------------------------------------- Title: Authorized Signatory PILGRIM AMERICA PRIME RATE TRUST By /s/ Thomas Hunt -------------------------------------- Title: Assistant Porfolio Manager ANNEX I ------- COMMITMENTS -----------
B Term C Term CoBank Revolving Lender Commitment Commitment Commitment Commitment ------ ------------ -------------- -------------- ----------- Bankers Trust Company $ 47,500,000 $ 7,993,595.94 $ 0 $15,000,000 NationsBank of Texas, N.A. $ 10,000,000 $ 0 $ 0 $15,000,000 CoBank, ACB $ 0 $ 0 $51,506,404.18 $ 0 First Union National Bank $ 10,000,000 $ 0 $ 0 $15,000,000 Prime Income Trust $ 15,000,000 $ 3,999,999.97 $ 0 $ 0 Heller Financial, Inc. $ 5,000,000 $ 0 $ 0 $ 7,500,000 The Travelers Insurance $ 15,000,000 $ 4,999,999.96 $ 0 $ 0 Company Union Bank of California, $ 7,500,000 $ 0 $ 0 $ 9,000,000 N.A. Centura Bank $ 10,000,000 $ 0 $ 0 $14,500,000 Toronto Dominion (Texas), Inc. (for First Dominion $ 5,000,000 $ 1,999,999.98 $ 0 $ 0 Capital) Fleet National Bank $ 7,500,000 $ 0 $ 0 $ 9,000,000 Merrill Lynch Senior Floating Rate Fund, Inc. $ 10,000,000 $ 1,499,999.98 $ 0 $ 0 Pilgrim America Prime Rate Trust $ 12,500,000 $ 2,999,999.98 $ 0 $ 0 ------------ -------------- -------------- ----------- $155,000,000 $23,493,595.82 $51,506,404.18 $85,000,000 ============ ============== ============== ===========
ANNEX II -------- ADDRESSES --------- Bankers Trust Company 130 Liberty Street New York, New York 10006 Attention: Mary Kay Coyle Telephone No.: (212) 250-2500 Telecopier No.: (212) 250-7218 NationsBank of Texas, N.A. 901 Main Street, 64th Floor Dallas, Texas 75202 Attention: Pam Kurtzman Telephone No.: (214) 508-0997 Telecopier No.: (214) 508-9390 CoBank ACB 200 Galleria Parkway N.W., Suite 1900 Atlanta, Georgia 30339 Attention: Rick Freeman Telephone No.: (770) 618-3200 Telecopier No.: (770) 618-3202 First Union National Bank One First Union Center 301 South College Street Charlotte, North Carolina 28288-0735 Attention: Jeff Haristy Telephone No.: (704) 374-4999 ANNEX II Page 2 Telecopier No.: (704) 374-4092 Prime Income Trust (Dean Witter) Two World Trade Center, 72nd Floor New York, New York 10048 Attention: Sheila Finnerty Telephone No.: (212) 392-5686 Telecopier No.: (212) 392-5345 Heller Financial, Inc. 500 West Monroe Street Chicago, Illinois 60661 Attention: Patrick Hayes Telephone No.: (312) 441-7035 Telecopier No.: (312) 441-7357 Heller Financial, Inc. 900 Circle 7S Parkway Suite 900 Atlanta, Georgia 30339 Attention: Betsy Edelman Telephone No.: (770) 980-6016 Telecopier No.: (770) 980-6315 The Travelers Insurance Company One Tower Square Hartford, Connecticut 06183-2030 Attention: Allen Cantrell Telephone No.: (860) 954-2396 ANNEX II Page 3 Telecopier No.: (860) 954-5243 Union Bank of California, N.A. 445 South Figueroa Street Los Angeles, California 90071 Attention: Ryan Flanagan Telephone No.: (713) 236-7001 Telecopier No.: (713) 236-5747 Centura Bank 200 Providence Road, 3rd Floor P.O. Box 626 Charlotte, North Carolina 28207 Attention: Gregory Greer Telephone No.: (704) 331-1478 Telecopier No.: (704) 331-1761 First Dominion Capital 1330 Avenue of the Americas New York, New York 10019 Attention: Andrew H. Marsh Telephone No.: (212) 258-1010 Telecopier No.: (212) 258-1019 Copy to: Toronto Dominion (Texas), Inc. 909 Fannin Street Houston, TX 77010 Attention: David Parker ANNEX II Page 4 Telephone No.: (713) 653-8248 Telecopier No.: (713) 652-2647 Fleet National Bank 1185 Avenue of the Americas, MCS16K 16th Floor New York, New York 10167 Attention: Tanya Crossley Telephone No.: (212) 819-6047 Telecopier No.: (212) 819-6202 Merrill Lynch Senior Floating Rate Fund, Inc. 800 Scudder Mill Road Sec. 1 Plainsboro, New Jersey 08536 Attention: Lynn Baraski Telephone No.: (609) 282-5013 Telecopier No.: (609) 282-2756 Attention: George Pelose Telephone No.: (609) 282-2060 Telecopier No.: (609) 282-0727 Pilgrim America Prime Rate Trust Two Renaissance Square 40 North Central Avenue, Suite 1200 Phoenix, Arizona 85004-4424 Attention: Tim Hunt Telephone No.: (602) 417-8257 ANNEX II Page 5 Telecopier No.: (602) 417-8327 ANNEX III SUBSIDIARIES A. MJD COMMUNICATIONS, INC. ------------------------ 1. Common Stock MJD Partners, L.P. 38,145.00 John P. Duda 537.00 Walter E. Leach, Jr. 490.00 Carousel 47.881.93 Kelso 47,881.93 Michael and Lindy Bergstein 414.00 Joel Bergstein MP Plan 311.00 Eugene B. Johnson 400.00 Jack H. Thomas 200.00 Peter Nixon 30.00 Michael Stein 300.00 Lisa Hood 30.00 Pamela D. Clarke 45.00 Patrick R. Eudy 150.00 Patrick L. Morse 100.00 Timothy W. Henry 85.00 ------------ Subtotal 137,000.86 2. Options to Purchase Common Stock Jack H. Thomas 1,421 Eugene B. Johnson 1,066 Walter E. Leach, Jr. 711 John P. Duda 1,066 ------- Subtotal 4,264 3. Class A Voting Common Stock Purchase Warrants Jack H. Thomas 10 Eugene B. Johnson 21 John P. Duda 17 Walter E. Leach, Jr. 15 Bugger Associates, Inc. 21 ---- Subtotal 84.00 B. MJD HOLDINGS CORP. - 3,000 shares of Common Stock, par value $.01 ------------------ per share, authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 shares Morehead Place, 521 E. Morehead Street, Suite 250, Charlotte, North Carolina 28202 C. ST ENTERPRISES, LTD. - 200,000 shares of Common Stock, par value $.01 -------------------- per share, authorized, 90,000 shares issued and outstanding. MJD Communications, Inc. - 90,000 shares Morehead Place, 521 E. Morehead Street, Suite 250, Charlotte, North Carolina 28202 Common Stock Purchase Warrants - 12,857.01 warrants issued and outstanding. ALTA Subordinated Debt Partners II, L.P. - Warrants to purchase 5,222.49 shares c/o Burr, Egan, Deleage & Co. One Embarcadero Center, Suite 4050 San Francisco, California 94111 ALTA Subordinated Debt Partners III, L.P. - Warrants to purchase 7,411.54 shares c/o Burr, Egan, Deleage & Co. One Embarcadero Center, Suite 4050 San Francisco, California 94111 Steve McGeeney - Warrants to purchase 111.49 shares c/o Paul, Hastings, Janofsky & Walker LLP Ninth Floor 1055 Washington Boulevard Stamford, Connecticut 06901-2217 Sylvana Zoberg - Warrants to purchase 111.49 shares 418 East 59th Street New York, New York 10022 D. All the issued and outstanding stock of the following entities is held by ST Enterprises, Ltd., P.O. Box 199, Dodge City, Kansas 67801: NORTHLAND TELEPHONE COMPANY OF MAINE, INC. - ------------------------------------------ 200 shares of Common stock, par value $.01 per share, authorized, 100 shares issued and outstanding. STE/NE ACQUISITION CORP. (d/b/a NORTHLAND TELEPHONE ----------------------- ------------------- COMPANY OF VERMONT) - 1,000 shares of Common Stock, ------------------ par value $.01 per share, authorized, 1,000 shares issued and outstanding ST PAGING, INC. - 10,000 shares of Common Stock, -------------- par value $.01 per share, authorized, 750 shares issued and outstanding ST COMMUNICATIONS, INC. - 10,000 shares of ---------------------- Common Stock, par value $100 per share, authorized, 54 shares issued and outstanding ST COMPUTER RESOURCES, INC. - 10,000 shares of -------------------------- Common Stock, no par value per share, authorized, 500 shares issued and outstanding ST BROADCASTING COMPANY, INC. - 1,500 shares of ---------------------------- common stock, par value $100 per share, authorized, 750 shares issued and outstanding E. BREADBASKET ENTERPRISES, INC. - 250,000 shares of Common Stock, par ---------------------------- value $1.00 per share, authorized, 10,000 shares issued and outstanding ST Broadcasting Company, Inc. - 10,000 shares P.O. Box 199, Dodge City, Kansas 67801 F. ST LONG DISTANCE, INC. - 1,000 shares of Common Stock, par value $.01 --------------------- per share, authorized, 100 shares issued and outstanding. ST Enterprises, Ltd. - 100 common shares 908 W. Frontview P. O. Box 199 Dodge City, Kansas 67801 G. SUNFLOWER TELEPHONE COMPANY, INC. - 1,500 shares of Common Stock, -------------------------------- par value $100 per share, and 1,500 shares of Preferred Stock, par value $100 per share, authorized, 234 preferred shares issued and outstanding and 968 common shares issued (234 preferred shares and 282 common shares held in treasury) ST Enterprises, Ltd. - 682 common shares Frank and Mathilda Schreck - 2 common shares Marienthal, Kansas 67863 Estate of Mary Simpson - 2 common shares c/o Foulston & Siefkin Trust Account for H.A. and/or Mary Simpson Foulston & Siefkin L.L.P. P.O. Box 1147 Dodge City, Kansas 67801 H. STE FINANCE COMPANY, INC. - 30,000 shares of Common Stock, par value ------------------------ $1.00 per share, authorized, 1,000 shares issued and outstanding. Sunflower Telephone Company, Inc. - 1,000 common shares P. O. Box 199 Dodge City, Kansas 67801 I. MJD VENTURES, INC. - 100 shares of Common Stock, par value $.01 per share, ----------------- authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 common shares J. SIDNEY TELEPHONE COMPANY - 100,000 shares of Common Stock, par value $.01 ------------------------ per share, authorized, 100 common shares issued and outstanding. MJD Ventures, Inc. - 100 common shares Morehead Place, 521 E. Morehead Street, Suite 250, Charlotte, North Carolina 28202 ALTA Subordinated Debt Partners, II, L.P. - Warrants to purchase 3.18 common shares ALTA Subordinated Debt Partners III, L.P. - Warrants to purchase 4.51 common shares K. MJD SERVICES CORP. - 100 shares of Common Stock, par value $.01 per share, ----------------- authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 common shares L. All of the issued and outstanding stock of the following entities is held by MJD Services Corp., Morehead Place, 521 E. Morehead Street, Suite 250, Charlotte, North Carolina 28202: BLUESTEM TELEPHONE COMPANY - 100 shares of Common -------------------------- Stock, par value $.01 per share, authorized, 100 shares issued and outstanding BIG SANDY TELECOM, INC. - 100 shares of Common Stock, ----------------------- par value $.01 per share, authorized, 100 shares issued and outstanding COLUMBINE ACQUISITION CORP. - 100 shares of Common --------------------------- Stock, par value $.01 per share, authorized, 100 common shares issued and outstanding M. ODIN TELEPHONE EXCHANGE, INC. - 150 shares of Common Stock, no par value per ----------------------------- share, authorized, 101 shares issued and outstanding (5.7143 shares held in treasury). MJD Services Corp. - 80.9928 common shares Morehead Place, 521 E. Morehead Street Suite 250, Charlotte, North Carolina 28202 Richfield Associates, Inc. - 14.2929 common shares 400 Andrews Street Suite 310 Rochester, New York 14604 N. MJD TELECOM, INC. - 100 shares of Common Stock, par value $.01 per share, ----------------- authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 shares O. CHAUTAUQUA & ERIE TELEPHONE CORPORATION - 100,000 shares of Common Stock, --------------------------------------- par value $.01 per share, and 35,000 shares of Preferred Stock, par value $50 per share, authorized, 100 common shares issued and outstanding and no preferred shares issued and outstanding. MJD Holdings Corp. - 100 common shares Morehead Place, 521 E. Morehead Street Suite 250, Charlotte, North Carolina 28202 P. KADOKA TELEPHONE CO. - 5,000 shares of Common Stock, par value $100 per -------------------- share, authorized, 1,212 shares issued and outstanding. MJD Holdings Corp. - 1,212 common shares Q. MJD TELECOM, INC. - 100 shares of Common Stock, par value $.01 per share, ----------------- authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 shares R. MJD TELECHOICE CORP. - 100 shares of Common Stock, par value $.01 per share, -------------------- authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 shares S. MJD CAPITAL CORP. - 100 shares of Common Stock, par value $.01 per share, ----------------- authorized, 100 shares issued and outstanding. MJD Communications, Inc. - 100 shares T. C-R COMMUNICATIONS, INC. - 750 shares of Common Stock, without par value, ------------------------ authorized, 749 shares issued and outstanding. MJD Ventures, Inc. - 750 shares U. C-R TELEPHONE COMPANY - 100 shares of Common Stock, par value $10.00 per --------------------- share, authorized, 100 shares issued and outstanding. C-R Communications, Inc. - 100 shares ANNEX IV The following plans were the only plans maintained by MJD Communications, Inc. or any of its Subsidiaries subject to Title IV of ERISA: 1. STE/NE Acquisition Corp. Pension Plan for Vermont Employees of Transferred GTE Operations (Northland). This plan was terminated in 1997 and the assets of the plan have been distributed. 2. Chautaqua & Erie Telephone Corporation Management Pension Plan. This plan was terminated in 1997 and the assets of the plan have been distributed. 3. Pension Plan for Employees of Chautaqua & Erie Telephone Corporation Union Pension Plan. This plan was terminated in 1997 and the assets of the plan have been distributed. 4. Taconic Telephone Corp. Union Employee Defined Benefit Plan. The plan has been terminated and the assets are in the process of being distributed. 5. Taconic Telephone Corp. Management Employee Defined Benefit Plan. The plan has been terminated and the assets are in the process of being distributed. The following outlines the retiree health benefits made available to certain employees of MJD Communications, Inc. and its Subsidiaries: 1. Odin Telephone Exchange, Inc. has made available to retired employees and surviving spouses of retired employees the ability to purchase health care benefits at the group rate paid by the company. 2. Chautaqua & Erie Telephone Corporation has made available to retired management employees and surviving spouses of retired management employees the ability to purchase health care benefits at the group rate paid by the company. The Company also provides that retired employees can purchase up to $20,000 of life insurance coverage. ANNEX V EXISTING LIENS A. LIENS ON CAPITAL STOCK AND OTHER EQUITY INTERESTS OF MJD COMMUNICATIONS AND --------------------------------------------------------------------------- THE SUBSIDIARIES ---------------- 1. Under Kansas law, the minority stockholders of Sunflower Telephone Company, Inc. have the right to participate in any issuance of stock by Sunflower Telephone Company, Inc. on a pro rata basis. B. ARRANGEMENTS REQUIRING MJD AND/OR THE SUBSIDIARIES TO ISSUE OR SELL CAPITAL --------------------------------------------------------------------------- STOCK OR OTHER EQUITY INTERESTS ------------------------------- 1. There are currently outstanding 4,264 options to purchase shares of Class A Voting Common Stock of MJD Communications, Inc. pursuant to the MJD Communications, Inc. 1995 Stock Option Plan (the "Plan"). An additional 1,420 options are available for issuance under the Plan (there will not be additional issuances of options under the Plan). The options vest in 20% increments over the 5 year period beginning on the date of the optionholder's employment and are exercisable at the fair market value of the stock at the date of grant. A list of optionholders is set forth in Annex III. 2. There are currently outstanding 84 MJD Communications, Inc. Class A Voting Stock Purchase Warrants (the "Warrants"). The Warrants are exercisable at a price of $.01 per share at any time during the 20 year period following the date of issuance. A list of the holders of Warrants is set forth in Annex III (A). 3. There are currently outstanding 12,500 ST Enterprises, Ltd. Common Stock Purchase Warrants, exercisable at a price of $.01 per share when the fair market value of ST Enterprises, Ltd. exceeds a certain target (subject to the put rights described in Annex V(C) below). A list of the holders of such warrants is set forth in Annex III(C). 4. There are currently outstanding 7.69 Sidney Telephone Company Common Stock Purchase Warrants, exercisable at any time at a rate of $.01 per share. A list of the holders of such warrants is set forth in Annex III(J). C. RIGHTS AND OBLIGATIONS TO REPURCHASE CAPITAL STOCK OR OTHER EQUITY INTERESTS ---------------------------------------------------------------------------- 1. Pursuant to the Amended and Restated Certificate of Incorporation of MJD Communications, Inc., the Series C Preferred Stock then outstanding shall, at the option of the Corporation, be redeemed in whole or in part upon the occurrence of (i) an Investor Sale, (ii) the Sale of the Corporation, or (iii) an IPO (each an "Optional Redemption"). 2. Pursuant to the Purchase Agreement dated as of June 30, 1994 for Notes and Warrants by and among MJD Communications, Inc., ST Enterprises, Ltd., BEDCO and the other parties thereto (the "BEDCO Purchase Agreement"), by the election of a majority-in-interest of the BEDCO Investors, the BEDCO Investors have the right to put their ST Enterprises, Ltd. Common Stock Purchase Warrants to ST Enterprises, Ltd. upon the earlier of June 30, 1999 for shares of common stock of ST Enterprises, Ltd. or their fair market value. D. MORTGAGES --------- 1. Supplemental Mortgage and Security Agreement dated as of February 1, 1988 by Taconic Telephone Corp. in favor of the United States of America (as filed in Columbia, Dutchess and Rensselaer Counties, New York. 2. Restated Mortgage, Security Agreement and Financing Statement (the "Agreement") dated as of June 22, 1990 by C-R Telephone Company in favor of the United States of America. The underlying debt under the Agreement has been paid; the release of the liens under the Agreement is in process. 3. Supplemental Mortgage, Security Agreement and Financing Statement dated as of May 1, 1995 by C-R Telephone Company in favor of United States of America (the "Agreement"). The underlying debt under the Agreement has been paid; the release of the liens under the Agreement is in process. E. LIENS ON TANGIBLE PERSONAL PROPERTY ----------------------------------- 1. Liens on the capital stock of the Subsidiaries as described in Annex V(A). 2. Liens on the tangible personal property of Taconic Telephone Corp. in favor of Key Bank N.A. and the United States of America pursuant to Supplemental Mortgage and Security Agreement dated as of February 1, 1988 by Taconic Telephone Corp. in favor of the United States of America. /1/ 3. Liens on certain tangible personal property of Taconic Telephone Corp. in favor of KeyCorp. Leasing Ltd. pursuant to Operating Lease. 4. Liens on certain personal tangible property of Taconic Telephone Corp. in favor of IBM Credit Corporation pursuant to Operating Lease. 5. Liens on the personal tangible property of MJD Capital Corp. in favor of NationsBank N.A., pursuant to Promissory Note dated November 7, 1997 in the principal amount of $99,976.25. 6. Liens on certain personal tangible property of MJD Capital Corp. in favor of Centura Bank, pursuant to a Loan Agreement dated as of October 8, 1997, between MJD Capital Corp. and Centura Bank (the "Loan Agreement"). MJD Capital Corp. has not made any borrowings pursuant to this credit facility. F. MISCELLANEOUS ------------- 1. Equipment Lease dated August 1, 1997 (less than $50,000) between MJD Communications, Inc. and Centura Bank (the "Lease"). (The Lease will be assigned to MJD Capital Corp. post-closing.) 2. Lease between ST Enterprises, Ltd. and Clune Leasing Ltd. for one (1) Canon Copier with cabinet and ADF. - -------------------- /1/ Key Bank N.A. loans to be repaid in full n March 30, 1998 and release of liens in favor of Key Bank N.A. will be terminated thereafter. ANNEX VI EXISTING INDEBTEDNESS 1. Indemnification Agreement dated July 31, 1994 among WFT Acquisition Co., STE/NE Acquisition Corp. and Vermont Telephone Company, Inc. 2. Promissory Note dated October 8, 1997, from MJD Capital Corp. to Centura Bank in the principal amount of $500,000. MJD Capital Corp. has not made any borrowings pursuant to this credit facility. 3. Promissory Note dated November 7, 1997 from MJD Capital Corp. to NationsBank N.A. in the principal amount of $99,976.25 (under a $1 Million facility). 4. Promissory Note from MJD Communications, Inc. to Farm Credit Leasing Corporation in the principal amount of $38,997.13 dated August 28, 1997 (the "Note"). (The Note will be assigned to MJD Capital Corp. post-closing.) 5. Secured Note and Co-Mortgage among Key Bank, RUS and Taconic Telephone Corp. in the principal amount of $3,100,000./1/ - 6. Promissory Note dated October 1, 1996 from C-R Communications, Inc. to Communications Management, Inc. in the principal amount of $156,520. 7. Unsecured Demand Notes to C&E Telephone from various holders in the aggregate principal amount of $879,000. See list attached hereto. 8. Unsecured Revolving Note maturing on October 1, 1998 from Ellensburg Telephone Corp. in the aggregate principal amount of $3 million in favor of US Bank./2/ - - ------------ /1/ Key Bank portion of debt to be paid in full on March 30, 1998. - /2/ There is no outstanding debt under this facility at this time. We expect - this note to be canceled and to have the notes returned by May 1, 1998 marked paid and satisfied. 9. Unsecured Revolving Note maturing on March 10, 2001 from Ellensburg Telephone Corp. in the aggregate principal amount of $6 million in favor of RTFC./3/ - - ------------ /3/ There is no outstanding debt under this facility at this time. We expect - this note to be canceled and to have the notes returned by May 1, 1998 marked paid and satisfied. 2 ATTACHMENT TO ITEM 7 ON ANNEX VI DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 8/23/76 Beckman, Seymour A. or Margaret A. ###-##-#### 10,000.00 568 D0617 4/12/86 Beckman, Seymour or Margaret A. ###-##-#### 5,000.00 617 D0568 5/8/90 Belcher, Alma R. and/or Camille A. ###-##-#### 1,000.00 1204 D1204 5/8/90 Belcher, Alma R. and/or Camille A. ###-##-#### 1,000.00 1205 D1204 5/22/81 Belcher, Robert or Isabelle ###-##-#### 10,000.00 931 D0931 5/8/78 Benson, Roy W. ###-##-#### 1,500.00 739 D0739 12/9/78 Billerio, Frank and Calella Billerio, JTTEN ###-##-#### 2,000.00 655 D0655 12/20/78 Case, Agatha ###-##-#### 5,000.00 682 D0682 5/5/88 Challey, Douglas D. and/or Donna M. ###-##-#### 1,000.00 1145 D1145 8/4/93 Cochrane, William J. Testamentary Trust, Roderick A. Nixon, or ###-##-#### 35,000.00 1283 D1283 successor, trustee 8/4/93 Cochrane, Cecile B. ###-##-#### 25,000.00 1284 D1284 3/3/98 Deck, Milford H. or Ruth M. ###-##-#### 10,000.00 566 D0566 4/1/80 Dibble, Mary S. ###-##-#### 5,000.00 812 D0812 - -------------------------------------------------------------------------------------------------------------------------
DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 1/1/81 Dibble, Mary S. ###-##-#### 3,000.00 878 D0812 4/1/83 Edwards, Alice H. Susan E. Barnett ###-##-#### 5,500.00 676 D0500 4/1/83 Edwards, Alice H. Susan E. Barnett ###-##-#### 5,000.00 940 D0500 9/29/76 Frost, Jackson ###-##-#### 3,000.00 621 D0621 7/24/87 Gorndt, Elizabeth M. and/or Juanita D. Rudolph ###-##-#### 5,000.00 1133 D1133 12/18/95 Greenleaf, Patricia N. ###-##-#### 5,000.00 1323 D1232 3/12/81 Hammer, Angelyn I. ###-##-#### 10,000.00 883 D0883 2/8/80 Hanson, Vivian Mrs. and/or Judy Stratton ###-##-#### 4,000.00 589 D0589 4/11/80 Hanson, Vivian Mrs. and/or Judy Stratton ###-##-#### 1,500.00 818 D0589 4/29/87 Homeman, Thornton and Mary C. ###-##-#### 10,000.00 1124 D0699 6/4/88 Horneman, Thornton and Mary C. ###-##-#### 10,000.00 1148 D0699 10/18/89 Horneman, Thornton and Mary C ###-##-#### 28,000.00 1185 D0699 8/24/90 Horneman, Thornton and Mary C. ###-##-#### 12,000.00 1210 D0699 - -------------------------------------------------------------------------------------------------------------------------
2 DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 7/6/76 Issler, William C. ###-##-#### 10,000.00 603 D0603 4/28/81 Kaprolat, Elmer G. or Ruth M. ###-##-#### 1,000.00 889 D0889 4/18/81 Kaprolat, Roger Q. or Ruth M. ###-##-#### 2,500.00 927 D0927 12/14/82 Kaprolat, Roger Q. or Ruth M. ###-##-#### 1,000.00 1005 D0927 12/28/84 Kaprolat, Roger Q. or Ruth M. ###-##-#### 1,000.00 1031 D0927 12/11/86 Knibloe, Keith M. ###-##-#### 5,000.00 1093 D1093 5/20/94 LaPorte, George ###-##-#### 20,000.00 1302 D1302 8/31/92 LeFever Russell H. and/or Mary E. ###-##-#### 40,000.00 1251 D1132 8/31/92 LeFever Russell H. and/or Mary E. ###-##-#### 25,000.00 1310 D1132 2/4/87 Loyal Order of Moose Westfield Lodge ###-##-#### 25,000.00 1098 D1098 12/17/86 Loyal Order of Moose Westfield Lodge ###-##-#### 20,000.00 1109 D1098 2/16/94 Loyal Order of Moose Westfield Lodge ###-##-#### 25,000.00 1297 D1098 7/1/80 Manley, Nancy C. ###-##-#### 2,000.00 838 D0838 - -------------------------------------------------------------------------------------------------------------------------
3 DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 7/29/80 Manley, Nancy C. ###-##-#### 3,000.00 854 D0838 5/7/81 Manley, Nancy, C. ###-##-#### 2,500.00 917 D0838 3/17/81 McLean, Arline I. ###-##-#### 5,000.00 885 D0885 10/23/78 Mellors, Charlotte B. ###-##-#### 5,000.00 751 D0751 5/8/86 Mellors, Charlotte B. ###-##-#### 5,000.00 1064 D0751 6/4/86 Mellors, Charlotte B. ###-##-#### 2,000.00 1074 D0751 2/17/94 Mellors, Richard ###-##-#### 2,000.00 1299 D1299 7/1/84 Naaser, Olga B. ###-##-#### 5,000.00 1023 D1023 1/1/76 Orton, Beverly Irene ###-##-#### 1,000.00 557 D0557 1/1/76 Daughrity, Patti Joanne ###-##-#### 1,000.00 558 D0558 9/5/86 Ossman, Junes T. ###-##-#### 1,000.00 1080 D0649 12/8/78 Ossman, Junes T. ###-##-#### 500.00 649 D0649 12/8/78 Ossman, Richard J. ###-##-#### 500.00 650 D0650 - -------------------------------------------------------------------------------------------------------------------------
4 DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 4/28/81 Parker, Mrs. Doris H. ###-##-#### 3,000.00 892 D0892 10/3/91 Rammelt, Ida T. and/or Nancy R. Johnston ###-##-#### 90,000.00 1242 D0756 10/18/92 Rammelt, Ida T. and/or Nancy R. Johnston ###-##-#### 10,000.00 1254 D0756 4/21/86 Rau, Dorothy T. ###-##-#### 5,000.00 843 D0843 5/8/81 Reinhoudt, Meriam Gayle ###-##-#### 1,500.00 921 D0921 6/7/85 Riedesel, Beatrice or Herman ###-##-#### 2,000.00 1027 D1027 6/7/85 Riedesel, Beatrice or Herman ###-##-#### 1,000.00 1042 D1027 9/30/85 Riedesel, Beatrice or Herman ###-##-#### 1,000.00 1048 D1027 12/28/87 Riedesel, Beatrice or Herman ###-##-#### 1,000.00 1137 D1027 12/1/88 Riedesel, Beatrice or Herman ###-##-#### 1,000.00 1168 D1027 5/24/89 Riedesel, Beatrice or Herman ###-##-#### 1,000.00 1170 D1027 12/4/89 Riedesel, Beatrice or Herman ###-##-#### 1,000.00 1189 D1027 7/1/83 Riedesel, Herman or Beatrice ###-##-#### 5,000.00 1009 D1009 - -------------------------------------------------------------------------------------------------------------------------
5 DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 7/31/84 Riedesel, Herman or Beatrice ###-##-#### 1,500.00 1022 D1009 6/7/85 Riedesel, Herman or Beatrice ###-##-#### 5,000.00 1041 D1009 12/4/89 Riedesel, Herman or Beatrice ###-##-#### 2,500.00 1190 D1009 9/11/86 Rogers, Alice R. ###-##-#### 7,000.00 1082 D1082 10/3/97 Rogers, Alice R. ###-##-#### 3,000.00 1337 D1082 8/2/94 Schwartz, Benjamin ###-##-#### 8,000.00 1308 D1110 2/21/95 Schwartz, Benjamin ###-##-#### 14,500.00 1317 D1110 1/1/95 Schwartz, Ronald W. ###-##-#### 10,000.00 1312 D1312 5/13/76 Smith, Maxine H. ###-##-#### 1,000.00 596 D0596 5/13/76 Smith, Maxine H. ###-##-#### 1,000.00 597 D0596 5/13/76 Smith, Maxine H. ###-##-#### 1,000.00 598 D0596 4/1/80 Smith, Maxine H. ###-##-#### 2,000.00 814 D0596 4/26/94 Smith, Maxine H. ###-##-#### 10,000.00 1309 D1309 - -------------------------------------------------------------------------------------------------------------------------
6 DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 9/19/76 D. Mark Smith ###-##-#### 5,000.00 742 D0742 8/5/94 D. Mark or Nancy J. Smith ###-##-#### 10,000.00 1301 D1303 12/17/91 Sonne, Olga H. ###-##-#### 39,000.00 1243 D1243 2/19/92 Stafford, Donald W. ###-##-#### 30,000.00 1245 D1245 1/28/93 Stafford, Donald W. ###-##-#### 20,000.00 1274 D1245 10/3/96 Stafford, Velma O. and Donald W. ###-##-#### 25,000.00 1329 D1290 12/11/92 Steward, Michele E. or Paul D. ###-##-#### 500.00 914 D0785 12/10/92 Steward, Michele E. or Paul D. ###-##-#### 500.00 992 D0785 6/1/90 Thomas Mrs. Betty E. and/or Arthur E. ###-##-#### 2,000.00 1207 D1078 1/8/91 Thomas Mrs. Betty E. and/or Arthur E. ###-##-#### 2,000.00 1223 D1078 1/3/77 Town, Lucille ###-##-#### 6,000.00 716 D0716 12/15/76 Town, Terrence D. and Nancy L. Town ###-##-#### 1,000.00 880 D0880 4/19/81 Town, Terrence D. and Nancy L. Town ###-##-#### 3,000.00 929 D0880 - -------------------------------------------------------------------------------------------------------------------------
7 DEMAND NOTE HOLDERS CHAUTAUQUA & ERIE TELEPHONE CORP. PROMISSORY NOTES AS OF DECEMBER 31, 1997
DATE OF NOTE NAME OF NOTE HOLDER SS NUMBER $ AMOUNT NOTE # ACCT. # - ------------------------------------------------------------------------------------------------------------------------- 1/8/87 Wagar, Constance N. ###-##-#### 10,000.00 1102 D1102 8/8/88 Wagar, Constance N. ###-##-#### 10,000.00 1151 D1102 11/18/88 Wagar, Constance N. ###-##-#### 10,000.00 1155 D1102 1/28/89 Wagar, John E. Trust Under Will f/b/o Constance N. Wagar and ###-##-#### 20,000.00 1326 D1164 Samuel N. Wagar, Co-Trustee 12/17/97 Ward, Betty and/or Harry F. ###-##-#### 40,500.00 1338 D1147 3/23/94 Ward, Michael October 1993 Irrevocable Trust ###-##-#### 3,000.00 1301 D1301 6/8/94 Ward, Michael October 1993 Irrevocable Trust ###-##-#### 8,500.00 1303 D1301 3/12/92 Wolfenden, Terry L. ###-##-#### 2,500.00 1247 D1247 12/6/76 Woloszyn, Chester B. ###-##-#### 3,000.00 647 D0647 2/20/92 Zappla, Anthony R. ###-##-#### 4,000.00 1162 #2 D1162 12/31/76 Zimmer, Earl L. and Olive B. ###-##-#### 5,000.00 715 D0715 5/1/81 Zimmer, Earl L. and Olive B. ###-##-#### 5,000.00 898 D0715 - ------------------------------------------------------------------------------------------------------------------------- TOTAL AMOUNT $879,009.00 ===========
8 ANNEX VII EXISTING INVESTMENTS A. INVESTMENTS ----------- 1. Odin Telephone Exchange, Inc. owns 2,006 shares (representing 14.28%) of the common stock, $.01 par value of Southern Illinois Cellular Corp., ("SICC") which provides cellular telephone services within certain restricted areas of central and southern Illinois. 2. Sunflower Telephone Company, Inc. owns approximately 5.06% of Professional Electronic Networks, L.C., which owns 49.5% of Ohio Professional Electronic Network Limited Liability Company, a provider of online access to public records in the State of Ohio. 3. The following entities own shares of Rural Telephone Bank: o Sunflower Telephone Company, Inc. -- 571 Class C shares o Sidney Telephone Company -- 131 Class C shares o Northland Telephone Company of Maine, Inc. -- 2,176 Class C shares o Big Sandy Telecom, Inc. -- 5 Class C shares o Odin Telephone Exchange, Inc. -- 33 Class C and 856 Class B shares o C-R Telephone Company -- 18 Class C Shares. 4. ST Enterprises, Ltd. owns 4,033 shares (6.557%) of the Kansas Consolidated Professional Resources Limited Partnership, a telephone consulting firm. 5. ST Enterprises, Ltd. owns 1 share of Dodge City Country Club. 6. Big Sandy Telecom, Inc. owns 6,569 shares of Common Stock of USTN Holdings, Inc. (the "USTN Shares"). The USTN Shares are being converted into 6,569 shares of Illuminet Holdings, Inc. as a result of the name change from USTN Holdings, Inc. to Illuminet Holdings, Inc. 7. Odin Telephone Exchange, Inc. owns 2 shares of Class A Voting Common Stock and 1,155 shares of Class B Nonvoting Common Stock of U.S. Intelco Holdings, Inc., which will be converted into 7,713 shares of Illuminet Holdings, Inc. 8. C-R Telephone Company owns 2 shares of Class A Voting Common Stock and 884 shares of Class B Nonvoting Common Stock which will be converted into 7,156 shares of Illuminet Holdings, Inc. 9. Sunflower Telephone Company, Inc. is the owner of 20 limited partnership units of Angeles Income Properties, Ltd. IV and 40 limited partnership units of Angeles Income Properties, Ltd. 10. The Company and/or the Subsidiaries will invest from time to time in various short-term investments, including without limitation, commercial paper and certificates of deposit. 11. The following entities have ownership in CoBank in the form of Class B Participation Certificate: o MJD Services Corp. - 100,053.78 units o MJD Holdings Corp. - 49,839.08 units o STE Finance Company, Inc. - 456,922.43 units o STE/NE Acquisition Corp. - 179,346.46 units o Northland Telephone Company of Maine, Inc. - 626,730.33 units o Sunflower Telephone Company, Inc. - 93,201.49 units o C&E Telephone Corp. - 8,852.2 units 12. MJD Ventures, Inc. held RTFC Subordinated Capital Certificates ("SCCs") originally issued at the time of the January 1996 acquisition of Sidney Telephone Company in the amount of $123,684.00. The Certificates will be repurchased by the RTFC as the loan balance is reduced. The SCC balance of 12/31/97 was $356,018.40. 13. MJD Ventures, Inc. holds Patronage Capital Certificates in RTFC in the amount of $14,605.37. 14. Sidney Telephone Company, Inc. holds Patronage Capital Certificates in RTFC in the amount of $4,389.31. 15. Stock option and warrants as described on Annex III. 16. C-R Cellular, Inc. owns 6.67% of the Illinois Valley Cellular RSA-2-I Partnership, an Illinois General Partnership which provides cellular telephone services within certain restricted areas of north central Illinois. 17. C-R Cellular, Inc. owns 6.67% of the Illinois Valley Cellular RSA-2-II Partnership, an Illinois General Partnership which provides cellular telephone services within certain restricted areas of north central Illinois. 18. C-R Cellular, Inc. owns 6.67% of the Illinois Valley Cellular RSA-2-III Partnership, an Illinois General Partnership which provides cellular telephone services within certain restricted areas of north central Illinois. 19. C-R Cellular, Inc. owns 700 shares (12.5%) of the Illinois Valley Cellular RSA 2, Inc., an Illinois corporation which provides switching services to the Illinois Valley Cellular RSA 2-I, 2-II and 2-III Partnerships described above. 20. C-R Communications, Inc. owns a 5.20833% membership interest in Illinet Communciations of Central Illinois, L.L.C., an Illinois limited liability company engaged in the operaton of cable television properties. 21. C-R Communications, Inc. owns a 9.09% membership interest in Illinet Communications, L.L.C., an Illinois limited liability company engaged in the provision of internet network transport facilities and equipment. 22. C-R Long Distance owns one share of stock in Associated Network Partners, Inc. ("ANPI"), an Illinois corporation that was formed by a group of Illinois independent telephone companies to act as a buyers club for interexchange telephone capacity so that the participating LECs or their affiliates could pool their minutes in order to get volume discounts. 23. Chautauqua & Erie Network, Inc. owns a 3.847% general partnership interest in the New York State Independent Network Partnership ("NYSINET"), which operates a statewide SS7 network in New York. 24. Taconic Telephone Corp. owns 31,380 shares of Common Stock of Frontier Corp., a public company traded on the New York Stock Exchange. 25. Taconic Telephone Corp. owns 43,885 shares of Common Stock of USTN Holdings, Inc. (the "USTN Shares"). The STN Shares are being converted into 43,885 shares of Illuminet Holdings, Inc. as a result of a name change from USTN Holdings, Inc. to Illuminet Holdings, Inc. 26. Taconic Cellular Corp. owns a 16.667% general partnership interest in the Hudson Valley RSA Cellular Partnership. 27. Taconic Telephone Corp. owns a 7.5% limited partnership interest in the Orange County - Poughkeepsie Limited Partnership. 28. Taconet Corp. owns a 3.847% general partnership interest in the New York State Independent Network Partnership ("NYSINET"), which operates a statewide SS7 network in New York. 29. Taconet Wireless Corp. owns a 15% general partnership interest and a 14% limited partnership interest in the River Run PCS Limited Partnership. This partnership was formed for the purpose of bidding in the FCC auction of PCS licenses. The partnership was unsuccessful in the bidding, and is in the process of being dissolved. 30. Taconic Cellular Corp.owns a 25% general partnership interest in the Columbia/Greene Cellular Partnership, which acts as a retail agent for Nynex Mobile in the RSA 6 service area. B. ADVANCES -------- Travel and lodging advances in the ordinary course of business [not to exceed $_________ per year]. ANNEX VIII ---------- REGULATORY MATTERS ------------------ A. MJD Communications, Inc. filed applications with the Colorado Public Utilities Commission to obtain consent for the pledge of MJD Communications, Inc.'s subsidiaries' stock and Inter-Company promissory notes, and for a change of control. B. MJD Communications, Inc. filed applications with the Vermont Public Utitlies Commission to obtain consent for the pledge of MJD Communications, Inc's subsidiaries' stock and Inter-Company promissory notes. ANNEX IX -------- TRANSACTIONS WITH AFFILIATES ---------------------------- A. Management Services Agreement dated as of August 1, 1996 by and between Odin Telephone Exchange, Inc. and MJD Services Corp. EXHIBIT A --------- FORM OF NOTICE OF BORROWING --------------------------- ___________ ___, _____ Bankers Trust Company, as Administrative Agent for the Lenders party to the Credit Agreement referred to below 130 Liberty Street New York, New York 10006 Attention: _____ Ladies and Gentlemen: The undersigned, MJD Communications, Inc. (the "Borrower"), refers to the Credit Agreement, dated as of March 30, 1998 (as amended, amended and restated, modified or supplemented from time to time, the "Credit Agreement," the capitalized terms defined therein being used herein as therein defined), among the Borrower, the lenders from time to time party thereto (the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent, and you, as Administrative Agent, and, pursuant to Section 1.03(a) of the Credit Agreement, hereby gives you irrevocable notice that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the "Proposed Borrowing") as required by Section 1.03(a) of the Credit Agreement: (i) The Proposed Borrowing is to consist of [B Term Loans] [C Term Loans - Fixed Rate] [C Term Loans - Floating Rate] [RF Loans] [AF Loans]. (ii) The aggregate principal amount of the Proposed Borrowing is ________. (iii) The Business Day of the Proposed Borrowing is [____________]./1/ (iv) The Loans to be made pursuant to the Proposed Borrowing shall be initially maintained as [Base Rate Loans] [Eurodollar Loans] [Fixed Rate Loans]. _______________________ /1/ Shall be a Business Day which (x) in the case of Base Rate Loans and Fixed Rate Loans, may be the date hereof if this Notice of Borrowing is delivered to the Administrative Agent at its Notice Office prior to 11:00 A.M. (New York time) on such date and (y) in the case of Eurodollar Loans, shall be at least three Business Days after the date hereof. EXHIBIT A PAge 2 (v) The initial Interest Period for the Proposed Borrowing is [one month] [three months] [six months], subject to the availability to all Lenders with Commitments and/or outstanding Loans under the respective Facility, [nine] [twelve] month.]/2/ The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in the Credit Agreement and the other Credit Documents are and will be true and correct in all material respects, both before and after giving effect to the Proposed Borrowing and to the application of the proceeds thereof, as though made on such date, unless stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date; and (B) no Default or Event of Default has occurred and is continuing, or would result from such Proposed Borrowing or from the application of the proceeds thereof. Very truly yours, MJD COMMUNICATIONS, INC. By:__________________________________________ Name: Title: _____________________ /2/ To be included for a Proposed Borrowing of Eurodollar Loans. EXHIBIT B-1 ----------- FORM OF B TERM NOTE ------------------- $________ New York, New York __________ __, ____ FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of ________________ (the "Lender"), in lawful money of the United States of America in immediately available funds, at the Payment Office (as defined in the Agreement referred to below) initially located at 130 Liberty Street, New York, New York 10006, on the B Maturity Date (as defined in the Agreement) the principal sum of ___________ DOLLARS ($________) or, if less, the then unpaid principal amount of all B Term Loans (as defined in the Agreement referred to below) made by the Lender pursuant to the Agreement. The Borrower also promises to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the B Term Notes referred to in the Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended and restated, modified or supplemented from time to time, the "Agreement"), and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured pursuant to the Pledge Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the B Maturity Date, in whole or in part. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. EXHIBIT B-1 Page 2 THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. MJD COMMUNICATIONS, INC. By_____________________________ Name: Title: EXHIBIT B-2 ----------- FORM OF C TERM NOTE-FLOATING RATE --------------------------------- $________ New York, New York _________ __, ____ FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of ________________ (the "Lender"), in lawful money of the United States of America in immediately available funds, at the Payment Office (as defined in the Agreement referred to below) initially located at 130 Liberty Street, New York, New York 10006, on the C Maturity Date (as defined in the Agreement) the principal sum of ___________ DOLLARS ($________) or, if less, the then unpaid principal amount of all C Term Loans-Floating Rate (as defined in the Agreement referred to below) made by the Lender pursuant to the Agreement. The Borrower also promises to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the C Term Notes-Floating Rate referred to in the Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended and restated, modified or supplemented from time to time, the "Agreement"), and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured pursuant to the Pledge Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the C Maturity Date in whole or in part. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. EXHIBIT B-2 Page 2 THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. MJD COMMUNICATIONS, INC. By___________________________________ Name: Title: EXHIBIT B-3 ----------- FORM OF C TERM NOTE - FIXED RATE -------------------------------- $________ New York, New York __________ __, ____ FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of CoBank, ACB (the "Lender"), in lawful money of the United States of America in immediately available funds, at the Payment Office (as defined in the Agreement referred to below) initially located at 130 Liberty Street, New York, New York 10006, the principal sum of ___________ DOLLARS ($________), which aggregate amount shall be payable as provided on Schedule I hereto. Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the Agreement referred to below. The Borrower also promises to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1 of this Note. All payments of principal, interest and all other amounts due under this Note shall be made in the manner provided in Section 3.03 of the Agreement referred to below. This Note is one of the C Term Notes-Fixed Rate referred to in the Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended and restated, modified or supplemented from time to time, the "Agreement"), and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured equally and ratably with all other Notes issued pursuant to the Agreement and is subject to voluntary prepayment as set forth in Section 2 below. In case an Event of Default shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be or become due and payable in the manner and with the effect provided in the Agreement. SECTION 1. Interest. During the period commencing on the Closing -------- Date and ending on the FRE Date identified on Schedule I hereto (the "Fixed Rate Period"), interest shall accrue on the unpaid principal amount of this Note at a rate of ________ percent (____%) per annum and shall be payable quarterly in arrears on the last Business Day of each March, June, September and December commencing on June 30, 1998 and on any EXHIBIT B-3 Page 2 prepayment, at maturity (whether by acceleration or otherwise) and, after such maturity, on demand. From and after the FRE Date, interest shall be payable on this Note as provided in the Agreement for Eurodollar Loans and/or Base Rate Loans as the Loans evidenced hereby shall be maintained from time to time. SECTION 2. Voluntary Prepayment. During the Fixed Rate Period, the -------------------- Borrower may, on one Business Day's prior notice, prepay in full, but not in part, the outstanding principal balance of this Note. Notwithstanding the foregoing, the Borrower's right to prepay shall be conditioned upon the payment of a surcharge as defined and calculated below (the "Surcharge") on the date such prepayment is made. The Surcharge shall be an amount equal to the sum of: (a) the present value of any funding losses incurred or imputed by CoBank to be incurred as a result of such prepayment, plus, (b) .5% of the amount prepaid. ---- Such Surcharge, including the amount of any funding losses incurred by CoBank, shall be determined and calculated in accordance with methodology established by CoBank and notified in writing to the Borrower. After the FRE Date, this Note may be prepaid as provided in the Agreement. SECTION 3. Application of Mandatory Prepayments. All mandatory ------------------------------------ prepayments of Term Loans required pursuant to Section 3.02(A)(c) through (g) of the Agreement that are to be applied to the C Term Loans-Fixed Rate (x) will first be applied to those C Term Loans-Fixed Rate as to which the FRE Date has occurred (all in accordance with the Agreement) and (y) to the extent (after giving effect to all payments under clause (x)) such prepayments are to be applied to C Term Loans-Fixed Rate as to which the FRE Date has not occurred, such prepayment amount shall, unless otherwise agreed by the Borrower and CoBank, be allocated among the outstanding principal amounts of such C Term Loans-Fixed Rate, as determined by CoBank. To the extent any such prepayment is applied to the outstanding principal balance of this Note during the Fixed Rate Period, a Surcharge shall be payable in connection with such prepayment. SECTION 4. Application of Scheduled Repayments. Each Scheduled ----------------------------------- Repayment of C Term Loans-Fixed Rate made by the Borrower shall be allocated to this Note in accordance with the repayment schedule set forth on Schedule I hereto. SECTION 5. Waiver. The Borrower hereby waives presentment, demand, ------ protest or notice of any kind in connection with this Note. SECTION 6. Governing Law. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE ------------- WITH AND BE GOVERNED BY EXHIBIT B-3 Page 3 THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. MJD COMMUNICATIONS, INC. By______________________________________ Name: Title: Page 4 Schedule I to the form of C term note - fixed rate (which form of C term note is Exhibit B-3 to Exhibit 10.1 to the Registration Statement), to be attached at a future date (i.e., in the event the C term note - fixed rate is completed upon ---- the occurrence of certain events). EXHIBIT B-4 ----------- FORM OF RF NOTE --------------- _________$ New York, New York __________ __, ____ FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _______________________ (the "Lender"), in lawful money of the United States of America in immediately available funds, at the Payment Office (as defined in the Agreement referred to below) initially located at 130 Liberty Street, New York, New York 10006, on the AF/RF Maturity Date (as defined in the Agreement) the principal sum of _________________ DOLLARS ($_________) or, if less, the then unpaid principal amount of all RF Loans (as defined in the Agreement) made by the Lender pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the RF Notes referred to in the Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended and restated, modified or supplemented from time to time, the "Agreement"), and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured pursuant to the Pledge Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the AF/RF Maturity Date, in whole or in part. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. EXHIBIT B-4 Page 2 THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. MJD COMMUNICATIONS, INC. By_____________________________________________ Title: EXHIBIT B-5 ----------- FORM OF AF NOTE --------------- $ _________ New York, New York __________ __, ____ FOR VALUE RECEIVED, MJD COMMUNICATIONS, INC., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _______________________ (the "Lender"), in lawful money of the United States of America in immediately available funds, at the Payment Office (as defined in the Agreement referred to below) initially located at 130 Liberty Street, New York, New York 10006, on the AF/RF Maturity Date (as defined in the Agreement) the principal sum of _________________ DOLLARS ($_________) or, if less, the then unpaid principal amount of all AF Loans (as defined in the Agreement) made by the Lender pursuant to the Agreement. The Borrower promises also to pay interest on the unpaid principal amount hereof in like money at said office from the date hereof until paid at the rates and at the times provided in Section 1.08 of the Agreement. This Note is one of the AF Notes referred to in the Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto (including the Lender), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended and restated, modified or supplemented from time to time, the "Agreement"), and is entitled to the benefits thereof and of the other Credit Documents (as defined in the Agreement). This Note is secured pursuant to the Pledge Agreement (as defined in the Agreement). As provided in the Agreement, this Note is subject to voluntary prepayment and mandatory repayment prior to the AF/RF Maturity Date, in whole or in part. In case an Event of Default (as defined in the Agreement) shall occur and be continuing, the principal of and accrued interest on this Note may be declared to be due and payable in the manner and with the effect provided in the Agreement. The Borrower hereby waives presentment, demand, protest or notice of any kind in connection with this Note. EXHIBIT B-5 Page 2 THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. MJD COMMUNICATIONS, INC. By_____________________________________ Title: EXHIBIT C --------- FORM OF SECTION 3.04 CERTIFICATE -------------------------------- Reference is hereby made to the Credit Agreement, dated as of March 30, 1998, among MJD Communications, Inc. ("MJD"), various lenders from time to time party thereto, NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (as amended, amended and restated, modified or supplemented from time to time, the "Credit Agreement"). Capitalized terms used herein that are not defined herein shall have the meanings ascribed to them in the Credit Agreement. Pursuant to the provisions of Section 3.04(b)(ii) of the Credit Agreement, the undersigned (the "Lender") hereby represents and warrants that: 1. The Lender is not a "bank" for purposes of Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 2. The Lender is not subject to regulatory or other legal requirements as a "bank" in any jurisdiction and has not been treated as a "bank" for purposes of any tax, securities law or other filing or submission made to any governmental authority, any application made to a rating agency or qualification for any exemption from tax, securities law or other legal requirements. 3. The Lender meets all of the requirements under Code Section 871(h) or 881(c) to be eligible for a complete exemption from withholding of United States Taxes on interest payments made to it under the Credit Agreement. 4. The Lender shall promptly notify MJD and the Administrative Agent if any of the representations and warranties made herein are no longer true and correct. [NAME OF LENDER] By________________________________ Title: Date: _______________, ____ March 30, 1998 To the Administrative Agent, the Syndication Agent, the Collateral Agent and each of the Lenders party to the Credit Agreement referred to below Ladies and Gentlemen: We have acted as special New York counsel to MJD Communications, Inc., a Delaware corporation (the "Borrower"), and each Subsidiary of the Borrower party to any Document referred to below (collectively with the Borrower, the "Credit Parties"), in connection with the execution and delivery of the Credit Agreement, dated as of March 30, 1998 (the "Credit Agreement"), among the Borrower, the financial institutions party thereto (the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent, and the transactions contemplated thereby. This opinion is delivered to you pursuant to Section 4.01(b) of the Credit Agreement. Unless otherwise indicated, capitalized terms used herein but not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents as we have deemed necessary or appropriate as a basis for the opinions set forth herein, including, without limitation, the following (collectively, the "Documents"): (a) the Credit Agreement, (b) the Notes, (c) the Subsidiary Guaranty, (d) the Pledge Agreement, (e) the Applicable Acquisition Documents, (f) the Capital Contribution Agreement and (g) such other public Page 2 and corporate documents and records as we deem necessary or appropriate in connection with this opinion. In our examination we have assumed (a) the genuineness of all signatures (other than as to any Credit Party), (b) the authenticity of all documents submitted to us as originals, (c) the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies, (d) all parties to the Documents, other than the Credit Parties, have the requisite power and authority to execute, deliver and perform such Documents, (e) such Documents have been duly authorized by all requisite action of the parties thereto (other than the Credit Parties), and have been duly executed and delivered by such parties, and (f) the Documents are the legal, valid, binding and enforceable obligations of the parties thereto (other than the Credit Parties). As to questions of fact not independently verified by us we have relied, to the extent we deemed appropriate, upon representations and certificates of officers of each Credit Party, public officials and other appropriate persons. Whenever a statement herein is qualified by "known to us", "to our knowledge" or a similar phrase, it is intended to indicate that, during the course of our representation of the Credit Parties, no information that would give us current actual knowledge of the inaccuracy of such statement has come to the attention of those attorneys in this firm who have rendered legal services in connection with the transaction described in the introductory paragraph hereof. However, except as otherwise expressly indicated, we have not undertaken any independent investigation to determine the accuracy of such statement, and any limited inquiry undertaken by us during the preparation of this opinion should not be regarded as such an investigation; no inference as to our knowledge of any matters bearing on the accuracy of any such statement should be drawn from the fact of our representation of any of the Credit Parties. We note that Daniel G. Bergstein, a member of this Firm, is a director and an indirect shareholder of the Borrower; however, Mr. Bergstein has not rendered any legal services to the Borrower in connection with the transaction described in the introductory paragraph hereof and none of his knowledge regarding the Borrower may be imputed to any person who did render such services. Based upon the foregoing, we are of the opinion that: 1. Each Credit Party (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization, (ii) has the corporate power and authority to own its property and assets and to transact the Page 3 business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in all jurisdictions where the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. 2. Each Credit Party has the corporate power and authority to execute, deliver and carry out the terms and provisions of each of the Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of the Documents to which it is a party. Each Credit Party has duly executed and delivered each Document to which it is a party and each such Document constitutes the legal, valid and binding obligations of such Credit Party enforceable against such Credit Party in accordance with its terms. 3. Neither the execution, delivery or performance by any Credit Party of the Documents to which it is a party, nor compliance by them with the terms and provisions thereof, nor the consummation of the transactions contemplated therein, (i) will contravene any applicable provision of any law, statute, rule or regulation (including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System) or any order, writ, injunction or decree of any court or governmental instrumentality known to us to be applicable to such Credit Party, (ii) will conflict or be inconsistent with or result in any breach of, in each case in any material respect, any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Pledge Agreement) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Borrower or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, debt agreement, debt instrument or other material contract known to us to which the Borrower or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation, by-laws or equivalent organizational documents of such Credit Party. 4. There are no actions, suits or proceedings pending or, to our knowledge, threatened in writing, against the Borrower or any of its Subsidiaries (i) with respect to the Transaction or any Document or (ii) that if adversely determined, would reasonably be expected to have a Material Adverse Effect. 5. No order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic Page 4 governmental or public body or authority (other than the Federal Communications Commission and any applicable state public utility or similar commission ("PUC") as to which we express no opinion), or any subdivision thereof, or any other third party (except as have been obtained or made on or prior to the date hereof and remain in full force and effect on the date hereof), is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Document or (ii) the legality, validity, binding effect or enforceability of any such Document. 6. No Credit Party is an "investment company" or, to our knowledge, a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 7. No Credit Party is a "holding company," or, to our knowledge, a "subsidiary company" of a "holding company," or , to our knowledge, an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 8. Based solely on a review of the stock ledgers of each of the issuers of equity securities listed on Annex B of the Pledge Agreement, each Credit Party is the record owner of all of the Stock (as such term is defined in the Pledge Agreement) listed under its name on Annex B to the Pledge Agreement. All such Stock has been duly authorized and validly issued, is fully paid and non- assessable, and is free of preemptive rights (however, we express no opinion as to any preemptive rights that may have been granted by any Person other than a Credit Party). After giving effect to the delivery to the Collateral Agent of the Pledged Stock and Pledged Notes (as each such term is defined in the Pledge Agreement), the security interest created in favor of the Collateral Agent under the Pledge Agreement constitutes a valid and enforceable perfected security interest in such Pledged Stock and Pledged Notes (and the proceeds thereof) in favor of the Collateral Agent for the benefit of the Secured Creditors, subject to no other security interest. No other filings or recordings are required in order to perfect (or maintain the perfection of) the security interest in the Pledged Stock and Pledged Notes created under the Pledge Agreement. Page 5 The opinions set forth above are subject to the following qualifications and exceptions: (a) Our opinions set forth above are subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other law affecting creditors' rights generally. (b) Our opinions are subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing, election of remedies, estoppel and other similar doctrines affecting the enforceability of agreements generally (regardless of whether considered in a proceeding in equity or at law). (c) The availability of specific performance, injunctive relief and other equitable remedies is subject to the discretion of the tribunal before which any proceeding therefor may be brought. (d) Our opinions in paragraph 8 in respect of the security interests created pursuant to the Pledge Agreement are subject to the effect of Section 9-306 of the UCC. (e) We express no opinion as to the enforceability of any provision contained in any Document allowing any person to set off and apply any party's deposits with such Person against such party's obligations under the Documents without prior notice having been given to such party. (f) We express no opinion as to the enforceability of (i) choice of law or forum selection provisions, (ii) any waiver by the parties of any constitutional rights or remedies, and (iii) any grants to the Administrative Agent, the Collateral Agent or the Lenders of powers of attorney. (g) Our opinions in paragraph 3 hereof, insofar as they relate to the enforceability of indemnification provisions set forth in the Credit Documents, are subject to the effect of federal and state securities laws and public policy relating thereto. In addition, certain cases in the Federal District Courts have called into question the enforceability of private contractual agreements allocating financial responsibility under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), as between parties who are potentially responsible parties under CERCLA, Page 6 and the reasoning in such cases could be utilized by parties attempting to avoid indemnity under both CERCLA and state environmental statutes which may contain similar language respecting indemnity agreements. (h) We express no opinion with respect to the effect of noncompliance by the Lenders with any state or federal laws or regulations applicable to the Lenders in connection with the transactions described in the Documents. (i) We express no opinion as to the enforceability of any provision of the Documents which purports to excuse the Administrative Agent, the Collateral Agent or the Lenders from liability for, or require the Credit Parties to indemnify the Administrative Agent, the Collateral Agent or the Lenders against, the Administrative Agent's, the Collateral Agent's or the Lenders' gross negligence or willful misconduct, as the case may be. (j) The enforceability of provisions in the Documents to the effect that terms may not be waived or modified except in writing may be limited under certain circumstances. (k) The rights of debtors, guarantors and other secured parties to receive notices under Sections 9-504 and 9-505 of the UCC may not be waived prior to default, the failure to comply with such notice requirements may bar or limit the recovery of any deficiency remaining after the retention or sale of repossessed collateral, and a secured party may be required to obtain, after appropriate notice and hearing, a judgment or decree of a court of competent jurisdiction permitting the secured party to enforce its rights to take possession and dispose of any of its collateral. (l) The rights of debtors, guarantors and other secured parties to redeem collateral under Section 9-506 of the UCC may not be waived prior to default. (m) The duties to exercise reasonable care in the custody and preservation of collateral in a secured party's possession and to deal with and dispose of collateral in a commercially reasonable manner as required by the UCC or other applicable law may not be disclaimed by agreement, waived or released prior to a default. (n) Notwithstanding certain language of the Documents relating to the recovery of expenses, attorneys fees and legal expenses, the Administrative Agent, the Collateral Agent and the Lenders may be limited to recovery of any reasonable expenses Page 7 or attorney's fees and legal expenses with respect to the enforcement of the Documents or the liens and security interests created thereunder. (o) We express no opinion as to any provisions in the Documents (i) deeming sales of, or otherwise dealing with, pledged collateral to have been made in a commercially reasonable manner; or (ii) restoring the Administrative Agent, the Collateral Agent or any secured party to its original position after the Administrative Agent or the Collateral Agent has commenced any proceeding and such proceeding has been discontinued or abandoned for any reason or shall have been determined adversely to the Administrative Agent or the Collateral Agent. (p) Except as expressly provided in paragraph 8 we express no opinion with respect to a security interest in money, securities or instruments. (q) With respect to the security interests created under the Pledge Agreement, we have assumed with your permission and without independent investigation that from and after the date of this opinion and at all relevant times hereafter: (i) all the Pledged Stock and the Pledged Notes are and will remain in the possession of the Collateral Agent in the State of New York; (ii) the Pledgors had and have rights in or title to the Pledged Stock and the Pledged Notes (and we do not express any opinion herein as to any of such rights or title); (iii) none of the Pledged Stock or the Pledged Notes consists of uncertificated securities; (iv) the Secured Creditors (as defined in the Pledge Agreement) do not have any knowledge of any adverse claim in respect of the Pledged Stock or the Pledged Notes; (v) that the laws of the State of New York exclusively govern the pledge of the Pledged Stock and the Pledged Notes and the realization of any rights thereto under the Pledge Agreement regardless of the jurisdiction of incorporation or organization of any issuer of such Pledged Stock or the Pledged Notes; and Page 8 (vi) we have not been requested to render and, with your permission, we express no opinion as to the applicability to the obligations of the Borrower under the Credit Agreement of Section 548 of the Bankruptcy Code and Article 10 of the New York Debtor & Creditor Law relating to fraudulent transfers and obligations. We understand, without independent verification, that , to the extent they have deemed necessary in the context of the proposed transaction, the Lenders have satisfied themselves on the basis of, among other things, the financial information furnished to the Lenders and their knowledge of the credit facilities available to the Borrower, that neither the Borrower nor any of its Subsidiaries is insolvent and that neither the Borrower nor any of its Subsidiaries will be rendered insolvent by the transactions contemplated by the Credit Agreement and the other Credit Documents and that, after giving effect to such transactions, neither the Borrower nor any of its Subsidiaries will be left with unreasonably small capital with which to engage in its anticipated business and that neither the Borrower nor any of its Subsidiaries will have intended to incur, or will have believed it has incurred, debts beyond its ability to pay as such debts mature. Notwithstanding the qualifications and exceptions set forth in clauses (c), (e) and (f) above, such qualifications and exceptions do not render the remedies under the Credit Documents inadequate for the practical realization of the benefits intended to be provided under the Credit Documents. We are members of the Bar of the State of New York, and we do not hold ourselves out as being conversant with, and express no opinion as to, the laws of any jurisdiction other than those of the United States of America, the State of New York and the general corporate law of the State of Delaware. This opinion is being furnished only to the addresses and is solely for their benefit and the benefit of their permitted participants and assigns in connection with the above transaction. This opinion may not be relied upon for any other purpose, or relied upon by any other person, firm or corporation for any purpose, without our prior written consent. Very truly yours, March 27, 1998 SJG:EFL To: The Administrative Agent, the Syndication Agent and the Lenders party to the Credit Agreement referred to below Re: Credit Agreement, dated as of March 27, 1998 (the "Credit Agreement"), among MJD Communications, Inc. (the "Borrower"), the lenders from time to time party thereto (each, a "Lender" and, collectively, the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative --------------------------------------------------- Agent ----- Ladies and Gentlemen: We have acted as special counsel to the Lenders party to the Credit Agreement in connection with the execution and delivery of the Credit Agreement. This opinion is delivered to you pursuant to Section 4.01(b) of the Credit Agreement. Terms used herein which are defined in the Credit Agreement shall have the respective meanings set forth in the Credit Agreement unless otherwise defined herein. In connection with this opinion, we have examined the originals, or certified, conformed or reproduction copies, of all records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In stating our opinion, we have assumed the genuineness of all signatures on original or certified copies, the authenticity of documents submitted to us as originals and the conformity to original or certified copies of all copies submitted to us as certified or reproduction copies. We have also assumed, for purposes of the opinions expressed herein, that the parties to the Credit Agreement have the corporate power and authority to enter into and perform the Credit Agreement and that the Credit Agreement has been duly authorized, executed and delivered by each such party. Based upon the foregoing, and subject to the limitations set forth herein, we are of the opinion that the Credit Agreement constitutes the valid and binding obligation of each Credit Party enforceable in accordance with its terms, except to the extent that enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by equity principles (regardless of whether enforcement is sought in equity or at law). We have not been requested to render and, with your permission, we express no opinion as to the applicability to the obligations of the Borrower under the Credit Agreement of Section 548 of the Bankruptcy Code and Article 10 of the New York Debtor & Creditor Law relating to fraudulent transfers and obligations. We understand, without independent verification, that, to the extent they have deemed necessary in the context of the proposed transaction, the Lenders have satisfied themselves on the basis of, among other things, the financial information furnished to the Lenders and their knowledge of the credit facilities available to the Borrower, that neither the Borrower nor any of its Subsidiaries is insolvent and that neither the Borrower nor any of its Subsidiaries will be rendered insolvent by the transactions contemplated by the Credit Agreement and the other Credit Documents and that, after giving effect to such transactions, neither the Borrower nor any of its Subsidiaries will be left with unreasonably small capital with which to engage in its anticipated business and that neither the Borrower nor any of its Subsidiaries will have intended to incur, or will have believed it has incurred, debts beyond its ability to pay as such debts mature. This opinion is limited to the federal law of the United States of America and the law of the State of New York. Very truly yours, -2- EXHIBIT E --------- FORM OF OFFICER'S CERTIFICATE ----------------------------- I, the undersigned, [President][Vice President] of MJD Communications, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), do hereby certify on behalf of the Company that: 1. This Certificate is furnished pursuant to the Credit Agreement, dated as of March 30, 1998, among the Company, the lenders from time to time party thereto, NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (such Credit Agreement, as in effect on the date of this Certificate, being herein called the "Credit Agreement"). Unless otherwise defined herein, capitalized terms used in this Certificate shall have the meanings set forth in the Credit Agreement. 2. The following named individuals are elected or appointed officers of the respective Credit Party set forth above such individuals' names below, each holds the office of such Credit Party set forth opposite his name and has held such office since ______ ___, 19__./1/ The signature written opposite the name and title of each such officer is his genuine signature. [NAME OF CREDIT PARTY] Name/2/ Office Signature ---------- ----------- ------------ ---------- ----------- ------------ ---------- ----------- ------------ 3. Attached hereto as Exhibit A is a certified copy of the Certificate of Incorporation, Certificate of Formation or equivalent organizational document of each Credit Party, as filed in the Office of the Secretary of State of the State of such Credit _______________ /1/ Insert a date prior to the time of any action relating to the Credit Documents. /2/ Include name, office and signature of each officer who will sign any Credit Document on behalf of such Credit Party, including, in the case of the Company, the officer who will sign the certification at the end of this Certificate. EXHIBIT E Page 2 Party's organization, together with all amendments thereto adopted through the date hereof. 4. Attached hereto as Exhibit B are true and correct copies of the By-Laws, partnership agreement, limited liability company agreement or equivalent organizational document of each Credit Party which are in full force and effect on the date hereof, together with all amendments thereto adopted through the date hereof and which, in the case of all By-Laws, were duly adopted. 5. Attached hereto as Exhibit C are true and correct copies of the resolutions of each Credit Party which were duly adopted on __________, 19__ [by unanimous written consent of the Board of Directors of each Credit Party] [by a meeting of the Board of Directors of each Credit Party at which a quorum was present and acting throughout], and said resolutions have not been rescinded, amended or modified. Except as attached hereto as Exhibit C, no resolutions have been adopted by the Board of Directors of any Credit Party which deal with the execution, delivery or performance of any of the Credit Documents to which such Credit Party is party. 6. On the date hereof, all of the applicable conditions set forth in Sections 4.01(e), (f), (g) and (m), 4.02(a), (b) and (e) and 4.03(b) of the Credit Agreement have been satisfied. 7. Attached hereto as Exhibit D are true and correct copies of all Plans, employee benefit plans and other documents referred to in Section 4.01(d)(i) of the Credit Agreement. 8. Attached hereto as Exhibit E are true and correct copies of all collective bargaining agreements and other similar agreements referred to in Section 4.01(d)(ii) of the Credit Agreement. 9. Attached hereto as Exhibit F are true and correct copies of all agreements governing the terms and relative rights of the capital stock of the Company or any Subsidiary referred to in Section 4.01(d)(iii) of the Credit Agreement. 10. Attached hereto as Exhibit G are true and correct copies of all material management agreements referred to in Section 4.01(d)(iv) of the Credit Agreement. 11. Attached hereto as Exhibit H are true and correct copies of all material employment agreements referred to in Section 4.01(d)(v) of the Credit Agreement. EXHIBIT E Page 3 12. Attached hereto as Exhibit I are true and correct copies of all tax sharing agreements, tax allocation and other similar agreements referred to in Section 4.01(d)(vi) of the Credit Agreement. 13. Attached hereto as Exhibit J is a true and correct copy of the Capital Contribution Agreement. 14. Attached hereto as Exhibit K is a true and correct copy of the documentation delivered in connection with the Refinancing pursuant to Section 4.01(m) of the Credit Agreement. 15. Attached hereto as Exhibit L are true and correct copies of the Applicable Acquisition Documents. 16. On the date hereof, the representations and warranties contained in the Credit Agreement or in the other Credit Documents are true and correct in all material respects with the same effect as though such representations and warranties had been made on the date hereof, both before and after giving effect to the incurrence of Loans on the date hereof and the application of the proceeds thereof, unless stated to relate to a specific earlier date, in which case such representations and warranties were true and correct in all material respects as of such earlier date. 17. On the date hereof, no Default or Event of Default has occurred and is continuing or would result from the making of any Loans on the date hereof or from the application of the proceeds thereof. 18. There is no proceeding for the dissolution or liquidation of any Credit Party or threatening its existence. IN WITNESS WHEREOF, I have hereunto set my hand this __ day of March, 1998. MJD COMMUNICATIONS, INC. By_______________________ Name: Title: EXHIBIT E Page 4 I, the undersigned, [Secretary/Assistant Secretary] of the Company, do hereby certify that: 1. [Name of Person making above certifications] is the duly elected and qualified [President/Vice President] of the Company and the signature above is his genuine signature. 2. The certifications made by [name of Person making above certifications] on behalf of the Company in Items 2, 3, 4, 5 and 18 above are true and correct. IN WITNESS WHEREOF, I have hereunto set my hand this _______ day of March, 1998. MJD COMMUNICATIONS, INC. By__________________________ Name: Title: Page 5 Exhibits A through L to the Form of Officer's Certificate (which form of officer's certificate is Exhibit E to Exhibit 10.1 to the Registration Statement) to be attached at a future date (i.e., in the event the officer's ---- certificate is completed upon the occurrence of certain events). EXHIBIT F CONFORMED AS EXECUTED SUBSIDIARY GUARANTY ------------------- SUBSIDIARY GUARANTY, dated as of March 30, 1998 (as amended, amended and restated, modified or supplemented from time to time, this "Guaranty"), made by each of the undersigned (each, a "Guarantor" and together with any other entity that becomes a party hereto pursuant to Section 26 hereof, collectively, the "Guarantors"). Except as otherwise defined herein, terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS MJD Communications, Inc. (the "Borrower"), the lenders from time to time party thereto (the "Lenders"), Nationsbank of Texas, N.A., as Syndication Agent (the "Syndication Agent"), and Bankers Trust Company, as Administrative Agent (the "Administrative Agent", and together with the Lenders, the Syndication Agent and the Collateral Agent, the "Lender Creditors"), have entered into a Credit Agreement, dated as of March 30, 1998 (as amended, amended and restated, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans as contemplated therein; WHEREAS, the Borrower may from time to time be party to one or more Interest Rate Agreements (each such Interest Rate Agreement with an Interest Rate Creditor (as defined below), a "Secured Interest Rate Agreement") with Bankers Trust Company, in its individual capacity ("BTCo"), any Lender or a syndicate of financial institutions organized by BTCo or such Lender or an affiliate of BTCo or such Lender (even if BTCo or any such Lender ceases to be a Lender under the Credit Agreement for any reason), and any institution that participates therein, and in each case their subsequent assigns (collectively, the "Interest Rate Creditors," and together with the Lender Creditors, collectively, the "Creditors"); WHEREAS, each Guarantor is a wholly-owned direct or indirect Subsidiary of the Borrower; WHEREAS, it is a condition to the making of Loans under the Credit Agreement that each Guarantor shall have executed and delivered this Guaranty; and WHEREAS, each Guarantor will obtain benefits from the incurrence of Loans by the Borrower under the Credit Agreement and the entering into of Secured Interest Rate Agreements and, accordingly, desires to execute this Guaranty in order to satisfy the conditions described in the preceding paragraph and to induce the Lenders to make Loans to the Borrower and Interest Rate Creditors to enter into Secured Interest Rate Agreements; NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, each Guarantor hereby makes the following representations and warranties to the Creditors and hereby covenants and agrees with each Creditor as follows: 1. Each Guarantor irrevocably and unconditionally, and jointly and severally, guarantees: (i) to the Lender Creditors, the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of (a) the principal of and interest on the Notes issued by, and the Loans made to, the Borrower under the Credit Agreement and (b) all other obligations (including obligations which, but for any automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing by the Borrower to the Lender Creditors under the Credit Agreement and the other Credit Documents (including, without limitation, indemnities, Fees and interest thereon) now existing or hereafter incurred under, arising out of or in connection with the Credit Agreement or any other Credit Document and the due performance and compliance with the terms of the Credit Documents by the Borrower (all such principal, interest, liabilities and obligations, the "Credit Document Obligations"); and (ii) to the Interest Rate Creditors, the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for any automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities owing by the Borrower under any Secured Interest Rate Agreement, whether now in existence or hereafter arising, and the due performance and compliance by the Borrower with all terms, conditions and agreements contained therein (all such obligations and liabilities, the "Interest Rate Obligations", and the Interest Rate Obligations together with the Credit Document Obligations, collectively, the "Guaranteed Obligations"). -2- Each Guarantor understands, agrees and confirms that the Creditors may enforce this Guaranty up to the full amount of the Guaranteed Obligations against each Guarantor without proceeding against the Borrower, any other Guarantor or any security for the Guaranteed Obligations, or under any other guaranty covering all or a portion of the Guaranteed Obligations. All payments by each Guarantor under this Guaranty shall be made on the same basis as payments by the Borrower under Sections 3.03 and 3.04 of the Credit Agreement. 2. Additionally, each Guarantor, jointly and severally, unconditionally and irrevocably, guarantees the payment of any and all Guaranteed Obligations to the Creditors whether or not due or payable by the Borrower upon the occurrence in respect of the Borrower of any of the events specified in Section 8.05 of the Credit Agreement, and unconditionally and irrevocably, jointly and severally, promises to pay such Guaranteed Obligations to the Creditors, on demand, in lawful money of the United States of America. 3. The liability of each Guarantor hereunder is exclusive and independent of any security for or other guaranty of the indebtedness of the Borrower whether executed by such Guarantor, any other Guarantor, any other guarantor or by any other party, and the liability of each Guarantor hereunder shall not be affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the indebtedness of the Borrower, (c) any payment on or in reduction of any such other guaranty or undertaking, (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower or (e) any payment made to any Creditor on the indebtedness which any Creditor repays to the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. 4. The obligations of each Guarantor hereunder are independent of the obligations of any other Guarantor, any other guarantor or the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not action is brought against any other Guarantor, any other guarantor or the Borrower and whether or not any other Guarantor, any other guarantor of the Borrower or the Borrower be joined in any such action or actions. 5. Each Guarantor hereby waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives promptness, diligence, presentment, demand of payment, protest, notice of dishonor or nonpayment of any such liabilities, suit or taking of other action by the Administrative Agent or any other Creditor -3- against, and any other notice to, any party liable thereon (including such Guarantor or any other guarantor of the Borrower). 6. Any Creditor may at any time and from time to time without the consent of, or notice to, any Guarantor, without incurring responsibility to such Guarantor, without impairing or releasing the obligations of such Guarantor hereunder, upon or without any terms or conditions and in whole or in part: (i) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew or alter, any of the Guaranteed Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, and the guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (ii) sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (iii) exercise or refrain from exercising any rights against the Borrower, any other guarantor or others or otherwise act or refrain from acting; (iv) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to creditors of the Borrower (other than the Creditors); (v) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Creditors regardless of what liabilities of the Borrower remain unpaid; (vi) consent to or waive any breach of, or any act, omission or default under, any of the Credit Documents, the Secured Interest Rate Agreements or any of the instruments or agreements referred to therein, or otherwise amend, modify or supplement any of the Credit Documents, the Secured Interest Rate Agreements or any of such other instruments or agreements; and/or -4- (vii) act or fail to act in any manner referred to in this Guaranty which may deprive such Guarantor of its right to subrogation against the Borrower to recover full indemnity for any payments made pursuant to this Guaranty. 7. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor shall affect, impair or be a defense to this Guaranty, and this Guaranty shall be primary, absolute and unconditional notwithstanding the occurrence of any event or the existence of any other circumstances which might constitute a legal or equitable discharge of a surety or guarantor except payment in full of the Guaranteed Obligations. 8. This Guaranty is a continuing one and all liabilities to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon. No failure or delay on the part of any Creditor in exercising any right, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly specified are cumulative and not exclusive of any rights or remedies which any Creditor would otherwise have. No notice to or demand on any Guarantor in any case shall entitle such Guarantor to any other further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Creditor to any other or further action in any circumstances without notice or demand. It is not necessary for any Creditor to inquire into the capacity or powers of the Borrower or any of its Subsidiaries or the officers, directors, partners or agents acting or purporting to act on its behalf, and any indebtedness made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. 9. Any indebtedness of the Borrower now or hereafter held by any Guarantor is hereby subordinated to the indebtedness of the Borrower to the Creditors; and such indebtedness of the Borrower to any Guarantor, if the Collateral Agent so requests after an Event of Default (as hereinafter defined) has occurred, shall be collected, enforced and received by such Guarantor as trustee for the Creditors and be paid over to the Creditors on account of the indebtedness of the Borrower to the Creditors, but without affecting or impairing in any manner the liability of such Guarantor under the other provisions of this Guaranty. Prior to the transfer by any Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to such Guarantor, such Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. 10. (a) Each Guarantor hereby waives any right (except as shall be required by applicable statute and cannot be waived) to require the Creditors to: (i) -5- proceed against the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party; (ii) proceed against or exhaust any security held from the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party; or (iii) pursue any other remedy in the Creditors' power whatsoever. Each Guarantor waives any defense based on or arising out of any defense of the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party other than payment in full of the Guaranteed Obligations, including, without limitation, any defense based on or arising out of the disability of the Borrower, any other Guarantor, any other guarantor of the Borrower or any other party, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the Guaranteed Obligations. The Creditors may, at their election, foreclose on any security held by the Administrative Agent, the Collateral Agent or the other Creditors by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Creditors may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of any Guarantor hereunder, except to the extent the Guaranteed Obligations have been paid in full. Each Guarantor waives any defense arising out of any such election by the Administrative Agent, the Collateral Agent and the other Creditors, even though such election may operate to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Guarantor against the Borrower, any other Guarantor or any other party or any security. (b) Each Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Indebtedness. Each Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which any Guarantor assumes and incurs hereunder, and agrees that the Creditors shall have no duty to advise such Guarantor of information known to them regarding such circumstances or risks. (c) Until such time as the Guaranteed Obligations have been paid in full in cash or Cash Equivalents, each Guarantor hereby waives all rights of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code, or otherwise) to the claims of the Creditors against the Borrower, any other Guarantor or any other guarantor of the Guaranteed Obligations and all contractual, statutory or common law rights of reimbursement, contribution or -6- indemnity from the Borrower or any other Guarantor which it may at any time otherwise have as a result of this Guaranty. 11. If and to the extent that any Guarantor makes any payment to any Creditor or to any other Person pursuant to or in respect of this Guaranty, any claim which such Guarantor may have against the Borrower by reason thereof shall be subject and subordinate to the prior payment in full of the Guaranteed Obligations to each Creditor. Prior to the transfer by any Guarantor of any note or negotiable instrument evidencing any indebtedness of the Borrower to such Guarantor, such Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. 12. Each Guarantor covenants and agrees that on and after the date hereof and until the Total Commitment and all Secured Interest Rate Agreements have been terminated, no Note remains outstanding and all Guaranteed Obligations have been paid in full, such Guarantor shall take, or will refrain from taking, as the case may be, all actions that are necessary to be taken or not taken so that no violation of any provision, covenant or agreement contained in Section 6 or 7 of the Credit Agreement, and so that no Event of Default, is caused by the actions of such Guarantor or any of its Subsidiaries. 13. Each Guarantor hereby jointly and severally agrees to pay, to the extent not paid pursuant to Section 11.01 of the Credit Agreement, all reasonable out-of-pocket costs and expenses (including, without limitation, the reasonable fees and disbursements of counsel) of each Creditor in connection with the enforcement of this Guaranty and of the Administrative Agent in connection with any amendment, waiver or consent relating to this Guaranty. 14. This Guaranty shall be binding upon each Guarantor and its successors and assigns and shall inure to the benefit of the Creditors and their successors and assigns to the extent permitted under the Credit Agreement. 15. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated except with the written consent of the Required Lenders (or to the extent required by Section 11.12 of the Credit Agreement, with the written consent of each Lender) and each Guarantor affected thereby (it being understood that the addition or release of any Guarantor hereunder shall not constitute a change, waiver, discharge or termination affecting any Guarantor other than the Guarantor so added or released), provided that (x) no -------- such change, waiver, modification or variance shall be made to this Section 15 without the consent of each Creditor affected thereby and (y) any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Creditors (and not all Creditors in a like or similar manner) shall -7- require the written consent of the Requisite Creditors (as defined below) of such Class. For the purpose of this Guaranty, the term "Class" shall mean each class of Creditors, i.e., whether (i) the Lender Creditors as holders of the ---- Credit Document Obligations or (ii) the Interest Rate Creditors as holders of the Interest Rate Obligations. For the purpose of this Guaranty, the term "Requisite Creditors" of any Class shall mean (i) with respect to the Credit Document Obligations, the Required Lenders and (ii) with respect to the Interest Rate Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Secured Interest Rate Agreements. 16. Each Guarantor acknowledges that an executed (or conformed) copy of each of the Credit Documents and the Secured Interest Rate Agreements has been made available to its principal executive officers and such officers are familiar with the contents thereof. 17. In addition to any rights now or hereafter granted under applicable law (including, without limitation, Section 151 of the New York Debtor and Creditor Law) and not by way of limitation of any such rights, upon the occurrence and during the continuance of an Event of Default (such term shall mean and include any "Event of Default" as defined in the Credit Agreement or any payment default under any Secured Interest Rate Agreement continuing after any applicable grace period), each Creditor is hereby authorized, at any time or from time to time, without notice to any Guarantor or to any other Person, any such notice being expressly waived, to set off and to appropriate and apply any and all deposits (general or special) and any other indebtedness at any time held or owing by such Creditor to or for the credit or the account of any Guarantor, against and on account of the obligations and liabilities of such Guarantor to such Creditor under this Guaranty, irrespective of whether or not such Creditor shall have made any demand hereunder and although said obligations, liabilities, deposits or claims, or any of them, shall be contingent or unmatured. Each Creditor agrees to promptly notify the relevant Guarantor after any such set off and application, provided that the failure to -------- give such notice shall not affect the validity of such set off and application. 18. All notices, requests, demands or other communications provided for hereunder made in writing (including communications by facsimile transmission) shall be deemed to have been duly given or made when delivered to the Person to which such notice, request, demand or other communication is required or permitted to be given or made under this Guaranty, addressed to such party at (i) in the case of any Lender Creditor, as provided in the Credit Agreement, (ii) in the case of each Guarantor, at its address set forth opposite its signature below and (iii) in the case of any Interest Rate Creditor, at such address as such Interest Rate Creditor shall have specified in writing to the Guarantors; or in any case at such other address as any of the Persons listed above may hereafter notify the others in writing. -8- 19. If claim is ever made upon any Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any such Creditor repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such Creditor or any of its property or (ii) any settlement or compromise of any such claim effected by such Creditor with any such claimant (including the Borrower), then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Guarantor, notwithstanding any revocation hereof or other instrument evidencing any liability of the Borrower, and each Guarantor shall be and remain liable to such Creditor hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such Creditor. 20. (a) THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF THE CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. Any legal action or proceeding with respect to this Guaranty or any other Credit Document may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Guaranty, each Guarantor hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Guarantor hereby irrevocably designates, appoints and empowers CT Corporation System with offices on the date hereof at 1633 Broadway, New York, NY 10019, as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding. If for any reason such designee, appointee and agent shall cease to be available to act as such, each Guarantor agrees to designate a new designee, appointee and agent in New York City on the terms and for the purposes of this provision satisfactory to the Administrative Agent under this Agreement. Each Guarantor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to each Guarantor at its address set forth opposite its signature below, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of any of the Creditors to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Guarantor in any other jurisdiction. (b) Each Guarantor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Guaranty or any other Credit Document brought in the courts referred to in clause (a) above and hereby further -9- irrevocably waives and agrees not to plead or claim in any such court that such action or proceeding brought in any such court has been brought in an inconvenient forum. (c) Each Guarantor and each Creditor hereby irrevocably waive all rights to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Guaranty, the other Credit Documents or the transactions contemplated hereby or thereby. 21. (a) After the Termination Date (as defined below), this Guaranty shall terminate (provided that all indemnities set forth herein shall survive any such termination) and the Administrative Agent, at the request and expense of the respective Guarantor, will execute and deliver to such Guarantor a proper instrument or instruments acknowledging the satisfaction and termination of this Guaranty as provided above. As used in this Guaranty, "Termination Date" shall mean the date upon which the Total Commitment and all Secured Interest Rate Agreements have been terminated, no Note under the Credit Agreement is outstanding (and all Loans have been paid in full) and all other Obligations (as defined in the Credit Agreement) have been paid in full (other than arising from indemnities for which no request has been made). (b) In the event that (x) all of the capital stock of one or more Guarantors is sold or otherwise disposed of (including by way of the merger or consolidation of such Guarantor with or into another Person) or liquidated, in any such case in compliance with the requirements of Section 7.02 of the Credit Agreement (or such sale or other disposition or liquidation has been approved in writing by the Required Lenders (or all Lenders if required by Section 11.12 of the Credit Agreement)), and the proceeds of such sale, disposition or liquidation are applied, to the extent applicable, in accordance with the provisions of the Credit Agreement, such Guarantor shall be released from this Guaranty and this Guaranty shall, as to each such Guarantor or Guarantors, terminate, and have no further force or effect (it being understood and agreed that the sale of one or more Persons that own, directly or indirectly, all of the capital stock, partnership interests or other equity interests of any Guarantor shall be deemed to be a sale of such Guarantor for the purposes of this Section 21). 22. Each Guarantor, in addition to the subrogation rights it shall have against the Borrower under applicable law as a result of any payment it makes hereunder, shall also have a right of contribution against all other Guarantors in respect of any such payment pro rata among same based on their --- ---- respective net fair values as enterprises, provided any such right of -------- contribution shall be subject and subordinate to the prior payment in full of the Guaranteed Obligations (and such Guarantor's obligations in respect thereof). It is the desire and intent of each Guarantor and the Creditors that this Guaranty shall be enforced to the full extent permissible under the laws and public -10- policies applied in each jurisdiction in which enforcement is sought. If and to the extent that the obligations of any Guarantor under this Guaranty would, in the absence of this sentence, be adjudicated to be invalid or unenforceable because of any applicable state or federal law relating to fraudulent conveyances or transfers, then the amount of such Guarantor's liability hereunder in respect of the Guaranteed Obligations shall be deemed to be reduced ab initio to that maximum amount which would be permitted without -- ------ causing such Guarantor's obligations hereunder to be so invalidated. 23. The Creditors agree that this Guaranty may be enforced only by the action of the Administrative Agent or the Collateral Agent, in each case acting upon the instructions of the Required Lenders and that no other Creditor shall have any right individually to seek to enforce or to enforce this Guaranty or to realize upon the security to be granted by the Pledge Agreement, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent or the Collateral Agent for the benefit of the Creditors upon the terms of this Guaranty and the Pledge Agreement. The Creditors further agree that this Guaranty may not be enforced against any director, officer or employee of any Guarantor. 24. This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Administrative Agent. 25. All payments made by any Guarantor hereunder will be made without setoff, counterclaim or other defense. 26. It is understood and agreed that any Subsidiary of the Borrower that is required to execute a counterpart of this Guaranty pursuant to the Credit Agreement shall automatically become a Guarantor hereunder by executing a counterpart hereof and delivering the same to the Administrative Agent. -11- IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be executed and delivered as of the date first above written. c/o MJD COMMUNICATIONS, INC. MJD HOLDINGS CORP., 521 East Morehead Street as a Guarantor Suite 250 Charlotte, NC 28202 By /s/ Walter Leach ---------------------------------- Title: Vice President, Secretary and Chief Financial Officer c/o MJD COMMUNICATIONS, INC. MJD VENTURES, INC., 521 East Morehead Street as a Guarantor Suite 250 Charlotte, NC 28202 By /s/ Walter Leach ---------------------------------- Title: Vice President, Secretary and Chief Financial Officer c/o MJD COMMUNICATIONS, INC. MJD SERVICES CORP., 521 East Morehead Street as a Guarantor Suite 250 Charlotte, NC 28202 By /s/ Walter Leach ---------------------------------- Title: Vice President, Secretary and Chief Financial Officer c/o MJD COMMUNICATIONS, INC. ST ENTERPRISES LTD., 521 East Morehead Street as a Guarantor Suite 250 Charlotte, NC 28202 By /s/ Walter Leach ---------------------------------- Title: Vice President, Secretary and Chief Financial Officer -12- Accepted and Agreed to: BANKERS TRUST COMPANY, as Administrative Agent for the Lenders By /s/ G. Andrew Keith ------------------------------------ Title: Vice President -13- EXHIBIT G CONFORMED AS EXECUTED PLEDGE AGREEMENT ---------------- PLEDGE AGREEMENT, dated as of March 30, 1998 (as amended, amended and restated, modified or supplemented from time to time, the "Agreement"), made by each of the undersigned (each, a "Pledgor" and together with any other entity that becomes a party hereto pursuant to Section 24 hereof, collectively, the "Pledgors"), in favor of BANKERS TRUST COMPANY, as Collateral Agent (including any successor collateral agent, the "Pledgee") for the benefit of the Secured Creditors (as defined below). Except as otherwise defined herein, terms used herein and defined in the Credit Agreement (as defined below) shall be used herein as therein defined. W I T N E S S E T H : - - - - - - - - - - WHEREAS, MJD Communications, Inc. (the "Borrower"), the lenders from time to time party thereto (the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent (the "Syndication Agent"), and Bankers Trust Company, as Administrative Agent (the "Administrative Agent" and together with the Lenders, the Syndication Agent, the Collateral Agent and the Pledgee, the "Lender Creditors"), have entered into a Credit Agreement, dated as of March 30, 1998 (as amended, modified or supplemented from time to time, the "Credit Agreement"), providing for the making of Loans as contemplated therein; WHEREAS, the Borrower may from time to time be a party to one or more Interest Rate Agreements (each such Interest Rate Agreement with an Interest Rate Creditor (as defined below), a "Secured Interest Rate Agreement") with Bankers Trust Company, in its individual capacity ("BTCo"), any Lender or a syndicate of financial institutions organized by BTCo or such Lender or an affiliate of BTCo or such Lender (even if BTCo or any such Lender ceases to be a Lender under the Credit Agreement for any reason), and any institution that participates therein, and in each case their subsequent assigns (collectively, the "Interest Rate Creditors," and together with the Lender Creditors, collectively, the "Secured Creditors"); WHEREAS, pursuant to the Subsidiary Guaranty, dated as of March 30, 1998 (as amended, modified or supplemented from time to time, the "Subsidiary Guaranty"), each Pledgor that is a Subsidiary Guarantor has jointly and severally guaranteed to the Secured Creditors the payment when due of the Guaranteed Obligations (as defined in the Subsidiary Guaranty); WHEREAS, it is a condition precedent to the making of Loans under the Credit Agreement that each Pledgor shall have executed and delivered to the Pledgee this Agreement; WHEREAS, each Pledgor desires to execute this Agreement to satisfy the conditions described in the preceding paragraph; NOW, THEREFORE, in consideration of the benefits accruing to each Pledgor, the receipt and sufficiency of which are hereby acknowledged, each Pledgor hereby makes the following representations and warranties to the Pledgee and hereby covenants and agrees with the Pledgee as follows: 1. SECURITY FOR OBLIGATIONS. This Agreement is made by each Pledgor ------------------------ for the benefit of the Secured Creditors to secure: (i) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities of such Pledgor, now existing or hereafter incurred under, arising out of or in connection with any Credit Document to which such Pledgor is a party and the due performance of and compliance by such Pledgor with the terms of each such Credit Document by such Pledgor (all such obligations and liabilities under this clause (i), except to the extent consisting of obligations or indebtedness with respect to Secured Interest Rate Agreements, being herein collectively called the "Credit Document Obligations"); (ii) the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of all obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities of such Pledgor, now existing or hereafter incurred under, arising out of or in connection with any Secured Interest Rate Agreement, including all obligations, if any, of such Pledgor under its Guaranty (if any) in respect of Secured Interest Rate Agreements (all such obligations and liabilities under this clause (ii) being herein collectively called the "Interest Rate Obligations"); -2- (iii) any and all sums advanced by the Pledgee in order to preserve the Collateral (as hereinafter defined) and/or its security interest therein; (iv) in the event of any proceeding for the collection of the Obligations (as defined below) or the enforcement of this Agreement, after an Event of Default (such term, as used in this Agreement, shall mean any Event of Default under the Credit Agreement or any payment default by the Borrower under any Secured Interest Rate Agreement after the expiration of any applicable grace period) shall have occurred and be continuing, the reasonable expenses of retaking, holding, preparing for sale or lease, selling or otherwise disposing of or realizing on the Collateral, or of any exercise by the Pledgee of its rights hereunder, together with reasonable attorneys' fees and court costs; and (v) all amounts paid by any Secured Creditor as to which such Secured Creditor has the right to reimbursement under Section 11 of this Agreement; all such obligations, liabilities, sums and expenses set forth in clauses (i) through (v) of this Section 1 being herein collectively called the "Obligations". 2. DEFINITION OF STOCK, NOTES, PARTNERSHIP INTERESTS, MEMBERSHIP ------------------------------------------------------------- INTERESTS, SECURITIES, ETC. As used herein, (i) the term "Stock" shall mean (x) - --------------------------- all of the issued and outstanding shares of stock at any time owned by any Pledgor of any corporation (other than (I) any Excluded Entity and (II) a corporation that is not organized under the laws of the United States or any State or territory thereof (a "Foreign Corporation")) and (y) with respect to a Foreign Corporation that is a first-tier Subsidiary (other than any Excluded Entity), all of the issued and outstanding shares of capital stock at any time owned by any Pledgor of such Foreign Corporation, provided that such Pledgor -------- shall not be required to pledge hereunder (and the term "Stock" shall not include) more than 65% of the total combined voting power of all classes of capital stock of any Exempted Foreign Corporation entitled to vote; (ii) the term "Notes" shall mean all promissory notes at any time issued to, or held by, any Pledgor; (iii) the term "Partnership Interest" shall mean the entire partnership interest (whether general and/or limited partnership interests) at any time owned by any Pledgor in any partnership (other than (I) an Excluded Entity and (II) a partnership that is not organized under the laws of the United States or any State or territory thereof (a "Foreign Partnership")) and (y) with respect to a Foreign Partnership (other than an Excluded Entity), the entire partnership interest at any time owned by any Pledgor in such Foreign Partnership, provided that such Pledgor shall not be required to pledge -------- hereunder (and the term "Partnership Interest" shall not include) more than 65% of the total voting power of all classes of partnership interests of any such Foreign Partnership entitled to vote (with any partnership (other than an Excluded Entity) in which any Pledgor owns a partnership interest being herein called -3- a "Pledged Partnership"); (iv) the term "Membership Interest" shall mean the entire membership interest at any time owned by any Pledgor in any limited liability company (other than (other than (I) an Excluded Entity and (II) a limited liability company that is not organized under the laws of the United States or any State or territory thereof (a "Foreign LLC")) and (y) with respect to a Foreign LLC (other than an Excluded Entity), the entire membership interest at any time owned by any Pledgor in such Foreign LLC, provided that such Pledgor -------- shall not be required to pledge hereunder (and the term "Membership Interest" shall not include) more than 65% of the total voting power of all classes of the membership interests of any such Foreign LLC entitled to vote (with any limited liability company (other than an Excluded Entity) in which any Pledgor owns a membership interest being herein called a "Pledged LLC"); (v) the term "Securities" shall mean all of the Stock, Notes, Partnership Interests and Membership Interests; (vi) the term "Exempted Foreign Corporation" shall mean any Foreign Corporation that is treated as a corporation or an association taxable as a corporation for U.S. Federal income tax purposes and (vii) the term "Excluded Entity" shall mean (w) any corporation, partnership, limited liability company or association which is not a Parent Company, an Intermediary Holding Company or a TelCo, (x) ST Enterprises, Ltd. to the extent (and only to the extent) the Existing Warrants remain outstanding, (y) STE/NE Acquisition Corp. (D/B/A Northland of Vermont), Big Sandy Telecom, Columbine Acquisition Corp. and Sunflower Telephone Company, in each case to the extent (and only to the extent) the relevant Pledgor has not obtained the appropriate regulatory approval to pledge the capital stock of any such Person on the Closing Date and, thereafter, in compliance with Section 6.11 of the Credit Agreement and (z) any TelCo acquired or created pursuant to a Permitted Acquisition after the Closing Date if (I) the relevant Pledgor has not obtained the appropriate regulatory approval to pledge the capital stock or other equity interests of such Telco in compliance with Section 6.11 of the Credit Agreement and (II) after giving effect to the acquisition or creation of such TelCo, the Pro Forma EBITDA Test is satisfied. Each Pledgor represents and warrants that on the date hereof: (a) each Subsidiary of such Pledgor whose equity interest is required to be pledged hereunder, and the direct ownership thereof, is listed on Annex A hereto; (b) the Stock held by such Pledgor consists of the number and type of shares of the stock of the corporations as described in Annex B hereto; (c) such Stock constitutes that percentage of the issued and outstanding capital stock of the issuing corporation as set forth in Annex B hereto; (d) the Notes held by such Pledgor consist of the promissory notes described in Annex C hereto; (e) such Pledgor is the holder of record and sole beneficial owner of the Stock and Notes held by such Pledgor and there exists no options or preemption rights in respect of any of the Stock; (f) the Partnership Interests and Membership Interests, as the case may be, held by such Pledgor constitute that percentage of the entire interest of the respective Pledged Partnership or Pledged LLC, as the case may be, as is set forth under its name in Annex D hereto; and (g) on the date hereof, such Pledgor owns or possesses no other Securities except as described on Annexes B, C and D hereto. -4- 3. PLEDGE OF SECURITIES, ETC. -------------------------- 3.1 Pledge. To secure the Obligations and for the purposes set ------ forth in Section 1, each Pledgor hereby: (i) grants and pledges to the Pledgee a security interest in all of the Collateral owned by such Pledgor; (ii) pledges and deposits as security with the Pledgee the Securities owned by such Pledgor on the date hereof, if any, and delivers to the Pledgee certificates or instruments therefor, duly endorsed in blank in the case of Notes and accompanied by undated stock or other powers duly executed in blank by such Pledgor in the case of Stock, Partnership Interests or Membership Interests, as the case may be, or such other instruments of transfer as are acceptable to the Pledgee; (iii) assigns, transfers, hypothecates, mortgages, charges and sets over to the Pledgee all of such Pledgor's right, title and interest in and to such Securities (and in and to all certificates or instruments evidencing such Securities), to be held by the Pledgee, upon the terms and conditions set forth in this Agreement; (iv) grants, pledges, assigns and transfers to the Pledgee all of such Pledgor's (x) Partnership Interest and all of such Pledgor's right, title and interest in each Pledged Partnership and (y) Membership Interest and all of such Pledgor's right, title and interest in each Pledged LLC, in each case including, without limitation: (a) all the capital thereof and its interest in all profits, losses and other distributions to which such Pledgor shall at any time be entitled in respect of such Partnership Interest and/or Membership Interest; (b) all other payments due or to become due to such Pledgor in respect of such Partnership Interest and/or Membership Interest, whether under any partnership agreement, limited liability company agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (c) all of its claims, rights, powers, privileges, authority, options, security interest, liens and remedies, if any, under any partnership -5- agreement, limited liability company agreement or at law or otherwise in respect of such Partnership Interest and/or Membership Interest; (d) all present and future claims, if any, of the Pledgor against any Pledged Partnership and any Pledged LLC for moneys loaned or advanced, for services rendered or otherwise; (e) all of such Pledgor's rights under any partnership agreement or limited liability company agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of such Pledgor relating to the Partnership Interest and/or Membership Interest, including any power to terminate, cancel or modify any partnership agreement or any limited liability company agreement, to execute any instruments and to take any and all other action on behalf of and in the name of such Pledgor in respect of any Partnership Interest or Membership Interest and any Pledged Partnership and any Pledged LLC to make determinations, to exercise any election (including, but not limited to, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; (f) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (g) to the extent not otherwise included, all proceeds of any or all of the foregoing. 3.2 Subsequently Acquired Securities. If any Pledgor shall acquire -------------------------------- (by purchase, stock dividend or otherwise) any additional Securities at any time or from time to time after the date hereof, such Pledgor will forthwith pledge and deposit such Securities (or certificates or instruments representing such Securities) as security with the Pledgee and deliver to the Pledgee certificates or instruments thereof, duly endorsed in blank in the case of Notes and accompanied by undated stock or other powers duly executed in blank by such Pledgor (and accompanied by any transfer tax stamps required -6- in connection with the pledge of such Securities) in the case of Stock, Partnership Interests or Membership Interests, as the case may be, or such other instruments of transfer as are acceptable to the Pledgee, and will promptly thereafter deliver to the Pledgee a certificate executed by a principal executive officer of such Pledgor describing such Securities and certifying that the same have been duly pledged with the Pledgee hereunder. No Pledgor shall be required at any time to pledge hereunder any Securities which constitute more than 65% of the total combined voting power of all classes of ownership interests of any Exempted Foreign Corporation, Foreign Partnership or Foreign LLC, as the case may be, entitled to vote. 3.3 Uncertificated Securities. Notwithstanding anything to the ------------------------- contrary contained in Sections 3.1 and 3.2, if any Securities (whether or not now owned or hereafter acquired) are uncertificated securities, the respective Pledgor shall promptly notify the Pledgee thereof, and shall promptly take all actions required to perfect the security interest of the Pledgee under applicable law (including, in any event, under Articles 8 and 9 of the New York Uniform Commercial Code if applicable). Each Pledgor further agrees to take such actions as the Pledgee deems necessary or desirable to effect the foregoing and to permit the Pledgee to exercise any of its rights and remedies hereunder, and agrees to provide an opinion of counsel reasonably satisfactory to the Pledgee with respect to any such pledge of uncertificated Securities promptly upon request of the Pledgee. 3.4 Definitions of Pledged Stock, Pledged Notes, Pledged Partnership ---------------------------------------------------------------- Interests, Pledged Membership Interests, Pledged Securities and Collateral. All - -------------------------------------------------------------------------- Stock at any time pledged or required to be pledged hereunder is hereinafter called the "Pledged Stock, all Notes at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Notes", all Partnership Interests at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Partnership Interests," all Membership Interests at any time pledged or required to be pledged hereunder are hereinafter called the "Pledged Membership Interests", all Pledged Stock, Pledged Notes, Pledged Partnership Interests and Pledged Membership Interests, together are called the "Pledged Securities"; and the Pledged Securities, together with all proceeds thereof, including any securities and moneys received and at the time held by the Pledgee hereunder, are hereinafter called the "Collateral." 4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. The Pledgee shall --------------------------------------------- have the right to appoint one or more sub-agents for the purpose of retaining physical possession of the Pledged Securities, which may be held (in the discretion of the Pledgee) in the name of the relevant Pledgor, endorsed or assigned in blank or in favor of the Pledgee or any nominee or nominees of the Pledgee or a sub-agent appointed by the Pledgee. -7- 5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until there --------------------------------------- shall have occurred and be continuing an Event of Default, each Pledgor shall be entitled to exercise all voting rights attaching to any and all Pledged Securities owned by it, and to give consents, waivers or ratifications in respect thereof, provided that no vote shall be cast or any consent, waiver or -------- ratification given or any action taken which would violate, result in breach of any covenant contained in, or be inconsistent with, any of the terms of this Agreement, the Credit Agreement, any other Credit Document or any Secured Interest Rate Agreement (collectively, the "Secured Debt Agreements"), or which would have the effect of impairing the value of the Collateral or any part thereof or the position or interests of the Pledgee or any other Secured Creditor therein. All such rights of a Pledgor to vote and to give consents, waivers and ratifications shall cease in case an Event of Default shall occur and be continuing and Section 7 hereof shall become applicable. 6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless and until an Event of --------------------------------- Default shall have occurred and be continuing, all cash dividends, distributions or other amounts payable in respect of the Pledged Securities shall be paid to the respective Pledgor, provided that all dividends, distributions or other -------- amounts payable in respect of the Pledged Securities which are determined by the Pledgee, in its absolute discretion, to represent in whole or in part an extraordinary, liquidating or other distribution in return of capital not permitted by the Credit Agreement shall be paid, to the extent so determined to represent an extraordinary, liquidating or other distribution in return of capital not permitted by the Credit Agreement, to the Pledgee and retained by it as part of the Collateral (unless such cash dividends or distributions are applied to repay the Obligations pursuant to Section 9 of this Agreement). The Pledgee shall also be entitled to receive directly, and to retain as part of the Collateral: (i) all other or additional stock, or other securities or property (other than cash) paid or distributed by way of dividend or otherwise in respect of the Collateral; (ii) all other or additional stock or other securities or property (including cash) paid or distributed in respect of the Collateral by way of stock-split, spin-off, split-up, reclassification, combination of shares or similar rearrangement; and (iii) all other or additional stock or other securities or property (including cash) which may be paid in respect of the Collateral by reason of any consolidation, merger, exchange of stock, conveyance of assets, liquidation or similar corporate reorganization (other than the Net Cash Proceeds from any Asset Sale applied to repay Loans and/or reinvested in accordance with the relevant provisions of the Credit Agreement). -8- Nothing contained in this Section 6 shall limit or restrict in any way the Pledgee's right to receive the proceeds of the Collateral in any form in accordance with Section 3 of this Agreement. All dividends, distributions or other payments which are received by the respective Pledgor contrary to the provisions of this Section 6 or Section 7 shall be received in trust for the benefit of the Pledgee, shall be segregated from other property or funds of such Pledgor and shall be forthwith paid over to the Pledgee as Collateral in the same form as so received (with any necessary endorsement). 7. REMEDIES IN CASE OF AN EVENT OF DEFAULT. (a) In case an Event of --------------------------------------- Default shall have occurred and be continuing, the Pledgee shall be entitled to exercise all of the rights, powers and remedies (whether vested in it by this Agreement or any other Secured Debt Agreement or by law) for the protection and enforcement of its rights in respect of the Collateral, including, without limitation, all the rights and remedies of a secured party upon default under the Uniform Commercial Code of the State of New York, and the Pledgee shall be entitled, without limitation, to exercise any or all of the following rights, which each Pledgor hereby agrees to be com mercially reasonable: (i) to receive all amounts payable in respect of the Collateral otherwise payable under Section 6 to such Pledgor; (ii) to transfer all or any part of the Collateral into the Pledgee's name or the name of its nominee or nominees; (iii) to accelerate any Pledged Note which may be accelerated in accordance with its terms, and take any other lawful action to collect upon any Pledged Note (including, without limitation, to make any demand for payment thereon); (iv) to vote all or any part of the Pledged Stock, Pledged Partnership Interests and Pledged Membership Interests (whether or not transferred into the name of the Pledgee) and give all consents, waivers and ratifications in respect of the Collateral and otherwise act with respect thereto as though it were the out right owner thereof (each Pledgor hereby irrevocably constituting and appointing the Pledgee the proxy and attorney- in-fact of such Pledgor, with full power of substitution to do so); and (v) at any time or from time to time to sell, assign and deliver, or grant options to purchase, all or any part of the Collateral, or any interest therein, at any public or private sale, without demand of performance, advertisement or notice of intention to sell or of the time or place of sale or adjournment thereof or to redeem -9- or otherwise (all of which are hereby waived by each Pledgor), for cash, on credit or for other property, for immediate or future delivery without any assumption of credit risk, and for such price or prices and on such terms as the Pledgee in its absolute discretion may determine, provided that at least -------- 10 days' notice of the time and place of any such sale shall be given to such Pledgor. The Pledgee shall not be obligated to make such sale of Collateral regardless of whether any such notice of sale has theretofore been given. Each purchaser at any such sale shall hold the property so sold absolutely free from any claim or right on the part of any Pledgor, and each Pledgor hereby waives and releases to the fullest extent permitted by law any right or equity of redemption with respect to the Collateral, whether before or after sale hereunder, all rights, if any, of marshalling the Collateral and any other security for the Obligations or otherwise, and all rights, if any, of stay and/or appraisal which it now has or may at any time in the future have under rule of law or statute now existing or hereafter enacted. At any such sale, unless prohibited by applicable law, the Pledgee on behalf of all Secured Creditors (or certain of them) may bid for and purchase (by bidding in Obligations or otherwise) all or any part of the Collateral so sold free from any such right or equity of redemption. Neither the Pledgee nor any Secured Creditor shall be liable for failure to collect or realize upon any or all of the Collateral or for any delay in so doing nor shall it be under any obligation to take any action whatsoever with regard thereto. 8. REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of the -------------------------- Pledgee provided for in this Agreement or any other Secured Debt Agreement, or now or hereafter existing at law or in equity or by statute shall be cumulative and concurrent and shall be in addition to every other such right, power or remedy. The exercise or beginning of the exercise by the Pledgee or any other Secured Creditor of any one or more of the rights, powers or remedies provided for in this Agreement or any other Secured Debt Agreement or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Pledgee or any other Secured Creditor of all such other rights, powers or remedies, and no failure or delay on the part of the Pledgee or any other Secured Creditor to exercise any such right, power or remedy shall operate as a waiver thereof. Unless otherwise required by the Credit Documents, no notice to or demand on any Pledgor in any case shall entitle it to any other or further notice or demand in similar other circumstances or constitute a waiver of any of the rights of the Pledgee or any other Secured Creditor to any other further action in any circumstances without demand or notice. The Secured Creditors agree that this Agreement may be enforced only by the action of the Administrative Agent or the Pledgee, in each case acting upon the instructions of the Required Lenders (or, after the date on which all Credit Document Obligations have been paid in full, the holders of at least the majority of the outstanding Interest Rate Obligations) and that no other Secured -10- Creditor shall have any right individually to seek to enforce or to enforce this Agreement or to realize upon the security to be granted hereby, it being understood and agreed that such rights and remedies may be exercised by the Administrative Agent or the Pledgee or the holders of at least a majority of the outstanding Interest Rate Obligations, as the case may be, for the benefit of the Secured Creditors upon the terms of this Agreement. 9. APPLICATION OF PROCEEDS. (a) All moneys collected by the Pledgee ----------------------- or the Collateral Agent upon any sale or other disposition of the Collateral, together with all other moneys received by the Pledgee or the Collateral Agent hereunder, shall be applied as follows: (i) first, to the payment of all Obligations owing to the Pledgee or the Collateral Agent of the type described in clauses (iii) and (iv) of the definition of "Obligations" contained in Section 1 hereof; (ii) second, to the extent proceeds remain after the application pursuant to preceding clause (i), an amount equal to the outstanding Obligations to the Secured Creditors shall be paid to the Secured Creditors as provided in Section 9(c) with each Secured Creditor receiving an amount equal to its out standing Obligations or, if the proceeds are insufficient to pay in full all such Obligations, its Pro Rata Share of the amount --- ---- remaining to be distributed to be applied, with respect to the Credit Document Obligations, firstly to the payment of interest in respect of the unpaid principal amount of Loans outstanding, secondly to the payment of principal of Loans outstanding, then to the other Credit Document Obligations; and (iii) third, to the extent proceeds remain after the application pursuant to the preceding clauses (i) and (ii) and following the termination of this Agreement pursuant to Section 18 hereof, to the relevant Pledgor or, to the extent directed by such Pledgor or a court of competent jurisdiction, to whomever may be lawfully entitled to receive such surplus. (b) For purposes of this Agreement, "Pro Rata Share" shall mean, when --- ---- calculating a Secured Creditor's portion of any distribution or amount, the amount (expressed as a percentage) equal to a fraction the numerator of which is the then outstanding amount of the relevant Obligations owed such Secured Creditor and the denominator of which is the then outstanding amount of all Obligations. (c) All payments required to be made to the (i) Lender Creditors hereunder shall be made to the Administrative Agent for the account of the respective Lender Creditors and (ii) Interest Rate Creditors hereunder shall be made to the paying -11- agent under the applicable Secured Interest Rate Agreement or, in the case of Secured Interest Rate Agreements without a paying agent, directly to the applicable Interest Rate Creditor. (d) For purposes of applying payments received in accordance with this Section 9, the Pledgee and the Collateral Agent shall be entitled to rely upon (i) the Administrative Agent for a determination (which the Administrative Agent agrees to provide upon request to the Pledgee and the Collateral Agent) of the outstanding Credit Document Obligations and (ii) any Interest Rate Creditor for a determination (which each Interest Rate Creditor agrees to provide upon request to the Pledgee and the Collateral Agent) of the outstanding Interest Rate Obligations owed to such Interest Rate Creditor. Unless it has actual knowledge (including by way of written notice from a Secured Creditor) to the contrary, the Administrative Agent under the Credit Agreement, in furnishing information pursuant to the preceding sentence, and the Pledgee and the Collateral Agent, in acting hereunder, shall be entitled to assume that (x) no Credit Document Obligations other than principal, interest and regularly accruing fees are owing to any Lender Creditor and (y) no Secured Interest Rate Agreements or Interest Rate Obligations with respect thereto are in existence. (e) It is understood that the Pledgors shall remain jointly and severally liable to the extent of any deficiency between (x) the amount of the Obligations for which it is liable directly or as a Guarantor that are satisfied with proceeds of the Collateral and (y) the aggregate outstanding amount of the Obligations. 10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral by the ------------------------ Pledgee hereunder (whether by virtue of the power of sale herein granted, pursuant to judicial process or otherwise), the receipt of the Pledgee or the officer making the sale shall be a sufficient discharge to the purchaser or purchasers of the Collateral so sold, and such purchaser or purchasers shall not be obligated to see to the application of any part of the purchase money paid over to the Pledgee or such officer or be answerable in any way for the misapplication or nonapplication thereof. 11. INDEMNITY. Each Pledgor jointly and severally agrees (i) to --------- indemnify and hold harmless the Pledgee and the other Secured Creditors from and against any and all claims, demands, losses, judgments and liabilities (including liabilities for penalties) of whatsoever kind or nature, and (ii) to reimburse the Pledgee for all reasonable costs and expenses, including reasonable attorneys' fees, arising in connection with any amendment, waiver or modification to this Agreement and the Pledgee and the other Secured Creditors for all reasonable costs and expenses (including reasonable attorney's fees) growing out of or resulting from the exercise by the Pledgee of any right or remedy granted to it hereunder or under any other Secured Debt Agreement except, -12- with respect to clauses (i) and (ii) above, for those arising from the Pledgee's gross negligence or willful misconduct. In no event shall the Pledgee be liable, in the absence of gross negligence or willful misconduct on its part, for any matter or thing in connection with this Agreement other than to account for moneys or other property actually received by it in accordance with the terms hereof. If and to the extent that the obligations of any Pledgor under this Section 11 are unenforceable for any reason, such Pledgor hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable law. 12. FURTHER ASSURANCES; POWER OF ATTORNEY. (a) Each Pledgor agrees ------------------------------------- that it will join with the Pledgee in executing and, at such Pledgor's own expense, file and refile under the Uniform Commercial Code such financing statements, continuation statements and other documents in such offices as the Pledgee may deem necessary or appropriate and wherever required or permitted by law in order to perfect and preserve the Pledgee's security interest in the Collateral hereunder and hereby authorizes the Pledgee to file financing statements and amendments thereto relative to all or any part of the Collateral without the signature of such Pledgor where permitted by law, and agrees to do such further acts and things and to execute and deliver to the Pledgee such additional conveyances, assignments, agreements and instruments as the Pledgee may reasonably require or deem advisable to carry into effect the purposes of this Agreement or to further assure and confirm unto the Pledgee its rights, powers and remedies hereunder or thereunder. (b) Each Pledgor hereby appoints the Pledgee, such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor or otherwise, from time to time after the occurrence and during the continuance of an Event of Default, in the Pledgee's reasonable discretion to take any action and to execute any instrument which the Pledgee may reasonably deem necessary or advisable to accomplish the purposes of this Agreement. 13. THE PLEDGEE AS COLLATERAL AGENT. The Pledgee will hold in ------------------------------- accordance with this Agreement all items of the Collateral at any time received under this Agreement. It is expressly understood and agreed that the obligations of the Pledgee as holder of the Collateral and interests therein and with respect to the disposition thereof, and otherwise under this Agreement, are only those expressly set forth in this Agreement. The Pledgee shall act hereunder on the terms and conditions set forth herein and in Section 11 of the Credit Agreement. 14. TRANSFER BY THE PLEDGORS. No Pledgor will sell or otherwise ------------------------ dispose of, grant any option with respect to, or mortgage, pledge or otherwise -13- encumber any of the Collateral or any interest therein (except in accordance with the terms of this Agreement and the other Secured Debt Agreements). 15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PLEDGORS. (a) ---------------------------------------------------------- Each Pledgor represents, warrants and covenants that: (i) it is, or at the time when pledged hereunder will be, the legal, beneficial and record owner of, and has (or will have) good and marketable title to, all Securities pledged by it hereunder, subject to no pledge, lien, mortgage, hypothecation, security interest, charge, option or other encumbrance whatsoever, except (x) the liens and security interests created by this Agreement and (y) liens permitted by Section 7.03(a) of the Credit Agreement; (ii) it has full power, authority and legal right to pledge all the Securities pledged by it pursuant to this Agreement; (iii) this Agreement has been duly authorized, executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (iv) except to the extent already obtained or made, no consent of any other party (including, without limitation, any stockholder, limited or general partner, member or creditor of such Pledgor or any of its Subsidiaries) and no consent, license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required to be obtained by such Pledgor in connection with (a) the execution, delivery or performance of this Agreement, (b) the validity or enforceability of this Agreement, (c) the perfection or enforceability of the Pledgee's security interest in the Collateral or (d) except for compliance with or as may be required by applicable securities laws, the exercise by the Pledgee of any of its rights or remedies provided herein; (v) the execution, delivery and performance of this Agreement by such Pledgor will not violate any provision of any applicable law or regulation or of any order, judgment, writ, award or decree of any court, arbitrator or governmental authority, domestic or foreign, applicable to such Pledgor, or of the certificate of incorporation, certificate of formation, by-laws, certificate of limited -14- partnership, partnership agreement or limited liability company agreement, as the case may be, of such Pledgor or of any securities issued by such Pledgor or any of its Subsidiaries, or of any mortgage, indenture, lease, loan agreement, credit agreement or other material contract, agreement or instrument or undertaking to which such Pledgor or any of its Subsidiaries is a party or which purports to be binding upon such Pledgor or any of its Subsidiaries or upon any of their respective assets and will not result in the creation or imposition of (or the obligation to create or impose) any lien or encumbrance on any of the assets of such Pledgor or any of its Subsidiaries except as contemplated by this Agreement; (vi) all the shares of the Stock have been duly and validly issued, are fully paid and non-assessable and are subject to no options to purchase or similar rights; (vii) each of the Pledged Notes constitutes, or when executed by the obligor thereof will constitute, the legal, valid and binding obligation of such obligor, enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditors' rights and by equitable principles (regardless of whether enforcement is sought in equity or at law); (viii) the pledge, assignment and delivery to the Pledgee of the Securities (other than uncertificated securities) pursuant to this Agreement creates a valid and, assuming such Securities are held in the continued possession of the Collateral Agent in the State of New York, perfected first priority Lien in the Securities and the proceeds thereof, subject to no other Lien or to any agreement purporting to grant to any third party a Lien on the property or assets of such Pledgor which would include the Securities (other than Liens permitted by Section 7.03(a) of the Credit Agreement); (ix) it has the unqualified right to pledge and grant a security interest in the Partnership Interests and Membership Interests as herein provided without the consent of any other Person, firm, association or entity which has not been obtained; (x) the Partnership Interests and the Membership Interests pledged by it pursuant to this Agreement have been validly acquired and are fully paid for and are duly and validly pledged hereunder; (xi) it is not in default in the payment of any portion of any mandatory capital contribution, if any, required to be made under any partnership agreement -15- or limited liability company agreement to which such Pledgor is a party, and such Pledgor is not in violation of any other material provisions of any partnership agreement or limited liability company agreement to which such Pledgor is a party, or otherwise in default or violation thereunder, no Partnership Interest or Membership Interest is subject to any defense, offset or counterclaim, nor have any of the foregoing been asserted or alleged against such Pledgor by any Person with respect thereto and as of the Closing Date, there are no certificates, instruments, documents or other writings (other than the partnership agreements and certificates, if any, delivered to the Collateral Agent) which evidence any Partnership Interest or Membership Interest of such Pledgor; (xii) the pledge and assignment of the Partnership Interests and the Membership Interests pursuant to this Agreement, together with the relevant filings, consents or recordings (which filings, consents and recordings have been made or obtained), creates a valid, perfected and continuing first security interest in such Partnership Interests and Membership Interest and the proceeds thereof, subject to no prior lien or encumbrance or to any agreement purporting to grant to any third party a lien or encumbrance on the property or assets of such Pledgor which would include the Collateral; (xiii) there are no currently effective financing statements under the UCC covering any property which is now or hereafter may be included in the Collateral and such Pledgor will not, without the prior written consent of the Pledgee, execute and, until the Termination Date (as hereinafter defined), there will not ever be on file in any public office, any enforceable financing statement or statements covering any or all of the Collateral, except financing statements filed or to be filed in favor of the Pledgee as secured party; (xiv) it shall give the Pledgee prompt notice of any written claim relating to the Collateral and shall deliver to the Pledgee a copy of each other demand, notice or document received by it which may adversely affect the Pledgee's interest in the Collateral promptly upon, but in any event within 10 days after, such Pledgor's receipt thereof; (xv) it shall not withdraw as a partner of any Pledged Partnership or member of any Pledged LLC, or file or pursue or take any action which may, directly or indirectly, cause a dissolution or liquidation of or with respect to any Pledged Partnership or Pledged LLC or seek a partition of any property of any Pledged Partnership or Pledged LLC, except as permitted by the Credit Agreement; -16- (xvi) a notice in the form set forth in Annex E attached hereto and by this reference made a part hereof (such notice, the "Pledge Notice"), appropriately completed, notifying each Pledged Partnership and Pledged LLC of the existence of this Agreement and attached thereto a copy of this Agreement have been delivered by such Pledgor to the relevant Pledged Partnership or Pledged LLC, and such Pledgor has received and delivered to the Pledgee an acknowledgment in the form set forth in Annex F attached hereto (such acknowledgement, the "Pledge Acknowledgement"), duly executed by the relevant Pledged Partnership or Pledged LLC; (xvii) as of the date hereof, all of its Partnership Interests and Membership Interests are uncertificated and each Pledgor covenants and agrees that it will not approve of any action by any Pledged Partnership or Pledged LLC to convert such uncertificated interests into certificated interests; and (xviii) it will take no action which would violate or be inconsistent with any of the terms of any Secured Debt Agreement, or which would have the effect of impairing the position or interests of the Pledgee or any other Secured Creditor under any Secured Debt Agreement except as permitted by the Credit Agreement. 16. PLEDGORS' OBLIGATIONS ABSOLUTE, ETC. The obligations of each ------------------------------------ Pledgor under this Agreement shall be absolute and unconditional and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including, without limitation: (i) any renewal, extension, amendment or modification of, or addition or supplement to or deletion from any of the Secured Debt Agreements, or any other instrument or agreement referred to therein, or any assignment or transfer of any thereof; (ii) any waiver, consent, extension, indulgence or other action or inaction under or in respect of any such agreement or instrument or this Agreement; (iii) any furnishing of any additional security to the Pledgee or its assignee or any acceptance thereof or any release of any security by the Pledgee or its assignee; (iv) any limitation on any party's liability or obligations under any such instrument or agreement or any invalidity or unenforceability, in whole or in part, of any such instrument or agreement or any term thereof; or -17- (v) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to such Pledgor or any Subsidiary of such Pledgor, or any action taken with respect to this Agreement by any trustee or receiver, or by any court, in any such proceeding, whether or not such Pledgor shall have notice or knowledge of any of the foregoing. 17. REGISTRATION, ETC. (a) If an Event of Default shall have ------------------ occurred and be continuing and any Pledgor shall have received from the Pledgee a written request or requests that such Pledgor cause any registration, qualification or compliance under any Federal or state securities law or laws to be effected with respect to all or any part of the Pledged Stock, such Pledgor as soon as practicable and at its expense will use its best efforts to cause such registration to be effected (and be kept effective) and will use its best efforts to cause such qualification and compliance to be effected (and be kept effective) as may be so requested and as would permit or facilitate the sale and distribution of such Pledged Stock, including, without limitation, registration under the Securities Act of 1933, as then in effect (or any similar statute then in effect), appropriate qualifications under applicable blue sky or other state securities laws and appropriate compliance with any other governmental requirements, provided that the Pledgee shall furnish to such Pledgor such -------- information regarding the Pledgee as such Pledgor may request in writing and as shall be required in connection with any such registration, qualification or compliance. Each Pledgor will cause the Pledgee to be kept reasonably advised in writing as to the progress of each such registration, qualification or compliance and as to the completion thereof, will furnish to the Pledgee such number of prospectuses, offering circulars and other documents incident thereto as the Pledgee from time to time may reasonably request, and will indemnify, to the extent permitted by law, the Pledgee, each other Secured Creditor and all others participating in the distribution of such Pledged Stock against all claims, losses, damages or liabilities caused by any untrue statement (or alleged untrue statement) of a material fact contained therein (or in any related registration statement, notification or the like) or by any omission (or alleged omission) to state therein (or in any related registration statement, notification or the like) a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same may have been caused by an untrue statement or omission based upon information furnished in writing to such Pledgor by the Pledgee or such other Secured Creditor expressly for use therein. (b) If at any time when the Pledgee shall determine to exercise its right to sell all or any part of the Pledged Securities pursuant to Section 7, and such Pledged Securities or the part thereof to be sold shall not, for any reason whatsoever, be effectively registered under the Securities Act of 1933, as then in effect, the Pledgee may, in its sole and absolute discretion, sell such Pledged Securities or part thereof by private sale in such manner and under such circumstances as the Pledgee may deem necessary or -18- advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Pledgee, in its sole and absolute discretion, (i) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Securities or part thereof shall have been filed under such Securities Act, (ii) may approach and negotiate with a single possible purchaser to effect such sale and (iii) may restrict such sale to a purchaser who will represent and agree that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Securities or part thereof. In the event of any such sale, the Pledgee shall incur no responsibility or liability for selling all or any part of the Pledged Securities at a price which the Pledgee, in its sole and absolute discretion, may in good faith deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were deferred until the registration as aforesaid. 18. TERMINATION; RELEASE. (a) After the Termination Date (as -------------------- defined below), this Agreement shall terminate (provided that all indemnities set forth herein including, without limitation, in Section 11 hereof shall survive any such termination) and the Pledgee, at the request and expense of the respective Pledgor, will execute and deliver to such Pledgor a proper instrument or instruments acknowledging the satisfaction and termination of this Agreement as provided above, and will duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as may be in the possession of the Pledgee and as has not theretofore been sold or otherwise applied or released pursuant to this Agreement, together with any moneys at the time held by the Pledgee hereunder. As used in this Agreement, "Termination Date" shall mean the date upon which the Total Commitment and all Secured Interest Rate Agreements have been terminated, no Note under the Credit Agreement is outstanding (and all Loans have been paid in full) and all other Obligations have been paid in full (other than arising from indemnities for which no request has been made). (b) In the event that any part of the Collateral is sold or otherwise disposed of in connection with a sale or other disposition permitted by Section 7.02 of the Credit Agreement or is otherwise released at the direction of the Required Lenders (or all the Lenders if required by Section 11.12 of the Credit Agreement), and the proceeds of such sale or other disposition or from such release are applied in accordance with the terms of the Credit Agreement to the extent required to be so applied, the Pledgee, at the request and expense of the respective Pledgor, will release such Collateral from this Agreement, duly assign, transfer and deliver to such Pledgor (without recourse and without any representation or warranty) such of the Collateral as is then being (or has been) so sold, disposed of or released and as may be in possession of the Pledgee and has not theretofore been released pursuant to this Agreement. -19- (c) At any time that any Pledgor desires that Collateral be released as provided in the foregoing Section 18(a) or (b), it shall deliver to the Pledgee a certificate signed by a principal executive officer stating that the release of the respective Collateral is permitted pursuant to Section 18(a) or (b). The Pledgee shall have no liability whatsoever to any Secured Creditor as the result of any release of Collateral by it as permitted by this Section 18. 19. NOTICES, ETC. All notices and other communications hereunder ------------- shall be in writing (including telegraphic, telex, telecopier, facsimile or cable communication) and shall be delivered, telegraphed, telexed, telecopied, faxed, cabled, or mailed (by first class mail, postage prepaid): (i) if to any Pledgor, at its address set forth opposite its signature below; (ii) if to the Pledgee, at: Bankers Trust Company 130 Liberty Street New York, New York 10006 Attention: Greg Shefrin Tel: (212) 250-7200 Fax: (212) 250-7218 (iii) if to any Bank Creditor (other than the Pledgee), either (x) to the Administrative Agent, at the address of the Administrative Agent specified in the Credit Agreement or (y) at such address as such Bank Creditor shall have specified in the Credit Agreement; (iv) if to any Interest Rate Creditor, at such address as such Interest Rate Creditor shall have specified in writing to the Pledgors and the Pledgee; or at such other address as shall have been furnished in writing by any Person described above to the party required to give notice hereunder. 20. WAIVER; AMENDMENT. None of the terms and conditions of this ----------------- Agreement may be changed, waived, modified or varied in any manner whatsoever unless in writing duly signed by the Pledgee (with the consent of the Required Lenders or, to the extent required by Section 11.12 of the Credit Agreement, all of the Lenders) and each Pledgor affected thereby, provided that (i) no such -------- change, waiver, modification or -20- variance shall be made to Section 9 hereof or this Section 20 without the consent of each Secured Creditor adversely affected thereby and (ii) any change, waiver, modification or variance affecting the rights and benefits of a single Class (as defined below) of Secured Creditors (and not all Secured Creditors in a like or similar manner) shall require the written consent of the Requisite Creditors (as defined below) of such Class of Secured Creditors. For the purpose of this Agreement, the term "Class" shall mean each class of Secured Creditors, i.e., whether (x) the Lender Creditors as holders of the Credit Document - ---- Obligations or (y) the Interest Rate Creditors as holders of the Interest Rate Obligations. For the purpose of this Agreement, the term "Requisite Creditors" of any Class shall mean each of (x) with respect to each of the Credit Document Obligations, the Required Lenders and (y) with respect to the Interest Rate Obligations, the holders of at least a majority of all obligations outstanding from time to time under the Secured Interest Rate Agreements. 21. PLEDGEE NOT BOUND. (a) Nothing herein shall be construed to ----------------- make the Pledgee or any other Secured Creditor liable as a general partner or limited partner of any Pledged Partnership or a member of any Pledged LLC or a shareholder of any corporation, and neither the Pledgee nor any Secured Creditor by virtue of this Agreement or otherwise (except as referred to in the following sentence) shall have any of the duties, obligations or liabilities of a general partner or limited partner of any Pledged Partnership or a member of any Pledged LLC or a stockholder of any corporation. The parties hereto expressly agree that, unless the Pledgee shall become the absolute owner of a Partnership Interest, a Membership Interest or Stock pursuant hereto, this Agreement shall not be construed as creating a partnership or joint venture or membership agreement among the Pledgee, any other Secured Creditor and/or a Pledgor. (b) Except as provided in the last sentence of paragraph (a) of this Section 21, the Pledgee, by accepting this Agreement, did not intend to become a general partner or limited partner of any Pledged Partnership or a member of any Pledged LLC or a shareholder of any corporation or otherwise be deemed to be a co-venturer with respect to any Pledgor or any Pledged Partnership or a member of any Pledged LLC or a shareholder of any corporation either before or after an Event of Default shall have occurred. The Pledgee shall have only those powers set forth herein and shall assume none of the duties, obligations or liabilities of a general partner or limited partner of any Pledged Partnership or of a member of any Pledged LLC or of a Pledgor. (c) The Pledgee shall not be obligated to perform or discharge any obligation of a Pledgor as a result of the collateral assignment hereby effected. (d) The acceptance by the Pledgee of this Agreement, with all the rights, powers, privileges and authority so created, shall not at any time or in any event obligate -21- the Pledgee to appear in or defend any action or proceeding relating to the Collateral to which it is not a party, or to take any action hereunder or thereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Collateral. 22. MISCELLANEOUS. This Agreement shall create a continuing security ------------- interest in the Collateral and shall (i) remain in full force and effect, subject to release and/or termination as set forth in Section 18, (ii) be binding upon each Pledgor, its successors and assigns; provided that no Pledgor -------- shall assign any of its rights or obligations hereunder without the prior written consent of the Pledgee (with the prior written consent of the Required Lenders or to the extent required by Section 11.12 of the Credit Agreement, all of the Lenders), and (iii) inure, together with the rights and remedies of the Pledgee hereunder, to the benefit of the Pledgee, the other Secured Creditors and their respective successors, transferees and assigns. The headings of the several sections and subsections in this Agreement are for purposes of reference only and shall not limit or define the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. In the event that any provision of this Agreement shall prove to be invalid or unenforceable, such provision shall be deemed to be severable from the other provisions of this Agreement which shall remain binding on all parties hereto. 23. GOVERNING LAW, ETC. (a) THIS AGREEMENT AND THE RIGHTS AND ------------------ OBLIGATIONS OF THE SECURED CREDITORS AND OF THE UNDERSIGNED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, each Pledgor which is not a Subsidiary Guarantor (each, an "NSG Pledgor") hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each NSG Pledgor hereby irrevocably designates, appoints and empowers CT Corporation System with offices on the date hereof at 1633 Broadway, New York, NY 10019, as its designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding. If for any reason such designee, appointee and agent shall cease to be available to act as such, each NSG Pledgor agrees to designate a new designee, appointee and agent in New York City on the terms and for the purposes of this provision satisfactory to the Collateral Agent under this Agreement. Each NSG Pledgor further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to each NSG Pledgor at its address set forth opposite its signature -22- below, such service to become effective 30 days after such mailing. Nothing herein shall affect the right of any of the Secured Creditors to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Pledgor in any other jurisdiction. (b) Each NSG Pledgor hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that such action or proceeding brought in any such court has been brought in an inconvenient forum. (c) Each Pledgor and the Pledgee hereby irrevocably waive all right to a trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement, the other Credit Documents or the transactions contemplated hereby or thereby. 24. ADDITIONAL PLEDGORS. It is understood and agreed that any ------------------- Subsidiary of the Borrower that is required to execute a counterpart of this Agreement pursuant to the Credit Agreement shall become a Pledgor hereunder by executing a counterpart hereof and delivering the same to the Pledgee and Annexes A, B, C and D will be modified at such time in a manner acceptable to the Pledgee to give effect to such additional Pledgor. 25. AUTHORIZATION AND DIRECTION. Each Pledged Partnership and each --------------------------- Pledged LLC is hereby authorized and directed to register the respective Pledgor's pledge to the Pledgee on behalf of the Secured Creditors of the interest of such Pledgor on such entity's books. Each Pledgor agrees to give the respective Pledged Partnership or Pledged LLC, as the case may be, a Pledge Notice, and to cause each such Pledged Partnership or Pledged LLC, as the case may be, to acknowledge such notice with a Pledge Acknowledgement. * * * -23- IN WITNESS WHEREOF, each Pledgor and the Pledgee have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. MJD COMMUNICATIONS, INC., as a Pledgor By /s/ Walter Leach ------------------------------------------- Title: Vice President, Secretary and Chief Financial Officer ST ENTERPRISES, LTD., as a Pledgor By /s/ Walter Leach ------------------------------------------- Title: Vice President, Secretary and Chief Financial Officer MJD HOLDINGS CORP., as a Pledgor By /s/ Walter Leach ------------------------------------------- Title: Vice President, Secretary and Chief Financial Officer MJD SERVICES CORP., as a Pledgor -24- By /s/ Walter Leach ------------------------------------------- Title: Vice President, Secretary and Chief Financial Officer MJD VENTURES, INC., as a Pledgor By /s/ Walter Leach ------------------------------------------- Title: Vice President, Secretary and Chief Financial Officer C-R COMMUNICATIONS, INC., as a Pledgor By /s/ Walter Leach ------------------------------------------- Title: Vice President, Secretary and Chief Financial Officer BANKERS TRUST COMPANY, as Collateral Agent, as Pledgee By /s/ Andrew Keith --------------------------------------------- Title: Vice President -25- ANNEX A ------- LIST OF PLEDGED SUBSIDIARIES ---------------------------- A. [PLEDGOR] Name Jurisdiction of Incorporation ---- ----------------------------- B. [PLEDGOR] Name Jurisdiction of Incorporation ---- ----------------------------- ANNEX B ------- LIST OF STOCK ------------- A. [PLEDGOR] Name of Issuing Type of Number of Certificate Percentage Corporation Shares Shares No. Owned ----------- ------- --------- ----------- ---------- B. [PLEDGOR] Name of Issuing Type of Number of Certificate Percentage Corporation Shares Shares No. Owned ----------- ------- --------- ----------- ---------- [TO BE PROVIDED BY THE BORROWER] ANNEX C ------- LIST OF NOTES ------------- A. [PLEDGOR] Obligor Amount (if any) Maturity Date (if any) ------- --------------- ---------------------- B. [PLEDGOR] Obligor Amount (if any) Maturity Date (if any) ------- --------------- ---------------------- [TO BE PROVIDED BY THE BORROWER] ANNEX D ------- PART I. - ------ LIST OF PARTNERSHIP INTERESTS ----------------------------- A. [PLEDGOR] ------- Type of Pledged Partnership Percentage Entities Interest --------- ------------ Owned ---------- B. [PLEDGOR] ------- Type of Pledged Partnership Percentage Entities Interest --------- ------------ Owned --------- PART II. - ------- LIST OF MEMBERSHIP INTERESTS ---------------------------- A. [PLEDGOR] ------- Type of Pledged Membership Percentage Entities Interest --------- ------------ Owned --------- B. [PLEDGOR] ------- ANNEX D Page 2 Type of Pledged Membership Percentage Entities Interest --------- ------------ Owned --------- ANNEX E ------- FORM OF PLEDGE NOTICE --------------------- [Letterhead of Pledgor] [Date] TO: [Name of Pledged Entity] Notice is hereby given that, pursuant to the Pledge Agreement (a true and correct copy of which is attached hereto), dated as of March __, 1998 (as amended, amended and restated, modified or supplemented from time to time in accordance with the terms thereof, the "Pledge Agreement"), between [NAME OF PLEDGOR] (the "Pledgor"), the other pledgors from time to time party thereto and Bankers Trust Company (the "Pledgee") on behalf of the Secured Creditors described therein, the Pledgor has pledged and assigned to the Pledgee for the benefit of the Secured Creditors, and granted to the Pledgee for the benefit of the Secured Creditors a continuing security interest in, all right, title and interest of the Pledgor, whether now existing or hereafter arising or acquired, as a [[limited] [general] partner] [member] in [NAME OF PLEDGED ENTITY] (the ["Partnership"] ["LLC"]), and in, to and under the [TITLE OF APPLICABLE AGREEMENT] (the "[Partnership] [LLC] Agreement"), including, without limitation: (i) all the capital of the [Partnership] [LLC] and the Pledgor's interest in all profits, losses, and other distributions to which the Pledgor shall at any time be entitled in respect of such interest; (ii) all other payments due or to become due to the Pledgor in respect of such partnership interest, whether under the [Partnership] [LLC] Agreement or otherwise, whether as contractual obligations, damages, insurance proceeds or otherwise; (iii) all of its claims, rights, powers, privileges, authority, options, security interest, liens and remedies, if any, under the [Partnership] [LLC] Agreement or at law or otherwise in respect of such interest; ANNEX E Page 2 (iv) all present and future claims, if any, of the Pledgor against the [Partnership] [LLC] for moneys loaned or advanced, for services rendered or otherwise; (v) all of the Pledgor's rights under the [Partnership] [LLC] Agreement or at law to exercise and enforce every right, power, remedy, authority, option and privilege of the Pledgor relating to the [Partnership] [Membership] Interest, including any power to terminate, cancel or modify the [Partnership] [LLC] Agreement, to execute any instruments and to take any and all other action on behalf of and in the name of the Pledgor in respect of the [Partnership] [Membership] Interest and the [Partnership] [LLC] to make determinations, to exercise any election (including, but not limited, election of remedies) or option or to give or receive any notice, consent, amendment, waiver or approval, together with full power and authority to demand, receive, enforce, collect or receipt for any of the foregoing, to enforce or execute any checks, or other instruments or orders, to file any claims and to take any action in connection with any of the foregoing; (vi) all other property hereafter delivered in substitution for or in addition to any of the foregoing, all certificates and instruments representing or evidencing such other property and all cash, securities, interest, dividends, rights and other property at any time and from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all thereof; and (vii) to the extent not otherwise included, all proceeds of any or all of the foregoing. Pursuant to the Pledge Agreement, the [Partnership] [LLC] is hereby authorized and directed to register the Pledgor's pledge to the Pledgee on behalf of the Secured Creditors of the interest of the Pledgor on the [Partnership's] [LLC's] books. ANNEX E Page 3 The Pledgor hereby requests the [Partnership] [LLC] to indicate the [Partnership's] [LLC's] acceptance of this Notice and consent to and confirmation of its terms and provisions by signing a copy hereof where indicated on the attached page and returning the same to the Pledgee on behalf of the Secured Creditors. [NAME OF PLEDGOR] By_________________________________ Title: ANNEX F ------- FORM OF PLEDGE ACKNOWLEDGMENT ----------------------------- [NAME OF PLEDGED ENTITY] (the ["Partnership"] ["LLC"]) hereby acknowledges receipt of a copy of the assignment by [NAME OF PLEDGOR] ("Pledgor") of its interest under the [TITLE OF APPLICABLE AGREEMENT] (the "[Partnership] [LLC] Agreement") pursuant to the terms of the Pledge Agreement, dated as of March __, 1998, (as the same may be amended, amended and restated, modified or supplemented) from time to time, between Pledgor, the other pledgors from time to time party thereto, and Bankers Trust Company (the "Pledgee") on behalf of the Secured Creditors described therein. The undersigned hereby further confirms the registration of the Pledgor's pledge of its interest to the Pledgee on behalf of the Secured Creditors on the [Partnership's] [LLC's] books. Dated: ______________ __, 199_ [NAME OF PLEDGED ENTITY] By____________________________ Title: EXHIBIT H --------- OFFICER'S SOLVENCY CERTIFICATE ------------------------------ To the Agents and each of the Lenders party to the Credit Agreement referred to below: I, the undersigned, the Chief Financial Officer of MJD Communications, Inc., a Delaware corporation (the "Borrower"), do hereby certify that: 1. This Certificate is furnished to the Lenders pursuant to Section 4.01(j) of the Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto (each, a "Lender" and, collectively, the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent. Unless otherwise defined herein, capitalized terms used in this Certificate shall have the meanings set forth in the Credit Agreement. 2. For purposes of this Certificate, the terms below shall have the following definitions: (a) "Fair Value" The amount at which the assets, in their entirety, of the Borrower and its Subsidiaries taken as whole would change hands between a willing buyer and a willing seller, within a commercially reasonable period of time, each having reasonable knowledge of the relevant facts, with neither being under any compulsion to act. (b) "Present Fair Salable Value" The amount that could be obtained by an independent willing seller from an independent willing buyer if the assets of the Borrower and its Subsidiaries taken as a whole are sold with reasonable promptness in an arm's length transaction under present conditions for the sale of comparable business enterprises. EXHIBIT H Page 2 (c) "New Financing" The Indebtedness incurred or to be incurred by the Borrower and its Subsidiaries under the Credit Documents (assuming the full utilization by the Borrower of the Commitments under the Credit Agreement) and all other financings contemplated by the Credit Documents and the Applicable Acquisition Documents, in each case after giving effect to the Transaction and the incurrence of all financings in connection therewith. (d) "Stated Liabilities" The recorded liabilities (including contingent liabilities that would be recorded in accordance with generally accepted accounting principles ("GAAP")) of the Borrower and its Subsidiaries taken as a whole as of the date hereof after giving effect to the consummation of the Transaction, determined in accordance with GAAP consistently applied, together with the amount of all New Financing. (e) "Identified Contingent Liabilities" The maximum estimated amount of liabilities reasonably likely to result from pending litigation, asserted claims and assessments, guaranties, uninsured risks and other contingent liabilities of the Borrower and its Subsidiaries taken as a whole after giving effect to the Transaction (including all fees and expenses related thereto but exclusive of such contingent liabilities to the extent reflected in Stated Liabilities), as identified and explained to me as the Chief Financial Officer in terms of their nature and estimated magnitude by responsible officers of the Borrower or that have been identified to me as the Chief Financial Officer as such by an officer of the Borrower. (f) "Will be able to pay its Stated Liabilities, including Identified Contingent Liabilities, as they mature" For the period from the date hereof through the stated maturity of all New Financing, the Borrower and its Subsidiaries taken as a whole will have sufficient assets and cash flow to pay their respective Stated Liabilities and EXHIBIT H Page 3 Identified Contingent Liabilities as those liabilities mature or otherwise become payable. (g) "Does not have Unreasonably Small Capital" For the period from the date hereof through the stated maturity of all New Financing, the Borrower and its Subsidiaries taken as a whole after consummation of the Transaction and all Indebtedness (including the Loans) being incurred or assumed and Liens created by the Borrower and its Subsidiaries in connection therewith, is a going concern and has sufficient capital to ensure that it will continue to be a going concern for such period and to remain a going concern. 3. For purposes of this Certificate, I, or senior officers of the Borrower with whom I have consulted ("Designated Officers"), have performed the following procedures as of and for the periods set forth below. (a) I have reviewed the financial statements referred to in Section 5.10(b) of the Credit Agreement. (b) I and/or certain Designated Officers have made inquiries of certain officers of the Borrower and its Subsidiaries and the Acquired Companies who have responsibility for financial and accounting matters regarding the existence and amount of Identified Contingent Liabilities associated with the Borrower and its Subsidiaries and the Acquired Companies. (c) I have knowledge of and have reviewed to my satisfaction the Credit Documents and the Applicable Acquisition Documents, and the respective Schedules and Exhibits thereto. (d) With respect to Identified Contingent Liabilities, I and/or Designated Officers: 1. inquired of certain officers of each of the Borrower and its Subsidiaries and the Acquired Companies who have responsibility for legal, financial and accounting matters as to the existence and estimated liability with respect to all contingent liabilities associated EXHIBIT H Page 4 with each of the Borrower and its Subsidiaries and the Acquired Companies; 2. confirmed with officers of each of the Borrower and its Subsidiaries and the Acquired Companies that to such officers' knowledge, (i) all appropriate items were included in Stated Liabilities or Identified Contingent Liabilities and (ii) the amounts relating thereto were the maximum estimated amount of liabilities reasonably likely to result therefrom as of the date hereof; and 3. hereby certify that, to my knowledge, all material Identified Contingent Liabilities that may arise from any pending litigation, asserted claims and assessments, guarantees, uninsured risks and other Identified Contingent Liabilities of each of the Borrower and its Subsidiaries and the Acquired Companies (exclusive of such Identified Contingent Liabilities to the extent reflected in Stated Liabilities) have been considered (after giving effect to the consummation of the Transaction and the incurrence of all financings in connection therewith) in making the certification set forth in paragraph 4 below, and with respect to each such Identified Contingent Liability, the estimable maximum amount of liability with respect thereto was used in making such certification. (e) I have had the projections relating to the Borrower and its Subsidiaries (the "Projections") which have been previously delivered to the Lenders, prepared under my direction, and have re-examined the Projections on the date hereof and considered the effect thereon of any changes since the date of the preparation thereof on the results projected therein. After such review, I hereby certify that in my opinion the Projections are reasonable. (f) I and/or Desiganted Officers have made inquiries of certain officers of each of the Borrower and its Subsidiaries and the Acquired Companies who have responsibility for financial reporting and accounting matters regarding whether they were aware of any events or conditions that, as of the date hereof, would cause the Borrower and its Subsidiaries taken as a whole, after giving effect to the consummation of the Transaction and the related financing transactions (including the incurrence of the New Financing), to (i) have assets with a Fair Value or Present Fair Salable EXHIBIT H Page 5 Value that are less than the sum of Stated Liabilities and Identified Contingent Liabilities; (ii) have Unreasonably Small Capital; or (iii) not be able to pay their respective Stated Liabilities and Identified Contingent Liabilities as they mature or otherwise become payable. 4. Based on and subject to the foregoing, I hereby certify on behalf of the Borrower that, after giving effect to the consummation of the Transaction and the related financing transactions (including the incurrence of the New Financing), it is my opinion that (i) the Fair Value and Present Fair Salable Value of the assets of the Borrower and its Subsidiaries taken as a whole exceed their Stated Liabilities and Identified Contingent Liabilities taken as a whole; (ii) the Borrower and its Subsidiaries taken as a whole do not have Unreasonably Small Capital; and (iii) the Borrower and its Subsidiaries taken as a whole will be able to pay their respective Stated Liabilities and Identified Contingent Liabilities as they mature or otherwise become payable. EXHIBIT H Page 6 IN WITNESS WHEREOF, I have hereto set my hand this ______ day of March, 1998. MJD COMMUNICATIONS, INC. ---------------------------------- Name: Title: By accepting this certificate, the Administrative Agent acknowledges, on its own behalf and on the behalf of the Lenders from time to time party to the Credit Agreement, that (i) the foregoing certification is rendered solely in the executing party's capacity as an officer of the Borrower and its Subsidiaries and (ii) in the absence of fraud on the part of the executing party, no claim shall be asserted against the executing party in its individual capacity in connection with or arising out of this certificate or its execution or delivery. ACKNOWLEDGED: BANKERS TRUST COMPANY, as Administrative Agent on behalf of the Lenders - ---------------------------------- Name: Title: CAPITAL CONTRIBUTION AGREEMENT CAPITAL CONTRIBUTION AGREEMENT, (the "Agreement"), dated as of March 27, 1998, among Kelso Investment Associates V, L.P., a Delaware limited partnership, and Kelso Equity Partners V, L.P., a Delaware limited partnership (collectively, "Kelso"), Carousel Capital Partners, L.P., a Delaware limited partnership ("Carousel"), MJD Communications, Inc., a Delaware corporation (the "Borrower") and Bankers Trust Company, as Administrative Agent (the "Administrative Agent") for the Lenders (as defined below). W I T N E S S E T H: WHEREAS, Kelso, Carousel and the Borrower desire that the Lenders and the Administrative Agent enter into a Credit Agreement dated as of March 27, 1998 (as amended, amended and restated, supplemented or modified from time to time in accordance with the terms thereof, the "Credit Agreement") among the Borrower, the lenders named therein (together with their respective successors and assigns, the "Lenders"), the Administrative Agent and NationsBank of Texas, N.A., as Syndication Agent ; WHEREAS, Kelso and Carousel, as a result of their ownership of capital stock of the Borrower, and the Borrower will derive substantial benefits from the consummation of the transactions contemplated by the Credit Agreement and the making of Loans thereunder, including the making of the Loans to effect the Acquisitions; and WHEREAS, the execution and delivery of this Agreement is a condition precedent to the Lenders' obligation to make Loans (as defined in the Credit Agreement). NOW, THEREFORE, IT IS AGREED: 1. Definitions. All capitalized terms used herein and not otherwise defined herein shall have the respective meanings ascribed to such terms in the Credit Agreement. 2. Required Investments. (a) Subject to Section 2(b) hereof, if as of June 30, 1999 the Senior Leverage Ratio, as evidenced in the Officer's Certificate required pursuant to Section 6.01(e) of the Credit Agreement to be delivered in respect of the fiscal quarter ended June 30, 1999, is greater than 5.5 to 1, then each of Kelso and Carousel shall purchase for cash in equal proportions (the "Required Investment"), not later than the fifteenth Business Day after the date such Officer's Certificate has been or should have been delivered pursuant to the Credit Agreement (such earlier date, the "Notice Date"), additional shares of Common Stock of the Borrower at a price per share of $342.51, and the Borrower agrees to issue and sell such shares of Common Stock, for an amount which when applied to outstanding indebtedness of the Borrower would cause the Senior Leverage Ratio to be reduced to (but not below) 5.5 to 1 as of June 30, 1999. Neither Kelso nor Carousel shall have any obligation under this Agreement to make or cause to be made any investment in the Borrower other than the Required Investment. (b) Notwithstanding any provision herein to the contrary, (i) neither Kelso nor Carousel shall be obligated to make any Required Investments pursuant to Section 2(a) of this Agreement in an amount in excess of $7,500,000 and (ii) neither Kelso nor Carousel shall be obligated to make any Required Investments pursuant to Section 2(a) of this Agreement in excess of the Required Investments made by the other. 3. Officers' Certificate. The Borrower will deliver to each of Kelso and Carousel on the Notice Date (with a copy to the Administrative Agent) an Officers' Certificate setting forth the calculations for determining whether any Required Investments are required pursuant to Section 2(a) hereof (the "Contribution Certificate"), which calculations shall be in substantially similar detail as in a Compliance Certificate, and, if applicable, setting forth the Required Investments to be made by Kelso and Carousel pursuant to the terms of Section 2 hereof. If for any reason the Borrower shall fail to deliver the Officer's Certificates required under this Section 3, the Administrative Agent shall have the right to deliver any such notice or certificate (an "Agent's Notice") which, if applicable, shall demand that Kelso and Carousel make a Required Investment in accordance herewith. 4. Representations and Warranties. In order to induce the Lenders to enter into the Credit Agreement and to make the Loans provided for therein, each of Kelso, Carousel and the Borrower represents and warrants to the Administrative Agent and the Lenders as follows (with respect to each Person, as to itself only): (i) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization or incorporation, as the case may be, and has full power, authority and legal right to own its property and assets, and to transact the business in which it is engaged; (ii) it has the full partnership or corporate power, authority and legal right to execute, deliver and perform each of its obligations under this Agreement and has taken all necessary partnership or corporate and other actions to authorize the execution, delivery and performance of each of its obligations under this -2- Agreement and this Agreement constitutes the legal, valid and binding obligation of such Person, enforceable against such Person in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability; 5. No Guarantee of Indebtedness. Neither this Agreement, nor anything herein contained, nor any obligation performed or to be performed pursuant hereto by Kelso or Carousel shall be construed or deemed to constitute, a direct or indirect guarantee by Kelso or Carousel to any person or entity of the payment of the interest, principal or premium of any indebtedness, liability or obligation whatsoever of the Borrower or any Subsidiary of the Borrower, including without limitation the Loans. 6. Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing and mailed, faxed, sent by a nationally recognized express courier or delivered by hand, if to Kelso at 320 Park Avenue, New York, New York, Attention: James J. Connors, II, Vice-President & General Counsel; if to Carousel at 4201 Congress Street, Suite 440, Charlotte, NC 28209, Attention: Reid G. Leggett; if to the Borrower, at 521 East Morehead Place, Suite 250, Charlotte, NC 28202, Attention: Walter E. Leach, Jr. (with a copy to Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, New York, New York 10022, Attention: Neil A. Torpey); if to any Lender or the Administrative Agent in the manner specified in the Credit Agreement; or, at such other address as shall be designated by any party in a written notice to the other parties hereto as provided in this Section 7. All such notices and communications shall be effective at the earliest to occur of receipt, three business days after deposit in the United States mail, one Business Day after delivery to a nationally recognized express courier, delivery to a telegraph or cable company and telephone confirmation of receipt of fax communication; provided, however, that notices and communications to the Administrative Agent shall not be effective until received by the Administrative Agent. 7. No Waiver; Remedies Cumulative. No failure or delay on the part of any of the Lenders or the Administrative Agent in exercising any right, power or privilege hereunder and no course of dealing between Kelso, Carousel or the Borrower, on the one hand, and any of the Lenders or the Administrative Agent, on the other, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which any of the Lenders or the Administrative Agent would otherwise have. No notice to or demand on Kelso, Carousel or the Borrower in any case shall entitle any of them to any other or further notice or demand in similar or other circumstances or constitute a waiver of the -3- rights of any of the Lenders or the Administrative Agent to any other or further action in any circumstances without notice or demand. 8. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which shall together constitute one and the same instrument. 9. Headings Descriptive. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. 10. Amendment or Waiver. Neither this Agreement nor any of the terms hereof may be amended, modified, supplemented, waived, discharged or terminated unless such amendment, modification, supplement, waiver, discharge or termination is in writing signed by Kelso, Carousel, the Borrower and the Administrative Agent. Any waiver or consent shall be effective only in the specific instance or for the specific purpose for which it was given. 11. Successors and Assigns. This Agreement shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon each of Kelso and Carousel and the successors and assigns thereof, and shall inure to the benefit of the Lenders, and their respective successors and assigns, notwithstanding that from time to time during the term of the Credit Agreement there may be no obligations outstanding. 12. Survival. All agreements, representations and warranties made herein shall survive the execution and delivery of this Agreement, the making of the Loans and the execution and delivery of the Notes. 13. Termination. The obligations of Kelso and Carousel under this Agreement shall terminate upon the earliest to occur of (i) payment in full of all of the Loans and termination of the Commitments under the Credit Agreement (ii) the closing of the proposed sale and issuance by the Borrower of Senior Subordinated Notes due 2008 and Floating Interest Rate Senior Subordinated Notes due 2008 to a group of initial purchasers led by Salomon Smith Barney, BT Alex. Brown, NationsBanc, Montgomery Securities LLC and Donaldson, Lufkin & Jenrette Securities Corporation, or (iii) the Senior Leverage Ratio being, at any time after the date hereof, 4.0 to 1 or less. -4- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this agreement to be duly executed and delivered as of the date first above written . MJD COMMUNICATIONS, INC. By: ________________________________ Name: Title: KELSO EQUITY PARTNERS V, L.P. By: ________________________________ Name: Title: KELSO INVESTMENT ASSOCIATES V, L.P. By: Kelso Partners V, L.P., its General Partner ----------------------------- Name: Title: BANKERS TRUST COMPANY, as Administrative Agent By: ________________________________ Name: Title: -5- CAROUSEL CAPITAL PARTNERS, L.P. By: Carousel Capital Company, L.L.C., its General Partner -------------------------------- Name: Title: -6- EXHIBIT J --------- [LETTERHEAD OF AGENT FOR SERVICE OF PROCESS] ------------------------------------------ [Date] To the Administrative Agent and the Lenders party to the Credit Agreement referred to below, the Administrative Agent under the Subsidiary Guaranty referred to below and the Collateral Agent under the Pledge Agreement referred to below: Ladies and Gentlemen: Reference is made to (i) the Credit Agreement, dated as of March 30, 1998, among MJD Communications, Inc. (the "Borrower"), the lenders from time to time party thereto (the "Lenders"), NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent (the "Administrative Agent") (as such Credit Agreement may be modified, supplemented, amended or amended and restated from time to time, the "Credit Agreement"), (ii) the Subsidiary Guaranty, dated as of March 30, 1998, made by each Subsidiary Guarantor (as such Subsidiary Guaranty may be amended, amended and restated, modified or supplemented from time to time, the "Subsidiary Guaranty") and (iii) the Pledge Agreement, dated as of March 30, 1998, made by the Borrower and certain Subsidiaries of the Borrower (as such Pledge Agreement may be amended, amended and restated, modified or otherwise supplemented from time to time, the "Pledge Agreement"). Unless otherwise defined herein, capitalized terms used in this letter shall have the meanings set forth in the Credit Agreement. EXHIBIT J Page 2 Pursuant to (x) Section 11.08 of the Credit Agreement, the Borrower, (y) Section 20 of the Subsidiary Guaranty, each Subsidiary Guarantor, and (z) Section 23 of the Pledge Agreement, each Subsidiary party thereto that is not a Subsidiary Guarantor (each, an "NSG Pledgor") has irrevocably designated, appointed and empowered the undersigned, CT Corporation System, with offices currently located at 1633 Broadway, New York, New York 10019, as its authorized designee, appointee and agent to receive, accept and acknowledge for and on its behalf, and in respect of its property, service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding brought in the courts of the State of New York or of the United States of America for the Southern District of New York with respect to (i) in the case of the Borrower, the Credit Agreement and each other Credit Document to which it is a party, (ii) in the case of any Subsidiary Guarantor, the Subsidiary Guaranty and each other Credit Document to which it is a party and (iii) in the case of any NSG Pledgor, the Pledge Agreement. The undersigned hereby informs you that it irrevocably accepts such appointment as agent as set forth in Section 11.08 of the Credit Agreement, Section 20 of the Subsidiary Guaranty and Section 23 of the Pledge Agreement and agrees with you that the undersigned (i) shall inform the Administrative Agent promptly in writing of any change of its address in New York City, (ii) shall perform its obligations as such process agent in accordance with the provisions of Section 11.08 of the Credit Agreement, Section 20 of the Subsidiary Guaranty and Section 23 of the Pledge Agreement and (iii) shall forward promptly to the Borrower, the relevant Subsidiary Guarantor or the relevant NSG Pledgor, as the case may be, any legal process, summons, notices and documents received by the undersigned in its capacity as process agent. As process agent, the undersigned, and its successor or successors, agree to discharge the above-mentioned obligations and will not refuse fulfillment of such obligations under Section 11.08 of the Credit Agreement, Section 20 of the Subsidiary Guaranty or Section 23 of the Pledge Agreement, as the case may be. Very truly yours, CT CORPORATION SYSTEM By____________________________ Title: EXHIBIT J Page 3 EXHIBIT K --------- FORM OF ASSIGNMENT AGREEMENT ---------------------------- DATE: ________, __ Reference is made to the Credit Agreement described in Item 2 of Annex I annexed hereto (as such Credit Agreement may hereafter be amended, amended and restated, modified or supplemented from time to time, the "Credit Agreement"). Unless defined in Annex I attached hereto, terms defined in the Credit Agreement are used herein as therein defined. _____________ (the "Assignor") and ______________ (the "Assignee") hereby agree as follows: 1. The Assignor hereby sells and assigns to the Assignee without recourse and without representation or warranty (other than as expressly provided herein), and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the date hereof which represents the percentage interest specified in Item 4 of Annex I (the "Assigned Share") of all of the outstanding rights and obligations under the Credit Agreement relating to the Facilities indicated in Item 4 of Annex I, including, without limitation, [(u) in the case of any assignment of all or any portion of the Total B Term Commitment, all rights and obligations with respect to the Assigned Share of the Total B Term Commitment,]/1/ (v) in the case of any assignment of outstanding B Term Loans, all rights and obligations with respect to the Assigned Share of all then outstanding B Term Loans, (w) in the case of any assignment of outstanding C Term Loans-Floating Rate, all rights and obligations with respect to the Assigned Share of all then outstanding C Term Loans, (x) in the case of any assignment of outstanding C Term Loans-Fixed Rate, all rights and obligations with respect to the Assigned Share of all then outstanding C Term Loans-Fixed Rate, (y) in the case of any assignment of all or any portion of the Total Revolving Commitment, all rights and obligations with respect to the Assigned Share of the Total Revolving Commitment and of all then outstanding RF Loans and (z) in the case of any assignment of all or any portion of the Total Acquisition Commitment, all rights and obligations with respect to the Assigned Share of the Total __________________________ /1/ Delete bracketed language in Assignment Agreements executed after the termination of the Total B Term Commitment. EXHIBIT K Page 2 Acquisition Commitment and of all then outstanding AF Loans. After giving effect to such sale and assignment, the Assignee's [B Term Commitment,]/2/ Revolving Commitment and Acquisition Commitment and the amount of the outstanding B Term Loans, C Term Loans-Floating Rate and C Term Loans-Fixed Rate owing to the Assignee will be as set forth in Item 4 of Annex I hereto. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any liens or security interests; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the other Credit Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto; and (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any of its Subsidiaries or the performance or observance by the Borrower or any other Credit Party of any of its obligations under the Credit Agreement or the other Credit Documents or any other instrument or document furnished pursuant thereto. 3. The Assignee (i) represents and warrants that it is duly authorized to enter into and perform the terms of this Assignment Agreement; (ii) confirms that it has received a copy of the Credit Agreement and the other Credit Documents, together with copies of the financial statements referred to therein and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment Agreement; (iii) agrees that it will, independently and without reliance upon the Administrative Agent, the Syndication Agent, the Assignor 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 the Credit Agreement; (iv) appoints and authorizes the Administrative Agent, the Syndication Agent and the Collateral Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement and the other Credit Documents as are delegated to the Administrative Agent, the Syndication Agent and the Collateral Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) makes the representations and warranties required to be made by the Assignee under Section 11.04(b) of the Credit Agreement; [and] (vi) agrees that it will perform in accordance with their terms all of the obligations which by the __________________________ /2/ Delete bracketed language in Assignment Agreements executed after the termination of the Total B Term Commitment. EXHIBIT K Page 3 terms of the Credit Agreement are required to be performed by it as a Lender; and (viii) attaches the forms described in Section 11.04(b) of the Credit Agreement]./3/ 4. Following the execution of this Assignment Agreement by the Assignor and the Assignee, an executed original hereof (together with all attachments) will be delivered to the Administrative Agent. The effective date of this Assignment Agreement shall be (x) the date upon which all of the following conditions have been satisfied: (i) the execution hereof by the Assignor and the Assignee, (ii) to the extent required by Section 11.04(b) of the Credit Agreement, the consent hereto by the Administrative Agent and the Borrower (which consent, in either case, shall not be unreasonably withheld), (iii) the receipt by the Administrative Agent of the assignment fee referred to in Section 11.04(b) of the Credit Agreement and (iv) the recordation of the assignment effected hereby by the Administrative Agent in the Lender Register as provided in Section 11.16 of the Credit Agreement or (y) such later date as is otherwise specified in Item 5 of Annex I hereto (the "Settlement Date"). 5. Upon the delivery of a fully executed original hereof to the Administrative Agent, as of the Settlement Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment Agreement, have the rights and obligations of a Lender thereunder and under the other Credit Documents and (ii) the Assignor shall, to the extent provided in this Assignment Agreement, relinquish its rights and be released from its obligations under the Credit Agreement and the other Credit Documents. 6. It is agreed that upon the effectiveness hereof, the Assignee shall be entitled to (w) all interest on the Assigned Share of the B Term Loans, C Term Loans-Floating Rate, C Term Loans-Fixed Rate, RF Loans and/or AF Loans at the rates specified in Item 6 of Annex I, (x) all TF Commitment Commission (if applicable) on the Assigned Share of the Total B Term Commitment at the rate specified in Item 7 of Annex I, (y) all RF Commitment Commission (if applicable) on the Assigned Share of the Total Revolving Commitment at the rate specified in Item 8 of Annex I and (z) all AF Commitment Commission (if applicable) on the Assigned Share of the Total Acquisition Commitment at the rate specified in Item 9 of Annex I, which, in each case, accrue on and after the Settlement Date, such interest and, if applicable, TF Commitment Commission, RF Commitment Commission and/or AF Commitment Commission, to be paid by the Administrative Agent, upon receipt thereof from the Borrower, directly to the Assignee. It is further agreed that all payments of principal made by the Borrower on the Assigned Share of the B Term Loans, C Term Loans-Floating Rate, C Term Loans-Fixed Rate, RF Loans ________________________ /3/ If the Assignee is organized under the laws of a jurisdiction outside the United States. EXHIBIT K Page 4 and/or AF Loans which occur on and after the Settlement Date will be paid directly by the Administrative Agent to the Assignee. Upon the Settlement Date, the Assignee shall pay to the Assignor an amount specified by the Assignor in writing which represents the Assignee's Assigned Share of the principal amount of the B Term Loans, C Term Loans-Floating Rate, C Term Loans-Fixed Rate, RF Loans and/or AF Loans which are outstanding on the Settlement Date, net of any closing costs. The Assignor and the Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Settlement Date directly between themselves. 7. THIS ASSIGNMENT AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. * * * EXHIBIT K Page 5 IN WITNESS WHEREOF, the parties hereto have caused this Assignment Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [NAME OF ASSIGNOR], as Assignor By____________________________ Title: [NAME OF ASSIGNEE], as Assignee By____________________________ Title: Acknowledged and Agreed: [BANKERS TRUST COMPANY as Administrative Agent By____________________________ Title: MJD COMMUNICATIONS, INC., as Borrower By____________________________ Title]:/4/ ____________________ /4/ The consent of the Administrative Agent and, so long as no Default or Event of Default is then in existence, the Borrower is required in connection with any assignment to an Eligible Transferee pursuant to clause (y) of Section 11.04(b) of the Credit (continued...) ANNEX I ------- ANNEX FOR ASSIGNMENT AGREEMENT ANNEX I 1. The Borrower: MJD Communications, Inc. 2. Name and Date of Credit Agreement: Credit Agreement, dated as of March 30, 1998, among the Borrower, the lenders from time to time party thereto, NationsBank of Texas, N.A., as Syndication Agent, and Bankers Trust Company, as Administrative Agent. 3. Date of Assignment Agreement: _________ ___, ___ 4. Amounts (as of date of item #3 above):
Outstanding Outstanding Principal of Total Outstanding Principal of C C Term Total Total B Term Principal of B Term Loans- Loans- Revolving Acquisition Commitment Term Loans Floating Rate Fixed Rate Commitment Commitment ----------- ---------- ------------- ---------- ---------- ---------- a. Aggregate Amount for all Lenders $_________ $_________ $____________ $__________ $___________ $___________ b. Assigned Share __________% __________% _____________% ___________% ____________% ____________% c. Amount of Assigned Share $_________]/5/ $_________ $____________ $__________ $___________ $___________
_________________________ /4/ (...continued) Agreement (which consent, in either case, shall not be unreasonaly withheld). /5/ To be included in an Assignment Agreement entered into prior to the termination of the Total B Term Commitment. ANNEX I Page 2 5. Settlement Date: _________ ___, ___ 6. Rate of Interest As set forth in Section 1.08 of the Credit Agreement to the Assignee: (unless otherwise agreed to by the Assignor and the Assignee)./6/ 7. TF Commitment As set forth in Section 2.01(a) of the Credit Commission to the Agreement (unless otherwise agreed to by the Assignor Assignee: and the Assignee)./7/ 8. RF Commitment As set forth in Section 2.01(b) of the Credit Agreement Commission to the (unless otherwise agreed to by the Assignor and the Assignee: Assignee)./8/ 9. AF Commitment As set forth in Section 2.01(c) of the Credit Agreement Commission to the (unless otherwise agreed to by the Assignor and the ______________________ /6/ The Borrower and the Administrative Agent shall direct the entire amount of the interest to the Assignee at the rate set forth in Section 1.08 of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of interest through payments by the Assignee to the Assignor. /7/ Insert "Not Applicable" in lieu of text if no portion of the Total B Term Commitment is being assigned. Otherwise, the Borrower and the Administrative Agent shall direct the entire amount of the TF Commitment Commission to the Assignee at the rate set forth in Section 2.01(a) of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of the TF Commitment Commission through payment by the Assignee to the Assignor. /8/ Insert "Not Applicable" in lieu of text if no portion of the Total Revolving Commitment is being assigned. Otherwise, the Borrower and the Administrative Agent shall direct the entire amount of the RF Commitment Commission to the Assignee at the rate set forth in Section 2.01(b) of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of the RF Commitment Commission through payment by the Assignee to the Assignor. ANNEX I Page 3 Assignee: Assignee)./9/ 10. Notices: ASSIGNOR: ___________________ ___________________ ___________________ ___________________ Attention: Telephone No.: Facsimile No.: Reference: ASSIGNEE: ___________________ ___________________ ___________________ ___________________ Attention: Telephone No.: Facsimile No.: Reference: 11. Payment Instructions: _____________________ /9/ Insert "Not Applicable" in lieu of text if no portion of the Total Acquisition Commitment is being assigned. Otherwise, the Borrower and the Administrative Agent shall direct the entire amount of the AF Commitment Commission to the Assignee at the rate set forth in Section 2.01(c) of the Credit Agreement, with the Assignor and the Assignee effecting any agreed upon sharing of the AF Commitment Commission through payment by the Assignee to the Assignor. ANNEX I Page 4 ASSIGNOR: ___________________ ___________________ ___________________ ___________________ ABA No.: Account No.: Reference: Attention: ASSIGNEE: ___________________ ___________________ ___________________ ___________________ ABA No.: Account No.: Reference: Attention: ANNEX I Page 5 Accepted and Agreed: [NAME OF ASSIGNEE] [NAME OF ASSIGNOR] By: ________________________ By: ________________________ Name: Name: Title: Title: EX-10.10 3 STOCKHOLDER'S AGREEMENT, DATED AS OF JULY 31, 1997 EXHIBIT 10.10 STOCKHOLDERS' AGREEMENT STOCKHOLDERS' AGREEMENT, dated as of July 31, 1997, among MJD Communications, Inc., a Delaware corporation (the "Company"); Carousel Capital ------- Partners, L.P., a Delaware limited partnership ("Carousel"); Kelso Investment -------- Associates V, L.P., a Delaware limited partnership ("KIA V"), and Kelso Equity ----- Partners V, L.P., a Delaware limited partnership ("KEP V", together with KIA V, ----- "Kelso"); MJD Partners, L.P., a Delaware limited partnership ("MJD Partners"); ----- ------------ MJD Partners, Inc., a Delaware corporation ("MJD Inc."); Bugger Associates, -------- Inc., a Delaware corporation ("Bugger"), Daniel G. Bergstein ("Bergstein"), ------ --------- Meyer Haberman, Eugene B. Johnson ("Johnson") and Jack H. Thomas ("Thomas", ------- ------ collectively, the "MJD Principals"); Joel Bergstein, Michael Bergstein and Lindy -------------- Sobel Bergstein; and those employees of the Company listed on Schedule A attached hereto (collectively, the "Management Stockholders"). Schedule A shall ----------------------- be updated from time to time to include each Management Stockholder who becomes a party to this Agreement after the date hereof pursuant to Section 14. Carousel and Kelso are hereinafter referred to collectively as the "Investor -------- Stockholders". For purposes of this Agreement, KIA V and KEP shall be deemed to - ------------ be a single Investor Stockholder. The Investor Stockholders, MJD Partners, Bugger, Johnson, Thomas and the Management Stockholders are hereinafter referred to collectively as the "Stockholders". ------------ Capitalized terms used herein without definition are defined in Section 16. NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth in this Agreement, the parties hereto agree as follows: 1. Restrictions on Transfer of Common Stock. 1.1 Restrictions on ---------------------------------------- --------------- Transfers by Kelso. (a) Prior to the fourth anniversary of the date hereof, no - ------------------ shares of Common Stock or any interest therein now or hereafter owned by Kelso may be Transferred, except for any (i) involuntary Transfer to a third party - permitted under Section 5, (ii) sale to one or more third parties pursuant to -- Section 1.1(b), Section 3.3 ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction Sale Procedure") or (iii) Transfer to a Kelso --- Permitted Assignee that agrees to be bound by the terms of this Agreement pursuant to Section 15.4. (b) At any time after a Board Event (other than as a result of the operation of clause (iii) or (v) of the definition thereof), Kelso may sell any shares of Common Stock held by it to one or more third parties, provided that -------- Carousel consents in writing to such sale and such sale is made in compliance with the provisions of Section 3.2 ("Right of First Offer") and Section 3.3 ("Tag-Along Rights"). 1.2. Restrictions on Transfers by Carousel. (a) Prior to the fourth ------------------------------------- anniversary of the date hereof, no shares of Common Stock or any interest therein now or hereafter owned by Carousel may be Transferred, except for any (i) involuntary Transfer to a third party permitted under Section 5, (ii) sale - -- to one or more third parties pursuant to Section 1.2(b), Section 3.3 ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction Sale Procedure") or (iii) Transfer to a Carousel Permitted Assignee that agrees to be --- bound by the terms of this Agreement pursuant to Section 15.4. (b) At any time after a Board Event (other than as a result of the operation of clause (iii) or (v) of the definition thereof), Carousel may sell any shares of Common Stock held by it to one or more third parties, provided -------- that Kelso consents in writing to such sale and such sale is made in compliance with the provisions of Section 3.2 ("Right of First Offer") and Section 3.3 ("Tag-Along Rights"). 1.3. Restrictions on Transfers by MJD Partners and Bugger. (a) Prior ---------------------------------------------------- to the fourth anniversary of the date hereof, no shares of Common Stock or any interest therein now or hereafter owned by MJD Partners or Bugger may be Transferred, except for any (i) involuntary Transfer to a third party permitted - under Section 5, (ii) sale to one or more third parties pursuant to Section 3.3 -- ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction Sale Procedure") or (iii) sale pursuant to Section 1.5 ("De Minimis Transfer"). --- (b) If the Investor Stockholders collectively increase their investment in the Company by $10 million or more in accordance with Section 8 prior to the fourth anniversary of the date hereof, then, after the restrictions set forth in Section 1.3(a) lapse, no shares of Common Stock or any interest therein now or hereafter owned by MJD Partners may be Transferred until such time as the Investor Stockholders (and their respective Permitted Assignees) collectively own less than 50% of the greatest number of shares of Common Stock owned by the Investor Stockholders at any time prior to the fourth anniversary of the date hereof (the "50% Condition"), except for any (i) involuntary ------------- - Transfer to a third party permitted under Section 5, (ii) Transfer, authorized -- by the prior written approval (not to be unreasonably withheld) of the Board (excluding members who are designees of MJD Partners), to an Affiliate of MJD Partners that agrees to be bound by the terms of this Agreement pursuant to Section 15.4, (iii) sale to one or more third parties pursuant to Section 3.3 --- ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction Sale Procedure"), 2 (iv) sale pursuant to a Registration in accordance with the Registration Rights -- Agreement or (v) sale pursuant to Section 1.5 ("De Minimis Transfer"). - 1.4. Restrictions on Transfers by MJD Principals. (a) Until such -------------------------------------------- time as the 50% Condition shall have been satisfied, no interest in MJD Partners now or hereafter owned by any MJD Principal may be Transferred, except, subject to Section 15.4, for (i) any Transfer pursuant to Section 1.5 ("De Minimis - Transfer"), (ii) any Transfer from one MJD Principal to another MJD Principal or -- to a Management Stockholder, provided that, in the case of a Transfer by Johnson -------- or Thomas, such Transfer must be authorized by the prior written approval of the Board (excluding members who are designees of MJD Partners), and in the case of a Transfer by any other MJD Principal, such Transfer must not be consummated until after receipt by the Company of reasonable prior written notice thereof, (iii) any Transfer for estate-planning purposes of such MJD Principal, provided --- -------- that such Transfer must be authorized by the prior written approval (not to be unreasonably withheld) of the Board (excluding members who are designees of MJD Partners) (other than a Transfer by a Founder after receipt by the Company of reasonable prior written notice of the material terms of such Transfer), to (A) - a trust under which the distribution of such interest in MJD Partners may be made only to beneficiaries who are such MJD Principal, his spouse, his parents, members of his immediate family or his lineal descendants, (B) a charitable - remainder trust, the income from which will be paid to such MJD Principal during his life, (C) a corporation, the stockholders of which are only such MJD - Principal, his spouse, his parents, members of his immediate family or his lineal descendants or (D) a partnership or limited liability company, the - partners or members of which are only such MJD Principal, his spouse, his parents, members of his immediate family or his lineal descendants or (iv) any -- Transfer, in case of his death, by will or by the laws of intestate succession, to his executors, administrators, testamentary trustees, legatees or beneficiaries. Any transferee pursuant to clause (ii) above shall be deemed to be a "MJD Principal" for all purposes of this Agreement. (b) Until such time as the 50% Condition shall have been satisfied, no interest in MJD Inc. now or hereafter owned by any MJD Principal may be Transferred, except, subject to Section 15.4, for (i) any Transfer from one MJD - Principal to another MJD Principal, provided that, in the case of a Transfer by -------- Johnson or Thomas, such Transfer must be authorized by the prior written approval of the Board (excluding members who are designees of MJD Partners), and in the case of a Transfer by any other MJD Principal, such Transfer may not be consummated until after receipt by the Company of reasonable prior written notice thereof, (ii) any Transfer for estate-planning purposes of such MJD -- Principal, authorized by the prior written approval (not to be unreasonably withheld) of the Board (excluding members who are designees of MJD Partners) (other than a Transfer by a Founder after receipt 3 by the Company of reasonable prior written notice of the material terms of such Transfer), to (A) a trust under which the distribution of such interest in MJD - Inc. may be made only to beneficiaries who are such MJD Principal, his spouse, his parents, members of his immediate family or his lineal descendants, (B) a - charitable remainder trust, the income from which will be paid to such MJD Principal during his life, (C) a corporation, the stockholders of which are only - such MJD Principal, his spouse, his parents, members of his immediate family or his lineal descendants or (D) a partnership or limited liability company, the - partners or members of which are only such MJD Principal, his spouse, his parents, members of his immediate family or his lineal descendants or (iii) any --- Transfer, in case of his death, by will or by the laws of intestate succession, to his executors, administrators, testamentary trustees, legatees or beneficiaries. (c) So long as this Agreement shall remain in full force and effect, no interest in MJD Partners now or hereafter owned by MJD Inc. may be Transferred. 1.5 De Minimis Transfers. MJD Partners and the Founders may Transfer -------------------- shares of Common Stock owned directly by them and the Founders may Transfer limited partnership interests in MJD Partners, in either case, to one or more third parties, provided that, in the aggregate (considering all Transfers by MJD -------- Partners and the Founders), the sum of all such Transferred shares of Common Stock and Indirect Shares of Common Stock (as defined below) constitute no more than the lesser of (a) shares of Common Stock with a Fair Market Value (as - defined in Section 4.7) of $5 million and (b) 20% of the aggregate number of - shares of Common Stock owned by the Founders and MJD Partners on the Closing Date. "Indirect Shares of Common Stock" shall mean the number of shares of Common Stock indirectly represented by the limited partnership interests in MJD Partners Transferred pursuant to this Section 1.5. 1.6 Restrictions on Transfers by Management Stockholders. Until such ---------------------------------------------------- time as the 50% Condition shall have been satisfied, no Management Stockholder may Transfer any shares of Common Stock or any interest therein now or hereafter owned by such Management Stockholder except, subject to Section 15.4, (a) for - any (i) Transfer from a Management Stockholder to MJD Partners or to any MJD - Principal, provided that such Transfer must be authorized by the prior written -------- approval (not to be unreasonably withheld) of the Board (excluding members who are designees of MJD Partners), (ii) involuntary Transfer to a third party -- permitted under Section 5, (iii) sale to one or more third parties pursuant to --- Section 3.3 ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights") or Section 6 ("Auction Sale Procedure") or (iv) sale pursuant to a Registration in accordance -- with the Registration Rights Agreement, (b) for any Transfer for estate-planning - purposes of such Management Stockholder, 4 authorized by the prior written approval (not to be unreasonably withheld) of the Board (excluding such Management Stockholder and other members of the Board who are designees of MJD Partners), to (i) a trust under which the distribution - of the shares of Common Stock may be made only to beneficiaries who are such Management Stockholder, his or her spouse, his or her parents, members of his or her immediate family or his or her lineal descendants, (ii) a charitable -- remainder trust, the income from which will be paid to such Management Stockholder during his or her life, (iii) a corporation, the stockholders of --- which are only such Management Stockholder, his or her spouse, his or her parents, members of his or her immediate family or his or her lineal descendants or (iv) a partnership or limited liability company, the partners or members of -- which are only such Management Stockholder, his or her spouse, his or her parents, members of his or her immediate family or his or her lineal descendants or (c) for any Transfer in case of his or her death, by will or by the laws of - intestate succession, to his or her executors, administrators, testamentary trustees, legatees or beneficiaries. 1.7. Treatment of Certain Bergstein Family Members. Each of Joel --------------------------------------------- Bergstein, Michael Bergstein and Lindy Sobel Bergstein hereby acknowledges that all shares of Common Stock and all interests therein now or hereafter owned by such Person shall for all purposes of this Agreement be treated as if such shares and interests were owned by Bugger and each such Person has as of the date hereof granted Bugger an irrevocable power of attorney directing Bugger to exercise all rights and perform all obligations hereunder and under the Registration Rights Agreement in respect of such Person's shares and interests so long as this Agreement shall remain in full force and effect. 2. Sales by MJD Partners to Third Parties. 2.1 General. (a) At -------------------------------------- ------- any time after the restrictions on Transfers set forth in Section 1.3 are no longer applicable, MJD Partners may sell any shares of Common Stock held by it to one or more third parties, provided that such sale is made in compliance with -------- the provisions of Section 2.2 ("Right of First Refusal") and Section 2.3 ("Tag- Along Rights"). For purposes of this Section 2, a sale to a third party shall not include a Transfer by MJD Partners (i) pursuant to a Registration in - accordance with the Registration Rights Agreement or (ii) pursuant to Section -- 1.5 ("De Minimis Transfer"), Section 3.3 ("Tag-Along Rights"), Section 3.4 ("Drag-Along Rights"), Section 5 ("Involuntary Transfers") or Section 6 ("Auction Sale Procedure"). (b) Notwithstanding the foregoing provisions of Section 2.1(a), in the event that the 50% Condition shall have been satisfied at the time the restrictions on Transfers set forth in Section 1.3 are no longer applicable, then MJD Partners shall not be required to comply with the provisions of Section 2.2 and may sell any shares of 5 Common Stock held by it to one or more third parties, provided that such sale is -------- made in compliance with Section 2.3 ("Tag-Along Rights") and Section 15.4. 2.2. Right of First Refusal. (a) Procedure. Subject to Section ---------------------- --------- 2.1(b), if at any time after the restrictions on Transfers set forth in Section 1.3 are no longer applicable MJD Partners shall have received a bona fide offer ---- ---- or offers from a third party or parties to purchase any shares of Common Stock, then prior to selling such shares of Common Stock to such third party or parties MJD Partners shall deliver to the Company and the Investor Stockholders a letter signed by it setting forth: (i) the name(s) of such third party or parties; (ii) the purchase price per share of Common Stock offered by such third party or parties; (iii) all material terms and conditions contained in the offer of the third party or parties; (iv) MJD Partners' offer (irrevocable by its terms for 30 days following receipt) to sell to the Company all (but not less than all) of the shares of Common Stock covered by the offer of the third party or parties, for a purchase price per share and on other terms and conditions not less favorable to the Company than those contained in the offer of the third party or parties (the "Offer"); and ----- (v) closing arrangements and a closing date not less than 60 nor more than 90 days following the delivery of such letter (or such later date as is necessary to obtain all requisite governmental and regulatory approvals and consents, provided MJD Partners covenants to use commercially -------- reasonable efforts to obtain such approvals and consents) for any purchase and sale that may be effected by the Company. (b) Effecting Sales. Subject to Sections 2.2(c) and (d), if, upon --------------- the expiration of 30 days following receipt by the Company and the Investor Stockholders of the letter described in Section 2.2(a), neither the Company nor any Permitted Assignee as provided in Sections 2.2(c) and (d) shall have accepted the Offer, MJD Partners shall have the right, subject to Section 2.3, to sell to such third party or parties all (but not less than all) of the shares of Common Stock covered by the Offer, for a purchase price and on other terms and conditions no less favorable to MJD Partners than those contained in the Offer. If MJD Partners has not signed a binding purchase agreement (subject to customary closing conditions) with such third party or 6 parties within 45 days of the expiration of such 30 day period or if such sale has not been completed within 120 days (or such later date as is necessary to obtain all requisite governmental and regulatory approvals and consents) from the expiration of such 30 day period, the shares of Common Stock covered by such Offer may not thereafter be sold by MJD Partners unless the procedures set forth in this Section 2.2 shall have again been complied with. If the Company or any Permitted Assignee shall have accepted the Offer, the closing of the purchase and sale pursuant to such acceptance shall take place as set forth in MJD Partners' letter to the Company and the Investor Stockholders. (c) Right of Investor Stockholders to Purchase. In the event that ------------------------------------------ neither Investor Stockholder shall have Transferred any shares of Common Stock or any interest therein now or hereafter owned by it to any Person (other than to a Permitted Assignee) at the time of the Offer and the Company shall not have exercised its right to accept the Offer within 20 days of receipt by the Company and the Investor Stockholders of the letter giving rise to such right, then the Investor Stockholders shall have the right to require the Company to assign such right to them or one or more Permitted Assignees and the Investor Stockholders or such Permitted Assignees, as the case may be, shall have the right to purchase that portion of the shares covered by the Offer equal to their pro rata --- ---- interest in the Company (based on the percentage of outstanding shares of Common Stock owned by each of them on the date of such Offer) or such other portion of such shares as the Investor Stockholders may agree upon, provided that such -------- right must be exercised prior to the expiration of 30 days following receipt by the Company and the Investor Stockholders of the letter described in Section 2.2(a). (d) Right of One Investor Stockholder to Purchase. In the event that --------------------------------------------- only one Investor Stockholder shall have Transferred any shares of Common Stock or any interest therein now or hereafter owned by it to any Person (other than to a Permitted Assignee) at the time of the Offer and the Company shall not have exercised its right to accept the Offer within 20 days of receipt by the Company and the Investor Stockholders of the letter giving rise to such right, then the Investor Stockholder which has not Transferred any shares of Common Stock or any interest therein now or hereafter owned by it to any Person (other than to a Permitted Assignee) shall have the right to require the Company to assign such right to it or its Permitted Assignees and such Investor Stockholder or its Permitted Assignees, as the case may be, shall have the right to purchase the shares covered by the Offer, provided that such right must be exercised prior to -------- the expiration of 30 days following receipt by the Company and the Investor Stockholders of the letter described in Section 2.2(a). Such Investor Stockholder may, with the consent of the other Investor Stockholder, assign its right to purchase all or a portion of the shares covered by the Offer to the other Investor 7 Stockholder or its Permitted Assignees, provided that such right must be -------- exercised prior to the expiration of 30 days following receipt by the Company and the Investor Stockholders of the letter described in Section 2.2(a). 2.3. Tag-Along Rights. If neither the Company nor any Permitted ---------------- Assignee shall have accepted the Offer pursuant to Section 2.2 or if Section 2.1(b) is applicable and MJD Partners shall have agreed to sell to a third party or parties the shares of Common Stock covered by the Offer or otherwise if Section 2.1(b) is applicable and such shares represent more than 50% of the aggregate number of shares of Common Stock owned by MJD Partners on the Closing Date, then MJD Partners must offer each Stockholder a pro rata right to --- ---- participate in such sale with respect to such Stockholder's shares of Common Stock, for a purchase price per share of Common Stock equal to the purchase price per share of Common Stock being paid for MJD Partners' shares and on other terms and conditions not less favorable to such Stockholder than those applicable to MJD Partners. 3. Sales by Investor Stockholders to Third Parties. 3.1 General. ----------------------------------------------- ------- At any time after the fourth anniversary of the date hereof, Carousel and Kelso may each sell any shares of Common Stock held by it to one or more third parties, provided that such sale is made in compliance with the provisions of -------- Section 3.2 ("Right of First Offer") and Section 3.3 ("Tag-Along Rights"). For purposes of this Section 3, a sale to a third party shall not include a Transfer by either Investor Stockholder (a) to any Permitted Assignee, (b) pursuant to - - Section 2.3 ("Tag-Along Rights"), (c) pursuant to a Registration in accordance - with the Registration Rights Agreement or (d) pursuant to Section 5 - ("Involuntary Transfers") or Section 6 ("Auction Sale Procedure"). 3.2. Right of First Offer. (a) Procedure. Subject to Section 3.1, -------------------- --------- if at any time after the date hereof, (i) either Investor Stockholder desires to - sell any of the shares of Common Stock held by it (the "Offering Investor ----------------- Stockholder") and (ii) MJD Partners continues to own at least 20% of the - ----------- -- aggregate number of shares of Common Stock owned by MJD Partners on the Closing Date, then prior to selling such shares of Common Stock to any third party or parties, the Offering Investor Stockholder shall deliver to the other Investor Stockholder and MJD Partners a letter signed by it setting forth the number of shares of Common Stock the Offering Investor Stockholder desires to sell (the "Sale Notice"). Within 30 days of receipt of the Sale Notice, the other ----------- Investor Stockholder and MJD Partners may make an offer to purchase (i) the - portion of such shares of Common Stock offered by the Offering Investor Stockholder equal to their pro rata interest in the Company (based on the --- ---- percentage of outstanding shares of Common Stock owned by each of them on the date of the Sale Notice), (ii) such other portion of such shares as the other -- Investor Stockholder and MJD Partners may agree upon or (iii), in the event --- either the other Investor Stockholder or MJD Partners does 8 not exercise such right, all shares of Common Stock offered by the Offering Investor Stockholder, by delivering written notice to the Offering Investor Stockholder setting forth: (i) the number of shares of Common Stock to be purchased and the prospective purchase price per share of Common Stock; (ii) any other material terms and conditions to such purchase; (iii) evidence reasonably satisfactory to such Investor Stockholder for the financing of such purchase; and (iv) closing arrangements and a closing date not less than 30 nor more than 90 days following the delivery of such notice (or such later date as is necessary to obtain all requisite governmental and regulatory approvals and consents). (b) Effecting Sales. If, upon the expiration of 30 days following --------------- receipt by the other Investor Stockholder and MJD Partners of the Sale Notice, neither the other Investor Stockholder nor MJD Partners shall have made an offer to purchase the shares of Common Stock covered by the Sale Notice, the Offering Investor Stockholder may sell to a third party or parties any of the shares of Common Stock covered by the Sale Notice for whatever price and upon whatever other terms and conditions the Offering Investor Stockholder may agree to, provided that the Offering Investor Stockholder and the third party execute a - -------- binding purchase agreement (subject to customary closing conditions) within 120 days after the expiration of such 30 day period and consummate the closing thereunder within 120 days (or such later date as is necessary to obtain all requisite governmental and regulatory approvals and consents) from the execution of the binding purchase agreement. If the other Investor Stockholder and/or MJD Partners shall have made an offer to purchase the shares of Common Stock covered by the Sale Notice, then the Offering Investor Stockholder may either (i) accept - such offer and the sale of such shares of Common Stock shall be consummated as soon as practicable after the delivery of a notice of acceptance by the Offering Investor Stockholder, but in any event within 90 days of the delivery of the Sale Notice (or such later date as is necessary to obtain all requisite governmental and regulatory approvals and consents), or (ii) reject such offer, -- by written notice delivered to the other Investor Stockholder and MJD Partners within 20 days of the delivery to the Offering Investor Stockholder of such offer, in which case the Offering Stockholder shall have the right to sell to a third party or parties all (but not less than all) of the shares of Common Stock covered by the Sale Notice, for a purchase price and on other terms and conditions no less favorable to the Offering Investor Stockholder than those 9 contained in the other Investor Stockholder's and/or MJD Partners' offer, provided that the Offering Investor Stockholder and the third party purchaser - -------- execute a binding purchase agreement (subject to customary closing conditions) within 120 days of the other Investor Stockholder's and/or MJD Partners' offer and consummate the closing thereunder within 120 days (or such later date as is necessary to obtain all requisite governmental and regulatory approvals and consents) from the execution of the binding purchase agreement. If the Offering Investor Stockholder and a third party purchaser do not execute such a purchase agreement or close such transaction within the time periods set forth in the proviso of the preceding sentence, then the shares of Common Stock covered by such Sale Notice may not thereafter be sold by the Offering Investor Stockholder unless the procedures set forth in this Section 3.2 shall have again been complied with. Any offer by the other Investor Stockholder or MJD Partners pursuant to this Section 3.2(b) shall not preclude either of them from making additional offers for such shares or participating in any auction relating to the sale of any such shares. (c) Sale of Assets. The provisions of Sections 3.2(a) and (b) shall -------------- apply, mutatis mutandis, in the event of a proposed sale of all or substantially ------- -------- all of the assets of the Company and its subsidiaries. 3.3. Tag-Along Rights. If at any time after the fourth anniversary of ---------------- the date hereof or as otherwise permitted by Section 1.1(b) or 1.2(b), as the case may be, either Carousel or Kelso shall have agreed to sell to one or more third parties any shares of Common Stock owned by such Investor Stockholder (the "Selling Investor Stockholder"), which together with all shares of Common Stock ---------------------------- previously sold by the Selling Investor Stockholder, represent more than 50% of the aggregate number of shares of Common Stock owned by the Selling Investor Stockholder on the Closing Date, then the Selling Investor Stockholder must offer the other Stockholders a pro rata right to participate in such sale with --- ---- respect to the other Stockholders' shares of Common Stock, for a purchase price per share of Common Stock equal to the purchase price per share of Common Stock being paid for the Selling Investor Stockholder's shares and on other terms and conditions not less favorable to the other Stockholders than those applicable to the Selling Investor Stockholder. 3.4. Drag-Along Rights. (a) If at any time after the fourth ----------------- anniversary of the date hereof or as otherwise permitted by Section 1.1(b) or 1.2(b), Carousel or Kelso, as the case may be, proposes to sell to one or more third parties all of the shares of Common Stock then owned by it, then, if requested by Carousel or Kelso, as the case may be, the other Stockholders so requested shall be required to join Carousel or Kelso, as the case may be, in such sale on a pro rata basis for a purchase price per share of Common Stock and --- ---- on other terms and conditions not less favorable to the 10 other Stockholders so requested than those applicable to Carousel or Kelso, as the case may be. (b) If at any time after the fourth anniversary of the date hereof (i) MJD Partners owns at least 50% of the aggregate number of shares owned by - MJD Partners and the Founders on the Closing Date and (ii) Carousel and Kelso -- collectively own less than 10% of the issued and outstanding shares of Common Stock, then, if MJD Partners proposes to sell to one or more third parties all of the shares of Common Stock then owned by it, then, if requested by MJD Partners, the other Stockholders so requested shall be required to join MJD Partners in such sale on a pro rata basis for a purchase price per share of --- ---- Common Stock and on other terms and conditions not less favorable to the other Stockholders so requested than those applicable to MJD Partners. 4. Management Stockholders. 4.1. Sale by Management Stockholders ----------------------- -------------------------------- to the Company. Subject to all subsections of this Section 4 and Section 7, - -------------- each of the Management Stockholders shall have the right to sell to the Company, and the Company shall have the obligation to purchase from such Management Stockholder, all (but not less than all) of such Management Stockholder's shares of Common Stock at their Fair Market Value (as defined in Section 4.7) if the employment of such Management Stockholder with the Company or any of its subsidiaries is terminated by the Company or any such subsidiary without Cause or terminates as a result of (i) the death or Disability of such Management - Stockholder, (ii) the resignation of such Management Stockholder for Good Reason -- or (iii) the retirement of such Management Stockholder upon or after reaching --- the age of 65 ("Retirement"). ---------- 4.2. Notice to the Company. If any Management Stockholder desires to --------------------- sell shares of Common Stock to the Company pursuant to Section 4.1, he or she (or his or her estate, trust, corporation or partnership, as the case may be) shall notify the Company not more than 60 days after the occurrence of the event giving rise to such Management Stockholder's right to sell his or her shares of Common Stock and shall specify the number of shares of Common Stock such Management Stockholder owns. 4.3. Right of the Company to Purchase. Subject to all subsections of -------------------------------- this Section 4 and Section 7, the Company shall have the right to purchase from a Management Stockholder, and such Management Stockholder shall have the obligation to sell to the Company, all (but not less than all) of such Management Stockholder's shares of Common Stock: (a) at the Fair Market Value of the shares of Common Stock to be purchased if such Management Stockholder's employment with the Company or any of its subsidiaries is terminated as a result of (i) the termination by - the 11 Company or any such subsidiary of such employment without Cause, (ii) -- the death or Disability of such Management Stockholder, (iii) the --- resignation of such Management Stockholder for Good Reason or (iv) the -- Retirement of such Management Stockholder; (b) at the lesser of the Fair Market Value and the Carrying Value of the shares of Common Stock to be purchased if such Management Stockholder's employment with the Company or any of its subsidiaries is terminated by the Company or any such subsidiary for Cause; or (c) at the Fair Market Value or the Carrying Value of the shares of Common Stock to be purchased, in the sole discretion of the Board (excluding members who are designees of MJD Partners), if such Management Stockholder's employment with the Company or any of its subsidiaries is terminated for any reason other than as a result of an event described in subparagraph (a)(i), (a)(ii), (a)(iii) or (a)(iv) or in paragraph (b) of this Section 4.3; provided that, in the case of (i) shares of Common Stock owned by John P. Duda - -------- - and Walter E. Leach, Jr. on the Closing Date and (ii) shares of Common Stock -- underlying options and warrants granted to John P. Duda and Walter E. Leach, Jr. by the Company prior to the date hereof to purchase shares of Common Stock to be purchased if such Management Stockholder's employment with the Company or any of its subsidiaries is terminated for any reason, at the Fair Market Value of such shares, and in the case of such options, less the exercise price of such options. 4.4. Notice to Management Stockholders. If the Company desires to --------------------------------- purchase shares of Common Stock from a Management Stockholder pursuant to Section 4.3, it shall notify such Management Stockholder (or his or her estate, as the case may be) not more than 60 days after the occurrence of the event giving rise to the Company's right to acquire such Management Stockholder's shares of Common Stock. 4.5. Payment. (a) Subject to Section 7, payment for shares of Common ------- Stock sold by a Management Stockholder pursuant to Section 4.1 shall be made on the date 30 days (or the first business day thereafter if the 30th day is not a business day) following the date of the receipt by the Company of such Management Stockholder's notice; provided, however, that if such payment is -------- ------- being made pursuant to Section 4.7(c), then such payment shall be made on the date that is 30 days (or the first business day thereafter if the 30th day is not a business day) following the date of the determination of Fair Market Value. 12 Any payments based on Fair Market Value required to be made by the Company under this Section 4.5(a) shall accrue simple interest at a rate per annum of 8% from the date of termination of employment of the relevant Management Stockholder to the date the Company has paid in full for all of the shares of Common Stock. All payments of interest accrued hereunder shall be paid only at the date of payment by the Company for the shares of Common Stock being purchased. (b) Subject to Section 7, payment for shares of Common Stock purchased by the Company pursuant to Section 4.3(a) shall be made on the date 30 days (or the first business day thereafter if the 30th day is not a business day) following the date of the receipt by a Management Stockholder of the Company's notice pursuant to Section 4.4; provided, however, that if such -------- ------- payment is being made pursuant to Section 4.7(c), then such payment shall be made on the date that is 30 days (or the first business day thereafter if the 30th day is not a business day) following the date of the determination of Fair Market Value. Subject to Section 7 and in the sole discretion of the Board (excluding members who are designees of MJD Partners), payment for shares of Common Stock purchased by the Company pursuant to Section 4.3(b) or 4.3(c) shall be made as follows (or on a more accelerated schedule if the Board (excluding members who are designees of MJD Partners) so elects): (i) if the date of termination occurs prior to the third anniversary of the Closing Date, then one-third of the purchase price of the purchased shares shall be paid within 30 days following each of the third, fourth and fifth anniversaries of the Closing Date; (ii) if the date of termination occurs on or after the third anniversary of the Closing Date and prior to the fourth anniversary of the Closing Date, then (A) two-thirds of the purchase price of the purchased - shares shall be paid within 30 days following such fourth anniversary and (B) one-third of the purchase price of the purchased shares shall be paid -- within 30 days following the fifth anniversary of the Closing Date; (iii) if the date of termination occurs on or after the fourth anniversary of the Closing Date and prior to the fifth anniversary of the Closing Date, then the purchase price of the purchased shares shall be paid within 30 days following such fifth anniversary; and (iv) if the date of termination occurs on or after the fifth anniversary of the Closing Date, then the purchase price of the purchased shares shall be paid 13 contemporaneously with the surrender of the certificates representing the purchased shares. Any payments based on Fair Market Value required to be made by the Company under this Section 4.5(b) shall accrue simple interest at a rate per annum of 8% on the amounts not paid from the date of termination of employment to the date the Company makes such payments. All payments of interest accrued hereunder shall be paid only at the date or dates of payment by the Company for the shares of Common Stock being purchased. 4.6. Appraisal. The Company shall engage, from time to time, but not --------- less often than within 90 days after every Fiscal Year, commencing with the Fiscal Year ending on December 31, 1997, Houlihan Lokey Howard & Zukin or such other recognized independent valuation consultant or appraiser of national standing reasonably satisfactory to the Investor Stockholders and MJD Partners (the "Appraiser") to appraise the Fair Market Value of the Company and the --------- shares of Common Stock as of the last day of the Fiscal Year then most recently ended or, at the request of the Company, as of any more recent date (the "Appraisal Date") and to prepare and deliver a report to the Company describing - --------------- the results of such appraisal (the "Appraisal"). The Company shall bear the --------- fees and expenses of each Appraisal. 4.7. Fair Market Value. (a) The "Fair Market Value" of any share of ----------------- ----------------- Common Stock being purchased by or sold to the Company (or to any Permitted Assignee if the right to purchase has been assigned to any Permitted Assignee) pursuant to this Section 4 shall be (i) the fair market value of the entire - Common Stock equity interest of the Company taken as a whole, without additional premiums for control or discounts for minority interests or restrictions on transfer, divided by (ii) the number of outstanding shares of Common Stock, -- calculated on a fully-diluted basis. Except as set forth in subsections (b) and (c) of this Section 4.7, the Fair Market Value of any share of Common Stock shall be calculated with reference to the most recent Appraisal and as of the most recent Appraisal Date prior to termination of the relevant Management Stockholder's employment (or as of the first Appraisal and the first Appraisal Date in the event that such termination occurs prior to December 31, 1997). (b) For the purposes of Section 5 ("Involuntary Transfers"), the Fair Market Value of any share of Common Stock shall be calculated with reference to the most recent Appraisal and as of the most recent Appraisal Date prior to the date of the Involuntary Transfer (or as of the first Appraisal and the first Appraisal Date in the event that such Involuntary Transfer occurs prior to December 31, 1997). 14 (c) Beginning with the Fiscal Year commencing January 1, 1998, if the applicable date of termination of the relevant Management Stockholder's employment is on or after the first day of the seventh month of any Fiscal Year, the Fair Market Value of any share of Common Stock shall be calculated with reference to the most recent Appraisal and as of the most recent Appraisal Date prior to such date of termination of employment, plus (or minus) the product of (i) the increase (decrease) in the Fair Market Value of any share to be so - purchased from such Appraisal Date prior to the date of termination of employment to the Appraisal Date next following such date of termination of employment hereunder and (ii) a fraction, the denominator of which is the number -- of days in the period between the Appraisal Dates preceding and following the date of termination of employment hereunder and the numerator of which is the number of days elapsed from the Appraisal Date at the beginning of such period through such date of termination of employment. 4.8. Notice to Stockholders. Promptly after receipt of each ---------------------- Appraisal, the Company shall deliver to each Stockholder a copy of the Appraisal. 4.9. Acknowledgment of Status. Each of Johnson and Thomas hereby ------------------------ acknowledges that he shall be deemed a "Management Stockholder" for all purposes of this Agreement with respect to all shares of Common Stock now or hereafter owned directly by him. 5. Involuntary Transfers. Any transfer of title or beneficial --------------------- ownership of shares of Common Stock upon default, foreclosure, forfeit, court order, or otherwise than by a voluntary decision on the part of a Stockholder (an "Involuntary Transfer") shall be void unless such Stockholder complies with -------------------- this Section 5 and enables the Company to exercise in full its rights hereunder. Upon any Involuntary Transfer, the Company shall have the right to purchase such shares of Common Stock pursuant to this Section 5 and the Person to whom such shares have been transferred (the "Involuntary Transferee") shall have the ---------------------- obligation to sell such shares in accordance with this Section 5. Upon the Involuntary Transfer of any shares of Common Stock, such Stockholder shall promptly (but in no event later than five business days after such Involuntary Transfer) furnish written notice to the Company, the Investor Stockholders and MJD Partners indicating that the Involuntary Transfer has occurred, specifying the name of the Involuntary Transferee, giving a detailed description of the circumstances giving rise to, and stating the legal basis for, the Involuntary Transfer. Upon the receipt of such notice, and for 60 days thereafter, the Company shall have the right to purchase, and the Involuntary Transferee shall have the obligation to sell, all (but not less than all) of the shares of Common Stock acquired by the Involuntary Transferee for a purchase price equal to the lesser of (a) the Fair Market Value of such shares of Common Stock and (b) the - - amount of the indebtedness or other liability that gave rise 15 to the Involuntary Transfer plus the excess, if any, of the Carrying Value of such shares of Common Stock over the amount of such indebtedness or other liability that gave rise to the Involuntary Transfer. 6. Auction Sale Procedure. 6.1. General. (a) At any time after ---------------------- ------- the fourth anniversary of the date hereof, (i) either Investor Stockholder shall - be entitled to initiate the procedure for the public sale of the Company, provided that it and its Permitted Assignees continue to own, in the aggregate, - -------- at least 50% as many shares of Common Stock as owned by such Investor Stockholder on the Closing Date, and (ii) MJD Partners shall also be entitled to -- initiate such procedure, provided that it and its assignees permitted by this -------- Agreement own at least the same percentage of the issued and outstanding shares of Common Stock as owned by MJD Partners on the Closing Date. The public sale procedure (the "Auction Sale Procedure") set forth in this Section 6 shall be ---------------------- initiated by a Stockholder authorized pursuant to this Section 6.1(a) or the Investor Stockholders authorized pursuant to Section 6.1(b), in either case, by delivering to the Company and the Remaining Stockholders (as defined below) a written notice that such Stockholder(s) has elected to initiate the Auction Sale Procedure. For purposes of this Section 6, "Supervising Stockholder" shall mean ----------------------- the Investor Stockholder, if any, which has an unrealized investment in the Company representing at least 20% more cash in the Company than the other Investor Stockholder, or, in accordance with Section 6.1(b), the Investor Stockholders; and "Remaining Stockholders" shall mean all of the Stockholders ---------------------- except the Management Stockholders and the Stockholder(s) that initiated the Auction Sale Procedure. (b) At any time after a Board Event (other than as a result of the operation of clause (iii) or (v) of the definition thereof), the Investor Stockholders shall jointly be entitled to initiate the Auction Sale Procedure. (c) Once the Auction Sale Procedure has been initiated pursuant to this Section 6.1 by either or both of the Investor Stockholders, the provisions of Section 3.2 shall also apply. The Auction Sale Procedure shall continue until such time, if ever, that an offer to purchase the shares of Common Stock covered by the Sale Notice is accepted by the Offering Investor Stockholder pursuant to Section 3.2 and the closing of such purchase is consummated. 6.2. Retention of Investment Bank. Within 45 days after the ---------------------------- initiation of the Auction Sale Procedure, the Supervising Stockholder, or, if there is no Supervising Stockholder, the Investor Stockholders, shall in good faith select an investment banking firm (the "Investment Bank") to assist the --------------- Company and the Stockholders in connection with the Auction Sale Procedure. Notwithstanding the foregoing, the Stockholders (other than the Management Stockholders and the 16 Stockholder(s) selecting the Investment Bank pursuant to the preceding sentence of this Section 6.2) collectively shall have the right to veto, for any reason, two, but only two, investment banks selected by the Supervising Stockholder or the Investor Stockholders, as the case may be. All fees and expenses of the Investment Bank shall be borne by the Company. 6.3. Preparation of Confidential Memorandum. As soon as practicable -------------------------------------- following the selection of the Investment Bank, the Investment Bank shall prepare a confidential offering memorandum (the "Confidential Memorandum") for ----------------------- the purpose of soliciting prospective purchasers of all of the Common Stock. The Company and each Stockholder shall provide all such assistance and cooperation with respect to the preparation of the Confidential Memorandum as the Investment Bank or any other Stockholder may reasonably request. 6.4. Auction Procedures. If requested by the Supervising Stockholder, ------------------ or, if there is no Supervising Stockholder, the Investor Stockholders, the Investment Bank shall develop procedures for conducting the auction of the Company, such procedures to be reasonably acceptable to the Supervising Stockholder or the Investor Stockholders, as the case may be, and no more onerous to prospective purchasers than procedures that are customary in the market place at the time of the initiation of the Auction Sale Procedure. 6.5. Selection of Bid. The Confidential Memorandum and auction ---------------- procedures shall solicit prospective purchasers of all of the Common Stock. Based on the advice of the Investment Bank, the Supervising Stockholder, or, if there is no Supervising Stockholder, the Investor Stockholders, shall in good faith select the best bid or bids. So long as the bidders selected are not Affiliates of the Supervising Stockholder, or, if there is no Supervising Stockholder, the Investor Stockholders, any Remaining Stockholder may object to the bidder or bidders selected only if they can demonstrate that any Stockholder selecting the bidder or bidders was grossly negligent or engaged in willful misconduct in connection with such selection or selections. 6.6. Negotiation of Sale Agreement. The Supervising Stockholder and ----------------------------- its counsel, or, if there is no Supervising Stockholder, the Investor Stockholders and their counsel, shall be entitled to negotiate the sale agreement or agreements on behalf of the Company with the prospective purchaser or purchasers. The Remaining Stockholders and their counsel shall be entitled to participate in such negotiations and the Supervising Stockholder or the Investor Stockholders, as the case may be, shall consider in good faith the Remaining Stockholders' comments. Without the Remaining Stockholders' consent, which consent may be withheld for any reason, the Supervising Stockholder, or, if there is no Supervising Stockholder, the Investor Stockholders, shall 17 not agree to any term in any sale agreement that is more favorable to the Supervising Stockholder or any of its Affiliates, or, if there is no Supervising Stockholder, the Investor Stockholders or any of their respective Affiliates than to the Remaining Stockholders. 6.7. Information Regarding Auction. The Supervising Stockholder, or ----------------------------- if there is no Supervising Stockholder, the Investor Stockholders, shall keep MJD Partners and the other Investor Stockholder, if applicable, reasonably informed as to the current status of the auction of the Company. 6.8. Right of Remaining Stockholders to Bid. If the Auction Sale -------------------------------------- Procedure has been initiated pursuant to Section 6.1, then any Remaining Stockholder may retain the right to make one or more bids to purchase all of the Common Stock by delivering written notice, within 30 days after the initiation of the Auction Sale Procedure, to the Company, the Supervising Stockholder, if any, and the other Remaining Stockholders expressing such intention. Delivery of such notice by or on behalf of any Remaining Stockholder shall act as a waiver by such Remaining Stockholder of its rights under this Section 6 to participate in the Auction Sale Procedure, including, but not limited to, its right to participate in the selection of an investment bank, its right to participate in the selection of bids and its right to participate in the negotiation of any sale agreement. In the event that any Remaining Stockholder shall not deliver such notice within such 30 day period, then no bids by such Remaining Stockholder or its Affiliates to purchase all of the Common Stock will be accepted by the Investment Bank, the Company or the Supervising Stockholder, or, if there is no Supervising Stockholder, the Investor Stockholders. 6.9. Cooperation. Each Stockholder shall cooperate in all respects in ----------- order to carry out the intent and accomplish the purposes of this Section 6. The provisions of Section 17.5 ("Further Assurances") are specifically incorporated herein by reference and the Stockholders' obligations thereunder, insofar as they relate to this Section 6, shall include, without limitation, the obligation to deliver stock certificates representing shares of Common Stock, in a form suitable for transfer, duly endorsed in blank, and the obligation to execute and deliver any stock purchase agreement or approve any merger agreement or agreements negotiated pursuant to Section 6.6. Each Stockholder agrees that its failure to strictly comply with the provisions of this Section 6 and Section 17.5, insofar as it relates to this Section 6, shall be deemed a material breach of this Agreement and shall entitle the aggrieved Stockholder to institute and prosecute proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach of this Agreement. Such remedies shall be cumulative and not exclusive, and shall be in addition to any other remedies which such Stockholder may have. 18 7. Prohibited Purchases. Notwithstanding anything to the contrary -------------------- herein, the Company shall not be permitted or obligated to purchase any shares of Common Stock hereunder to the extent (a) the Company is prohibited from - purchasing such shares by applicable law or by any debt instruments or agreements, including any amendment, renewal, extension, substitution, refinancing, replacement or other modification thereof (the "Financing --------- Documents") entered into by the Company or any of its subsidiaries, (b) a - --------- - default has occurred under any Financing Document and is continuing, (c) the - purchase of such shares of Common Stock would, or in the reasonable opinion of the Board might, result in the occurrence of an event of default under any Financing Document or create a condition which would or might, with notice or lapse of time or both, result in such an event of default, or (d) the purchase - of such shares of Common Stock would, in the reasonable opinion of the Board, be imprudent in view of the financial condition (present or projected) of the Company or any of its subsidiaries or the anticipated impact of the purchase of such shares on the Company's or any of its subsidiaries' ability to meet their respective obligations under any Financing Document. If shares of Common Stock that the Company has the right or obligation to purchase on any date exceed the total amount permitted to be purchased on such date pursuant to the preceding sentence (the "Maximum Amount"), the Company shall purchase on such date only -------------- that number of shares of Common Stock up to the Maximum Amount (and shall not be required to purchase more than the Maximum Amount) in such amounts as the Board shall in good faith determine, applying the following order of priority: (a) First, the shares of Common Stock of all Management Stockholders whose shares of Common Stock are being purchased by the Company by reason of termination of employment due to death or Disability and, to the extent that the number of shares of Common Stock that the Company is obligated to purchase from such Management Stockholders (but for this Section 7) exceeds the Maximum Amount, such shares of Common Stock pro rata among such --- ---- Management Stockholders on the basis of the number of shares of Common Stock held by each of such Management Stockholders that the Company is obligated or has the right to purchase, and (b) Second, to the extent that the Maximum Amount is in excess of the amount the Company purchases pursuant to clause (a) above, the shares of Common Stock of all Management Stockholders whose shares of Common Stock are being purchased by the Company by reason of termination of employment without Cause or due to Retirement or resignation for Good Reason up to the Maximum Amount and, to the extent that the number of shares of Common Stock that the Company is obligated to purchase from such Management Stockholders (but for this Section 7) exceeds the Maximum 19 Amount, such shares of Common Stock pro rata among such Management --- ---- Stockholders on the basis of the number of shares of Common Stock held by each of such Management Stockholders that the Company is obligated or has the right to purchase, and (c) Third, to the extent the Maximum Amount is in excess of the amounts the Company purchases pursuant to clauses (a) and (b) above, the shares of Common Stock of all other Management Stockholders whose shares of Common Stock are being purchased by the Company up to the Maximum Amount and, to the extent that the number of shares of Common Stock that the Company is obligated to purchase from such Management Stockholders (but for this Section 7) exceeds the Maximum Amount, the shares of Common Stock of such Management Stockholders in such order of priority and in such amounts as the Board (excluding members who are designees of MJD Partners) in its sole discretion shall in good faith determine to be appropriate under the circumstances. Notwithstanding anything to the contrary contained in this Agreement, if the Company is unable to make any payment when due under this Agreement by reason of this Section 7, the Company shall make such payment at the earliest practicable date permitted under this Section 7 and any such payment shall accrue simple interest (or if such payment is accruing interest at such time, shall continue to accrue interest) at a rate per annum of 8% from the date such payment is due and owing to the date such payment is made. All payments of interest accrued hereunder shall be paid only at the date of payment by the Company for the shares of Common Stock being purchased. 8. Issuance of Additional Shares of Common Stock. 8.1 Preemptive --------------------------------------------- ---------- Rights of the Investor Stockholders and MJD Partners. In the case of the - ---------------------------------------------------- proposed sale or issuance of, or the proposed granting by the Company of, any equity securities of the Company to any Person (other than any Excluded Shares) following the date hereof, then the Investor Stockholders and MJD Partners shall have the right, exercisable within 20 days after the Company has given notice to the Investor Stockholders and MJD Partners of such proposed sale, issuance or grant, to purchase all of the equity securities proposed to be issued or granted on the terms set forth in Sections 8.2, 8.3 and 8.4. 8.2. Investments made before the end of the First Investment Period. -------------------------------------------------------------- Subject to Section 8.4, if the Company proposes to sell, issue or grant any equity securities of the Company as provided in Section 8.1 before the end of the First Investment Period, then each Investor Stockholder and, subject to Section 8.4(c), MJD Partners shall, in its sole discretion, be entitled to make one or more purchases of 20 additional shares of Common Stock for a purchase price per share equal to $342.51 and the Company shall be obligated to sell to the Investor Stockholders and MJD Partners additional shares of Common Stock at such purchase price per share at the closing of such purchase, such closing to occur within the First Investment Period. The notice referred to in Section 8.1 shall state the number of shares of Common Stock to be offered to each Investor Stockholder and MJD Partners, the aggregate consideration to be paid for such shares of Common Stock by each Investor Stockholder and MJD Partners and the proposed date, time and location of the closing of such purchase (which shall not be earlier than 45 days or later than 120 days after the date of such notice). At the closing of each such additional purchase, the Company shall issue and deliver to each Investor Stockholder and MJD Partners stock certificates representing that number of fully paid and nonassessable shares of Common Stock that each such Investor Stockholder and MJD Partners have agreed to purchase pursuant to this Section 8.2 and each such Investor Stockholder and MJD Partners shall pay to the Company by wire transfer of immediately available funds the aggregate consideration for such shares. 8.3 Investments made after the end of the First Investment Period. ------------------------------------------------------------- Subject to Section 8.4, if the Company proposes to sell, issue or grant any equity securities of the Company as provided in Section 8.1 after the end of the First Investment Period, then each Investor Stockholder and, subject to Section 8.4(c), MJD Partners shall, in its sole discretion, be entitled to make one or more purchases of additional shares of Common Stock for a purchase price per share agreed upon by the Investor Stockholders, MJD Partners and the Company. The notice referred to in Section 8.1 shall state the number of shares of Common Stock to be offered to each Investor Stockholder and MJD Partners, the aggregate consideration to be paid for such shares of Common Stock by each Investor Stockholder and MJD Partners and the proposed date, time and location of the closing of such purchase (which shall not be earlier than 45 days or later than 120 days after the date of such notice). At the closing of each such additional purchase, the Company shall issue and deliver to each Investor Stockholder and MJD Partners stock certificates representing that number of fully paid and nonassessable shares of Common Stock that each such Investor Stockholder and MJD Partners have agreed to purchase pursuant to this Section 8.3 and each such Investor Stockholder and MJD Partners shall pay to the Company by wire transfer of immediately available funds the aggregate consideration for such shares. 8.4 Participation by Carousel, Kelso and MJD Partners. (a) Subject ------------------------------------------------- to all subsections of this Section 8.4, (i) each of Carousel, Kelso and MJD - Partners shall be entitled to purchase that portion of the shares of Common Stock covered by the notice referred to in Section 8.1 equal to its pro rata --- ---- interest in the Company (based on the percentage of outstanding shares of Common Stock owned by each of them on the 21 date of such notice) and (ii) if any of Carousel, Kelso or MJD Partners does not -- exercise its right to purchase its pro rata portion of shares of Common Stock --- ---- that the Company proposes to issue and sell pursuant to Section 8.1, then the others shall have the right to purchase their respective pro rata portion of --- ---- such shares of Common Stock not elected to be so purchased by Carousel, Kelso or MJD Partners, as the case may be, that the Company proposes to issue and sell. (b) Notwithstanding subsection (a) of this Section 8.4, Carousel, on the one hand, and Kelso, on the other hand, shall each be entitled to purchase 50% of any shares of Common Stock proposed to be sold to them pursuant to Section 8.2 or 8.3 until such time as the Investor Stockholders shall have invested an aggregate of $50 million in the Company (the calculation of such $50 million shall include the investments made by the Investor Stockholders on the Closing Date pursuant to the Stock Purchase Agreement). Thereafter, Carousel, on the one hand, and Kelso, on the other hand, shall be entitled to purchase 30% and 70%, respectively, of any shares of Common Stock proposed to be sold to them pursuant to Section 8.2 or 8.3 until such time as the Investor Stockholders shall have invested an aggregate of $100 million in the Company (the calculation of such $100 million shall include the investments contemplated by the preceding sentence). Notwithstanding the foregoing, Carousel and Kelso may agree to any allocation of any additional shares of Common Stock proposed to be sold to them pursuant to Section 8.2 or 8.3 and, in any event, either Investor Stockholder may purchase shares not purchased by the other. (c) Any purchase by MJD Partners of any additional shares of Common Stock pursuant to this Section 8 may only be financed by borrowings made directly by the Founders or MJD Partners, provided that such financing -------- arrangements must be authorized by the prior written approval (not to be unreasonably withheld) of the Board (excluding members who are designees of MJD Partners) and no funds may be provided by any third party investor. (d) If Carousel and Kelso do not purchase 100% of the equity securities of the Company offered to them pursuant to Section 8.1, then the Company may, subject to Section 10, raise additional equity financing as authorized by the Board. All references to the Investor Stockholders in this Section 8 shall include their respective Permitted Assignees. 8.5. New Investments. The Investor Stockholders shall consider in --------------- good faith additional investments proposed by the Company from time to time with reference to the investment guidelines attached hereto as Exhibit A. Such investment guidelines are not rules and no particular guideline is intended to take precedence over any other guideline. 22 9. Election of Directors. 9.1 Initial Board Make-Up of the --------------------- ---------------------------- Company. Until a Board Event, each Stockholder agrees that it will nominate and - ------- elect and will vote all of the shares of Common Stock owned or held of record by it to elect and, thereafter, for such period, to continue in office a Board consisting of seven members, (a) two of whom will be designated for nomination - and election by Carousel, (b) one of whom will be designated for nomination and - election by Kelso and (c) four of whom will be designated for nomination and - election by MJD Partners. The individuals designated for nomination and election by Carousel, Kelso or MJD Partners, as the case may be, pursuant to this Section 9.1 may be changed from time to time by Carousel, Kelso or MJD Partners, as the case may be. 9.2 Board Make-Up of the Company following a Board Event. At any ---------------------------------------------------- time following the occurrence of a Board Event, each Stockholder agrees that, upon written notice by either Investor Stockholder, it will nominate and elect and will vote all of the shares of Common Stock owned or held of record by it to elect and, thereafter, to continue in office a Board consisting of nine members, (a) two of whom will be designated for nomination and election by Carousel, (b) - - three of whom will be designated for nomination and election by Kelso and (c) - four of whom will be designated for nomination and election by MJD Partners. The individuals designated for nomination and election by Carousel, Kelso or MJD Partners, as the case may be, pursuant to this Section 9.2 may be changed from time to time by Carousel, Kelso or MJD Partners, as the case may be. 9.3 Five Year Plan and Annual Business Plan. Attached hereto as --------------------------------------- Exhibit B are the capital and operating budgets, together with the EBITDA performance targets, for the Company and its subsidiaries for the five year period ending December 31, 2001 (the "Five Year Plan"). The EBITDA performance -------------- targets included in the Five Year Plan shall, subject to Section 10, be adjusted in connection with the Board's authorization of each acquisition or disposition of material properties by the Company or any of its subsidiaries by adding thereto or subtracting therefrom projected EBITDA performance targets in respect of such acquisition or disposition, as the case may be. Commencing with the budget for the 1998 Fiscal Year, MJD Partners shall prepare and submit to the Board for its approval at least 30 days prior to the first day of each Fiscal Year proposed capital and operating budgets for the Company and its subsidiaries for the forthcoming Fiscal Year. As revised and approved by the Board, such proposed capital and operating budgets shall become the "Annual Business Plan" -------------------- for the Company and its subsidiaries. 9.4 Records and Reports, etc. (a) The Company shall furnish or ------------------------- cause to be furnished to the Investor Stockholders and MJD Partners: 23 (i) within 120 days following of the end of each Fiscal Year, audited consolidated financial statements of the Company and its subsidiaries, together with unaudited consolidating financial statements of the Company and its subsidiaries for such Fiscal Year; (ii) within 45 days following of the end of each fiscal quarter, unaudited consolidated and consolidating financial statements of the Company and its subsidiaries; (iii) monthly financial statements, together with a management overview and report with respect to the Company's and its subsidiaries' performance for such month; and (iv) such other information or reports as either of the Investor Stockholders or MJD Partners may reasonably request. (b) The Investor Stockholders and MJD Partners shall each, upon reasonable notice, and using their best efforts to minimize any interruption of the Company's and its subsidiaries' business, be entitled to inspect and audit the books, records and accounts of the Company and its subsidiaries during normal business hours and make copies thereof. (c) The Company shall deliver prompt written notice to each Investor Stockholder of the occurrence of any of the following: (i) the actual or threatened commencement of any suit, action or other legal or administrative proceeding affecting the Company or any of its subsidiaries which, if adversely determined, would involve in excess of $100,000; (ii) any event of default under any Financing Document, whether or not any requirement for the giving of notice, the lapse of time, or both, or any other condition, has been satisfied; or (iii) any other event that could reasonably be expected to have a material adverse effect on the business, assets, properties, liabilities, revenues, costs and expenses, operations, prospects or condition, financial or otherwise, of Company or any of its subsidiaries. 24 9.5 Board Meetings, Committees, etc. (a) There shall be regular -------------------------------- meetings of the Board held at least once per calendar quarter, at such times and in such places as the Board shall determine. (b) At its first meeting, the Board shall designate a Compensation Committee (the "Compensation Committee") consisting of three members of the ---------------------- Board, one of whom shall be the Company's chief executive officer, one of whom shall be designated by Carousel and one of whom shall be designated by Kelso. The Compensation Committee shall act by a majority of its members and its powers, subject to Section 10, shall include the power to review and approve the salaries and other compensation of the executive officers of the Company and its subsidiaries, including incentive compensation, deferred compensation and stock plans, the power to administer the Stock Option Plan and the Management Agreement and the power, subject to Section 9.3, to update the EBITDA performance targets included in the Five Year Plan (with the consent of MJD Partners, such consent not to be unreasonably withheld or delayed), and such other powers as may be delegated to it by the Board. The Board may designate an Executive Committee (the "Executive Committee") consisting of three members of ------------------- the Board, one of whom shall be the Company's chief executive officer, one of whom shall be designated by Carousel and one of whom shall be designated by Kelso. The Executive Committee shall act by a majority of its members and shall, subject to Section 10 and the Delaware General Corporation Law, have such powers as may be delegated to it by the Board. (c) Members of the Board shall not be entitled to receive compensation for their service as such, except (i) for members of the Board who - are not affiliated with any Stockholder or (ii) as may be provided in the -- Financial Advisory Agreements. Members of the Board shall be entitled to reimbursement for their reasonable out-of-pocket expenses incurred in connection with their service as such. 9.6 Board Make-Up of the Company's Subsidiaries. The Board shall ------------------------------------------- establish a policy and procedures with respect to the composition and election of the Board of Directors of each of the Company's subsidiaries. 9.7 Irrevocable Proxy. In order to effectuate Section 9 and, in ----------------- addition to and not in lieu of Section 9, each Stockholder hereby grants to the Secretary of the Company an irrevocable proxy solely for the purpose of voting all of the shares of Common Stock owned by the grantor of the proxy for the election of directors nominated in accordance with Section 9. 10. Actions Requiring Approval of the Investor Stockholders. 10.1. ------------------------------------------------------- General. Subject to Section 10.2, as long as the Investor Stockholders - ------- collectively own 25 at least 10% of the issued and outstanding shares of Common Stock, no Stockholder shall cause the Company or any of its subsidiaries to take, and the Company shall not take and shall cause its subsidiaries not to take, any of the following actions without the prior written approval of each of the Investor Stockholders or their designees on the Board: (a) any issuance, sale, delivery, or any entry into an agreement to issue, sell or deliver, any capital stock, warrants, options or similar rights, other securities convertible into any capital stock or other securities which contain any voting or equity participation rights of which the Company or any of its subsidiaries is the issuer or grantor, or any grant or issuance, or any agreement to grant or issue, any options, warrants, incentive awards or similar rights calling for the issuance of such securities; (b) any repurchase or redemption of any shares of capital stock of the Company or any of its subsidiaries, including pursuant to Section 2.2 and Section 4; (c) (i) any merger or consolidation with or into any other Person - (whether or not the Company or any of its subsidiaries survives such merger or consolidation) or (ii) any conveyance, sale, lease or other disposal, in -- any transaction or related series of transactions, of 25% or more of the property, business or assets of the Company (including the capital stock or assets of any of the Company's subsidiaries); (d) any recapitalization of the capital stock of the Company or its subsidiaries or any amendment, whether by merger, consolidation or otherwise, to the articles of incorporation or the by-laws of the Company or any of its subsidiaries; (e) any liquidation or dissolution of the Company or any of its subsidiaries; (f) entry into any business not substantially similar or reasonably related to the business of the Company and its subsidiaries as of the date hereof; (g) establishment of or material change to any incentive or bonus program of the Company or any of its subsidiaries, including the Stock Option Plan; 26 (h) any change to the EBITDA performance targets included in the Five Year Plan or approval of or material change to the Annual Business Plan; (i) incurrence or guarantee by the Company or any of its subsidiaries of indebtedness in excess of $5 million in the aggregate; (j) declaration or payment of dividends or other distributions in respect of the capital stock of the Company or any of its subsidiaries; (k) enter into any transaction or modify any existing arrangement between the Company or any of its subsidiaries, on the one hand, and MJD Partners, MJD Inc. or any MJD Principal or any of their respective Affiliates, on the other hand; or (l) selection or replacement of the Company's and its subsidiaries' independent public accountants. In the event of a Board Event caused as a result of the operation of clause (iii) of the definition thereof, the Investor Stockholders may, in their sole discretion, modify the terms of the Management Agreement. 10.2. After Additional Investments. At any time after either Carousel ---------------------------- or Kelso shall have an unrealized investment in the Company representing at least 100% more cash in the Company than the other, then the Investor Stockholder with the smaller investment in the Company shall lose all of its rights of approval set forth in Section 10.1, except with respect to any of the actions referred to in clauses (b), (c), (d) and (e) of Section 10.1 relating to the Company only. All references to Carousel or Kelso in this Section 10.2 shall include their respective Permitted Assignees. 11. Exit Payments. 11.1. General. If after the fourth anniversary ------------- ------- of the date hereof, Carousel, Kelso or MJD Partners becomes entitled to cash payments as a result of the Sale of the Company (any such payment being referred to herein as an "Exit Payment"), then, subject to Sections 11.4 and 15.4, the ------------ Exit Payment will be allocated among Carousel, Kelso and MJD Partners as follows: (a) The Exit Payment shall be allocated among Carousel, Kelso and MJD Partners, based on the percentage of outstanding shares of Common Stock owned by each of them on the date of any Exit Payment, until each of Carousel and Kelso has received an internal rate of return equal to 30% per annum, compounded annually, on the aggregate amount of capital invested in the Company by it. 27 (b) Once an Investor Stockholder has realized an internal rate of return of 30% as provided in Section 11.1(a), the amount of the Exit Payment, if any, in excess of such rate of return that would otherwise be allocated to such Investor Stockholder on the basis of the percentage of outstanding shares of Common Stock owned by such Investor Stockholder on the date of any Exit Payment, shall be allocated (i) 50% to such Investor - Stockholder and (ii) 50% to MJD Partners. -- For purposes of this Section 11.1, internal rates of return shall be calculated by taking into account (i) the date or dates of the investments of capital by - the Investor Stockholders in the Company, (ii) the date or dates of any Exit -- Payment and all other amounts received in respect of such Investor Stockholder's shares of Common Stock pursuant to prior sales of shares or dividends or distributions in respect thereof and (iii) the amounts of such investments, Exit --- Payment and other payments in respect of shares of Common Stock, provided that -------- any taxes of such Investor Stockholder, its partners or its investors shall not be taken into account when calculating internal rates of return. 11.2. Equitable Allocations. In the event any of Carousel, Kelso or --------------------- MJD Partners becomes entitled to a cash payment in respect of any shares of Common Stock, but in connection with a transaction (a) occurring prior to the - fourth anniversary of the date hereof or (b) not constituting a Sale of the - Company, then Carousel, Kelso and MJD Partners shall negotiate in good faith an equitable allocation of such cash payments which reflects the economic objectives set forth in Section 11.1 taking into account the limitations set forth in Section 11.4 and the proviso to Section 15.4. 11.3. Procedures for Payment; Characterization of Exit Payments; Tax -------------------------------------------------------------- Reporting. Carousel, Kelso and MJD Partners shall use reasonable efforts to - --------- arrange for any amounts allocated to Carousel, Kelso and MJD Partners pursuant to Section 11.1 or 11.2 to be paid directly to each such Stockholder by the relevant third party purchaser or the Company, as the case may be. In the event that Carousel, Kelso and MJD Partners are unable to make such arrangements, each such Stockholder shall pay any amounts allocated to the other Stockholders pursuant to Section 11.1 or 11.2 promptly following receipt of such amounts. Consistent with the intent of the parties, Carousel, Kelso, MJD Partners and the Company agree (and agree to cause their Affiliates), except to the extent prohibited by applicable law, (a) to treat, for income tax purposes, - the payment to, and receipt by, any Stockholder of its allocable share of any Exit Payment under this Section 11 as a payment in exchange for the sale of such Stockholder's Common Stock, 28 and (b) to report the payment and receipt of such amounts in accordance with - such treatment on all relevant tax returns filed with any relevant taxing authority. 11.4. Limitation. (a) In the event (i) any Founder Transfers, ---------- - directly or indirectly, any interest in MJD Partners or MJD Inc. now or hereafter owned by such Founder (other than a Transfer by one Founder to another Founder or as permitted by Section 1.4(a)(iii) or (iv) or Section 1.4(b)(ii) or (iii) or with the prior written consent of each Investor Stockholder) or (ii) -- MJD Inc. Transfers any interest in MJD Partners now or hereafter owned by MJD Inc., the Exit Payment allocable to MJD Partners pursuant to Section 11.1 shall be reduced proportionately to reflect (x) such Founder's former direct and - indirect interests in MJD Partners or MJD Inc., as the case may be, or (y) MJD - Inc.'s former interest in MJD Partners. (b) In the event Johnson or Thomas resigns other than for Good Reason or his employment with the Company or any of its subsidiaries is terminated by the Company or any such subsidiary for Cause, the Exit Payment allocable to MJD Partners pursuant to Section 11.1 shall be reduced proportionately to reflect such Person's direct and indirect interests (including any interest Transferred in accordance with Section 1.4(a) or Section 1.4(b)) in MJD Partners and MJD Inc. 11. Permitted Assignees. All references to the Investor ------------------- Stockholders in this Section 11 shall include any of their respective Permitted Assignees. 12. Stock Certificate Legends. A copy of this Agreement shall be ------------------------- filed with the Secretary of the Company and kept with the records of the Company. Each certificate representing shares of Common Stock owned by the Stockholders shall bear upon its face the following legends, as appropriate: (a) "THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS AND UNTIL REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR UNLESS, IN THE OPINION OF COUNSEL TO THE STOCKHOLDER, WHICH COUNSEL MUST BE, AND THE FORM AND SUBSTANCE OF WHICH OPINION ARE, SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION, TRANSFER OR OTHER DISPOSITION IS EXEMPT FROM REGISTRATION OR IS OTHERWISE IN 29 COMPLIANCE WITH THE ACT, SUCH LAWS AND THE STOCKHOLDERS' AGREEMENT OF THE ISSUER, DATED AS OF JULY 31, 1997 (THE "STOCKHOLDERS' AGREEMENT")." (b) "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER AND OTHER CONDITIONS, AS SPECIFIED IN THE STOCKHOLDERS' AGREEMENT, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE ISSUER AND WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF SUCH SHARES UPON WRITTEN REQUEST." In addition, each certificate representing shares of Common Stock owned by MJD Partners shall bear upon its face the following legends until such time as MJD Partners' indemnification obligation under the Stock Purchase Agreement shall have ended: (c) "THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CANCELLATION IN ACCORDANCE WITH ARTICLE XI OF THE STOCK PURCHASE AGREEMENT, DATED AS OF MARCH 6, 1997, COPIES OF WHICH ARE ON FILE AT THE OFFICE OF THE ISSUER AND WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF SUCH SHARES UPON WRITTEN REQUEST." In addition, certificates representing shares of Common Stock owned by any permitted transferees who are residents of certain states shall bear any legends required by the laws of such states. Each Stockholder shall be bound by the requirements of such legends. Upon a Registration of any shares of Common Stock, the certificate representing the registered shares shall be replaced, at the expense of the Company, with certificates not bearing the legends required by Sections 12(a), 12(b) and 12(c). 13. Absence of Other Arrangements. Each of the parties hereto hereby ----------------------------- represents and warrants to each other party hereto that it has not entered into or agreed to be bound by any other arrangements or agreements of any kind with any other Person with respect to the shares of Common Stock, including, but not limited to, arrangements or agreements with respect to the acquisition, disposition or voting of shares of Common Stock or any interest therein (whether or not such arrangements or agreements are with the Company, Carousel, Kelso, MJD Partners, any MJD Principal 30 or any holder of Common Stock that is not party to this Agreement), except for (a) the Stock Purchase Agreement and (b) the Registration Rights Agreement. - - 14. New Management Stockholders. The Company and each of the --------------------------- Stockholders hereby agrees that any employee of the Company or any of its subsidiaries who after the date of this Agreement is offered shares of Common Stock or holds stock options exercisable into shares of Common Stock shall, as a condition precedent to the acquisition of such shares of Common Stock or the exercise of such stock options, as the case may be, (a) become a party to this - Agreement by executing the same and (b) if such employee is a resident of a - state with a community property system, cause his or her spouse to execute a Spousal Waiver in the form of Exhibit C attached hereto and deliver such Agreement and Spousal Waiver, if applicable, to the Company at its address specified in Section 17.9. Upon such execution and delivery, such employee shall be a Management Stockholder for all purposes of this Agreement. 15. Parties. 15.1. Assignment by the Company. The Company shall ------- ------------------------- have the right to assign to one or more Permitted Assignees, and/or the right to cause one or more Permitted Assignees to assume, all or any portion of its rights and obligations under Section 4 ("Management Stockholders") and Section 5 ("Involuntary Transfers"), provided that any such assignment or assumption is -------- accepted by the proposed assignee or assignees. If the Company has not exercised its right to purchase shares of Common Stock pursuant to any such Section within 20 days of receipt by the Company of the letter or notice giving rise to such right, then the Investor Stockholders shall have the right to require the Company to assign such right to one or more Permitted Assignees. If such right to purchase is assigned to a Permitted Assignee or Permitted Assignees pursuant to this Section 15.1, such Permitted Assignee or Permitted Assignees shall be deemed to be the Company for purposes of any such purchases and the seller shall be obligated to sell to such Permitted Assignee or Permitted Assignees. If the Company shall fail to promptly record the cancellation of any shares of Common Stock owned by MJD Partners on the books and records of the Company as a result of MJD Partners' indemnification obligation under Article XI of the Stock Purchase Agreement, then each Investor Stockholder shall have the right to record the cancellation of such shares on the books and records of the Company and such shares shall be deemed cancelled under the law of the State of Delaware and for all purposes of this Agreement. 15.2. Assignment Generally. The provisions of this Agreement shall be -------------------- binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, permitted successors and assigns, provided that -------- neither MJD Partners nor any MJD Principal nor any Management Stockholder shall be permitted to assign any of its rights or cause a third party to assume any of its obligations under this 31 Agreement, unless such assignment or assumption is in connection with a Transfer explicitly permitted by this Agreement and, prior to such assignment or assumption, such assignee complies with the requirements of Section 15.4. 15.3. Termination. (a) Any party to, or Person who is subject to, ----------- this Agreement which ceases to own any shares of Common Stock or any interest therein shall cease to be a party to, or Person who is subject to, this Agreement and thereafter shall have no rights or obligations hereunder; provided, however, that a Transfer of shares of Common Stock not explicitly - -------- ------- permitted under this Agreement shall not relieve any Stockholder of any of its obligations hereunder. Notwithstanding the foregoing, in connection with a Transfer to an Affiliate explicitly permitted by this Agreement, prior to any such Person ceasing to be an Affiliate of the Stockholder from whom such Person acquired its shares of Common Stock, such Person shall be obligated to transfer such shares of Common Stock back to such original Stockholder and such original Stockholder shall thereupon be subject to this Agreement again. (b) All rights and obligations pursuant to Sections 1, 2, 3, 4, 5, 6, 8, 9, 10, 13, 14, 15.4 and 17.2 shall terminate upon an IPO. In the event that the Investor Stockholders cease to own collectively at least 10% of the issued and outstanding shares of Common Stock, all rights of the Investor Stockholders pursuant to Sections 3.4, 6, 8, 9, 10 and 17.2 shall terminate. 15.4. Agreements to Be Bound. Notwithstanding anything to the contrary ---------------------- contained in this Agreement, any Transfer of shares by a Stockholder (other than pursuant to a Registration) shall be permitted under the terms of this Agreement only if (a), in the case of a Management Stockholder, such Management - Stockholder shall cause the transferee of such shares of Common Stock to execute the Spousal Waiver in the form attached hereto as Exhibit C, if such transferee is an individual who resides in a state with a community property system, and (b) the transferee of such shares of Common Stock shall agree in writing to be - bound by the terms and conditions of this Agreement pursuant to an instrument of assignment and assumption reasonably satisfactory in substance and form, (i) in - the case of a Transfer by an MJD Principal, to the Investor Stockholders, (ii) -- in the case of a Transfer by a Management Stockholder, to the Company, (iii) in --- the case of a Transfer by an Investor Stockholder, to the other Investor Stockholder and MJD Partners, and (iv) in the case of a Transfer by MJD -- Partners, to the Investor Stockholders. Upon the execution of the Spousal Waiver and the instrument of assignment and assumption by such transferee, as the case may be, such transferee shall be deemed to be the relevant Stockholder, as the case may be, for all purposes of this Agreement, including, in the case of a Transfer by a Management Stockholder, the provisions of Section 4; provided, however, that Section 11 ("Exit Payments") shall not apply to any - -------- ------- transferee of MJD Partners, including a third party 32 transferee which has acquired MJD Partners' shares of Common Stock in accordance with Section 2.2 ("Right of First Refusal"), and the portion of any Exit Payment otherwise allocable to MJD Partners under Section 11 shall be reduced, on a pro --- rata basis, by the amount of such Exit Payment attributable to the shares of - ---- Common Stock so Transferred. 16. Defined Terms. As used in this Agreement, the following terms ------------- shall have the meanings ascribed to them below: "Affiliate": A Person that directly, or indirectly through one or --------- more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. "Board": The Board of Directors of the Company. ----- "Board Event": The earliest of (i) any failure of the Company in any ----------- - Fiscal Year to achieve at least 80% of the EBITDA performance targets set forth in the Five Year Plan, as amended, for such Fiscal Year, (ii) any Management -- Change, (iii) any Transfer by an MJD Principal in violation of this Agreement, --- which violation is not cured within 30 days after written notice to the Company from either Investor Stockholder describing in reasonable detail such violation and stating that failure to effect such cure within such time period will result in a "Board Event", (iv) the increase in the Investor Stockholders' percentage -- ownership of shares of Common Stock as a result of the cancellation of shares of Common Stock owned by MJD Partners with a Fair Market Value in excess of $5 million in accordance with Article XI of the Stock Purchase Agreement or the payment to the Investor Stockholders of an aggregate amount in excess of $5 million in accordance with Article XI of the Stock Purchase Agreement or any combination of the foregoing actions resulting in aggregate indemnity payments in excess of $5 million, (v) the aggregate investment in the Company and its - subsidiaries by the Investor Stockholders of at least $25 million (the calculation of such $25 million shall include the investments made by the Investor Stockholders on the Closing Date pursuant to the Stock Purchase Agreement), (vi) any default by the Company or any of its subsidiaries under any -- provision of any Financing Document, which default is not cured within 60 days after written notice to the Company from the Investor Stockholders describing in reasonable detail such default and stating that failure to effect such cure within such time period will result in a "Board Event" and (vii) the Transfer by --- MJD Partners of 25% or more of the shares of Common Stock owned by MJD Partners on the Closing Date. "Carousel Permitted Assignee": Carousel and any Affiliate of --------------------------- Carousel. 33 "Carrying Value": The price paid or fair market value of property -------------- contributed by a Stockholder for any share of Common Stock together with simple interest at a rate of 8% per annum from the date of the purchase of such share by such Stockholder through the date of the purchase by the Company less any distributions made to such Stockholder in respect of any such share (to the extent that the amount of such distributions do not exceed such simple interest), provided that the fair market value of any share of Common Stock -------- owned on the Closing Date shall be $342.51 on the Closing Date. "Cause": A termination of a Management Stockholder's employment by ----- the Company or any of its subsidiaries due to (i) the refusal or neglect of the - Management Stockholder to perform substantially his or her lawful employment- related duties, following written notice from the Company describing in reasonable detail such refusal or neglect and an opportunity for 30 days to cure the condition which is the subject of such notice, (ii) the Management -- Stockholder's personal dishonesty, willful misconduct or breach of fiduciary duty, (iii) the Management Stockholder's conviction of or entering a plea of --- guilty or nolo contendere to a crime constituting a felony or his or her willful ---- ---------- violation of any law, rule, or regulation (other than a traffic violation or similar offense or violation which in no way adversely affects the Company or its reputation or the ability of the Management Stockholder to perform his or her employment-related duties or to represent the Company) or (iv) the breach by -- the Management Stockholder of any written covenant or agreement with the Company or any of its subsidiaries not to disclose any material information pertaining to the Company or such subsidiary or not to compete or interfere with the Company or such subsidiary. "Closing Date": The date on which the closing under the Stock ------------ Purchase Agreement occurs. "Common Stock": The Company's Class A Voting common stock, par value ------------ $.01 per share. "Disability": The termination of the employment of any Management ---------- Stockholder by the Company or any of its subsidiaries shall be deemed to be by reason of a "Disability" if, as a result of such Management Stockholder's incapacity due to reasonably documented physical or mental illness, such Management Stockholder shall have been unable for more than six months within any 12-month period to perform his or her duties with the Company or such subsidiary on a full-time basis and within 90 days after written notice of termination has been given to such Management Stockholder, such Management Stockholder shall not have returned to the full time performance of his or her duties. The date of termination in the case of a termination 34 for "Disability" shall be deemed to be the last day of the aforementioned 90-day period. "Excluded Shares": Any shares of Common Stock issued or issuable (i) --------------- - in connection with an IPO or public offering of debt securities by the Company or (ii) to any employee of the Company or any of its subsidiaries in connection -- with the Stock Option Plan or any other employee incentive or bonus program duly authorized pursuant to this Agreement and by the Board. "50% Condition": As defined in Section 1.3(b). ------------- "Financial Advisory Agreements": The Financial Advisory Agreements, ----------------------------- each dated as of the date hereof, as the same shall be amended from time to time, between the Company and each of Carousel and Kelso and Company, L.P. "First Investment Period": The period commencing on the date hereof ----------------------- and ending 18 months thereafter. "Fiscal Year": A year beginning on January 1 of one calendar year and ----------- ending on December 31 of the same calendar year, or such other fiscal year as the Board may hereafter determine; provided, however, that the term "Fiscal -------- ------- Year" shall mean with respect to the Company's first period of operations the period commencing on the Closing Date and ending on December 31 of the same calendar year. "Founders": Bergstein, Bugger, Meyer Haberman, Johnson and Thomas. -------- "Good Reason": A termination of a Management Stockholder's employment ----------- with the Company or any of its subsidiaries shall be for "Good Reason" if such Management Stockholder voluntarily terminates his employment with the Company or any of its subsidiaries as a result of either of the following: (i) without the Management Stockholder's prior written consent, a significant reduction by the Company or such subsidiary of his or her current salary, other than any such reduction which is part of a general salary reduction or other concessionary arrangement affecting all employees or affecting the group of employees of which the Management Stockholder is a member (after receipt by the Company of written notice and a 20 day cure period), or a significant reduction in the level of authority theretofore exercised by the Management Stockholder, provided that the degree of -------- acquisition activity by the 35 Company and its subsidiaries shall not be taken into consideration when determining the Management Stockholder's level of authority; or (ii) the taking of any action by the Company or such subsidiary that would substantially diminish the aggregate value of the benefits provided him or her under the Company's or any of its subsidiaries' accident, disability, life insurance and any other employee benefit plans in which he or she was participating on the date of his or her execution of this Agreement, other than any such reduction which is (A) required by law, (B) - - implemented in connection with a general concessionary arrangement affecting all employees or affecting the group of employees of which the Management Stockholder is a member or (C) generally applicable to all - beneficiaries of such plans. "IPO": A Registration that covers (together with any prior effective --- Registrations) (i) 50% or more of the aggregate number of shares of Common Stock - then outstanding or (ii) shares of Common Stock that, after the closing of such -- Registration, will be traded on the New York Stock Exchange, the American Stock Exchange or the National Association of Securities Dealers Automated Quotation System. "Kelso Permitted Assignee": KIA V, KEP V, any Affiliate of KIA V, any ------------------------ Affiliate of KEP V, any KIA V Designee and any Affiliate of a KIA V Designee. "KIA V Designee": Any of the following individuals: Louis and -------------- Patricia Kelso Trust, John Rutledge, U. Bertram Ellis, Jr. and each of the members of the board of directors of Kelso & Companies, Inc. and any permitted transferee of any such person under their respective stockholders agreement with Kelso. "Management Agreement": The Management Services Agreement, dated as -------------------- of January 1, 1997, as amended and restated as of the Closing Date in the form attached hereto as Exhibit D, and as the same shall be further amended from time to time pursuant to the terms of this Agreement, by and between MJD Partners, Inc. and the Company. "Management Change": Failure for any reason of Johnson or Thomas to ----------------- devote a substantial amount of his respective time to the management and operation of the Company's and its subsidiaries' rural telephone business, unless within 60 days of such Person ceasing to devote such time to the management and operation of such business an individual has been designated to replace such Person by MJD Partners and such individual has been agreed to by the Investor Stockholders in their sole discretion. 36 "Permitted Assignee": Any Carousel Permitted Assignee, any Kelso ------------------ Permitted Assignee or any third party reasonably acceptable to the Investor Stockholder which has not arranged with such third party for the acquisition by it of shares of Common Stock. "Person": An individual, corporation, limited liability company, ------ partnership, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Registration": The closing of a public offering pursuant to an ------------ effective registration statement under the Securities Act of 1933, as amended, and the rules and regulations thereunder. "Registration Rights Agreement": The Registration Rights Agreement, ----------------------------- dated as of the date hereof, as the same shall be amended from time to time, among the Company, Carousel, KIA V, KEP V and MJD Partners. "Sale of the Company": Either (i) a sale by Carousel and/or Kelso of ------------------- - all of the shares of Common Stock owned by them to one or more third parties or (ii) a sale of all or substantially all of the Company's and its subsidiaries' -- assets. "Stock Option Plan": A stock option plan of the Company which, ----------------- subject to Section 10 and the approval by the Board or the Compensation Committee, (i) will cover up to 5% of the Company's capital stock and (ii) will - -- be established upon the recommendation of the chief executive officer. "Stock Purchase Agreement": The Stock Purchase Agreement, dated as of ------------------------ March 6, 1997, as the same shall be amended from time to time, among the Company, MJD Partners, Carousel, KIA V and KEP V. "Transfer (or any variation thereof used herein)": Any direct or ----------------------------------------------- indirect sale, assignment, mortgage, transfer, pledge, hypothecation or other disposal or any arrangement or agreement with respect to any of the foregoing. 17. Miscellaneous. 17.1. Recapitalizations, Exchanges, etc. ------------- ---------------------------------- Affecting the Common Stock. Except as otherwise provided herein, the provisions - -------------------------- of this Agreement shall apply to the full extent set forth herein with respect to (a) the shares of Common Stock and (b) any and all shares of capital stock of - - the Company or any successor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise) which may be issued in respect of, in exchange for, or in substitution for 37 the shares of Common Stock, by reason of any stock dividend, split, reverse split, combination, recapitalization, reclassification, merger, consolidation or otherwise. 17.2. Non-Competition Agreement. In order to induce the Investor ------------------------- Stockholders to enter into the Stock Purchase Agreement and this Agreement and in consideration of the contemplated purchase by the Company of each Management Stockholder's shares of Common Stock in accordance with Section 4, Eugene B. Johnson, Jack H. Thomas, John P. Duda and Walter E. Leach, Jr. agrees that from the date of the termination of his or her employment with the Company or any of its subsidiaries for any reason until the second anniversary of such termination, such Person will not become, directly or indirectly, associated in any way with any Person, whether as principal, owner, partner, consultant, advisor, agent, employee, director, independent contractor, member, stockholder or otherwise (other than a holder of less than 5% of the outstanding shares of any class of equity securities of a public company), that is actively engaged in the ownership, management or operation of any telephone company, other access provider or other Person, any of which competes or has any plans to compete with the Company or any of its subsidiaries in regard to the activities of the Company or any of its subsidiaries being conducted at the time of such termination or which are planned at the time of such termination. 17.3. No Third Party Beneficiaries. Except as otherwise provided ---------------------------- herein, this Agreement is not intended to confer upon any Person, except for the parties hereto, any rights or remedies hereunder. 17.4. Mechanics of Payment. If at any time the Company purchases any -------------------- shares of Common Stock pursuant to this Agreement, the Company may pay the purchase price determined under this Agreement for the shares of Common Stock it purchases by wire transfer of funds or company check in the amount of the purchase price, and upon receipt of payment of such purchase price or, pursuant to Section 7, any portion thereof, the seller shall deliver the certificates representing the number of shares of Common Stock being purchased in a form suitable for transfer, duly endorsed in blank, and free and clear of any lien, claim or encumbrance. Notwithstanding anything in this Agreement to the contrary, the Company shall not be required to make any payment for shares of Common Stock purchased hereunder until delivery to it of the certificates representing such shares or evidence or an affidavit, in either case in form and substance reasonably satisfactory to the Company of loss, theft or destruction of such certificates. If the Company is purchasing less than all the shares of Common Stock represented by a single certificate, the Company shall deliver to the seller a certificate for any unpurchased shares of Common Stock. 38 17.5. Further Assurances. Each party hereto or Person subject hereto ------------------ shall do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments and documents as any other party hereto or Person subject hereto may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 17.6. Amendment and Modification. This Agreement may be amended, -------------------------- modified or supplemented only by the written agreement of the Company, Carousel, Kelso and MJD Partners. Notwithstanding the foregoing, this Agreement may not be amended, modified or supplemented without the prior written consent of a majority in interest of the Management Stockholders (based on the number of shares of Common Stock owned by each Management Stockholder at the time of such amendment, modification or supplement) if such amendment, modification or supplement could reasonably be expected to adversely affect the Management Stockholders. 17.7. Governing Law. This Agreement and the rights and obligations ------------- of the parties hereunder and the persons subject hereto shall be governed by, and construed and interpreted in accordance with, the law of the State of Delaware, without giving effect to the choice of law principles thereof. 17.8. Invalidity of Provision. The invalidity or unenforceability of ----------------------- any provision of this Agreement in any jurisdiction shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. 17.9. Notices. All notices, requests, demands, letters, waivers and ------- other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered - personally, (b) mailed, certified or registered mail with postage prepaid, (c) - - sent by next-day or overnight mail or delivery or (d) sent by fax, as follows: - (i) If to the Company, to it at: MJD Communications, Inc. 521 East Morehead Street, Suite 250 Charlotte, North Carolina 28202 Attention: Mr. Eugene B. Johnson Phone: (704) 344-8150 Fax: (704) 344-8121 39 with a copy to: Carousel Capital Partners, L.P. 4201 Congress Street, Suite 440 Charlotte, North Carolina 28209 Attention: Mr. Nelson Schwab, III Mr. Reid G. Leggett Phone: (704) 643-3333 Fax: (704) 643-6403 Kelso & Company 320 Park Avenue, 24th Floor New York, New York 10022 Attention: James J. Connors, II, Esq. Phone: (212) 751-3939 Fax: (212) 223-2379 (ii) If to Carousel, to it at: Carousel Capital Partners, L.P. 4201 Congress Street, Suite 440 Charlotte, North Carolina 28209 Attention: Mr. Nelson Schwab, III Mr. Reid G. Leggett Phone: (704) 643-3333 Fax: (704) 643-6403 with a copy to: Kennedy Covington Lobdell & Hickman, L.L.P. NationsBank Corporate Center 100 North Tryon Street, Suite 4200 Charlotte, North Carolina 28202-4006 Attention: Stephen K. Rhyne, Esq. Phone: (704) 331-7400 Fax: (704) 331-7598 40 (iii) If to KIA V or KEP V, to it at: Kelso & Company 320 Park Avenue, 24th Floor New York, New York 10022 Attention: James J. Connors, II, Esq. Phone: (212) 751-3939 Fax: (212) 223-2379 with a copy to: Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attention: Richard D. Bohm, Esq. Phone: (212) 909-6226 Fax: (212) 909-6836 (iv) If to MJD Partners or MJD Inc., to it at: MJD Partners, L.P. 521 East Morehead Street, Suite 250 Charlotte, North Carolina 28202 Attention: Mr. Eugene B. Johnson Phone: (704) 344-8150 Fax: (704) 344-8121 with a copy to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue New York, New York 10022 Attention: Neil A. Torpey, Esq. Phone: (212) 318-6034 Fax: (212) 319-4090 41 (v) If to any of the MJD Principals, to him at: MJD Partners, L.P. 521 East Morehead Street, Suite 250 Charlotte, North Carolina 28202 Attention: Mr. Eugene B. Johnson Phone: (704) 344-8150 Fax: (704) 344-8121 with a copy to: Paul, Hastings, Janofsky & Walker LLP 399 Park Avenue New York, New York 10022 Attention: Neil A. Torpey, Esq. Phone: (212) 318-6034 Fax: (212) 319-4090 (vi) If to a Management Stockholder, to him or her, as listed below his or her name on the signature pages hereto. or to such other Person or address as any party shall specify by notice in writing to the Company and the other parties hereto. All such notices, requests, demands, letters, waivers and other communications shall be deemed to have been received (w) if by personal delivery on the day after such delivery, - (x) if by certified or registered mail, on the fifth business day after the - mailing thereof, (y) if by next-day or overnight mail or delivery, on the day - delivered or (z) if by fax, on the next day following the day on which such fax - was sent, provided that a copy is also sent by certified or registered mail. -------- 17.10. Headings; Execution in Counterparts. The headings and ----------------------------------- captions contained herein are for convenience and shall not control or affect the meaning or construction of any provision hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and which together shall constitute one and the same instrument. 17.11. Injunctive Relief. The shares of Common Stock cannot readily ----------------- be purchased or sold in the open market, and for that reason, among others, the parties hereto would be irreparably damaged in the event this Agreement is not specifically enforced. Each of the parties therefore agrees that in the event of a breach of any provision of this Agreement, the aggrieved party may elect to institute and prosecute 42 proceedings in any court of competent jurisdiction to enforce specific performance or to enjoin the continuing breach of this Agreement. Such remedies shall, however, be cumulative and not exclusive, and shall be in addition to any other remedy which any such party may have. 17.12. Entire Agreement. This Agreement, together with the Stock ---------------- Purchase Agreement and the Registration Rights Agreement, embodies the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, representations, warranties, covenants or undertakings relating to the shares of Common Stock, other than those expressly set forth or referred to herein or as set forth in the Stock Purchase Agreement or the Registration Rights Agreement. This Agreement supersedes all prior agreements and understandings among the parties with respect to such subject matter. 43 IN WITNESS WHEREOF, this Agreement has been signed by each of the parties hereto, effective as of the date first above written. MJD COMMUNICATIONS, INC. By: -------------------------------- Name: Title: CAROUSEL CAPITAL PARTNERS, L.P. By: Carousel Capital Company, L.L.C., its General Partner By: -------------------------------- Name: Title: KELSO INVESTMENT ASSOCIATES V, L.P. By: Kelso Partners V, L.P., its General Partner By: -------------------------------- Name: Title: KELSO EQUITY PARTNERS V, L.P. By: -------------------------------- Name: Title: 44 MJD PARTNERS, L.P. By: MJD Partners, Inc., its General Partner By: -------------------------------- Name: Title: MJD PARTNERS, INC. By: -------------------------------- Name: Title: BUGGER ASSOCIATES, INC. By: -------------------------------- Name: Title: ----------------------------------- Daniel G. Bergstein ----------------------------------- John P. Duda 6733 N. Baltusrol Lane Charlotte, NC 28210 ----------------------------------- Meyer Haberman 45 ----------------------------------- Lisa R. Hood P.O. Box 486 Bucklin, KS 67834 ----------------------------------- Eugene B. Johnson ----------------------------------- Walter E. Leach, Jr. 6419 Sharon Hills Road Charlotte, NC 28210 ----------------------------------- Peter G. Nixon P.O. Box 302 Westfield, NY 14787 ----------------------------------- Michael J. Stein 3016 Toalson Dodge City, KS 67801 ----------------------------------- Jack H. Thomas ----------------------------------- Joel Bergstein ----------------------------------- Michael Bergstein 46 ----------------------------------- Lindy Sobel Bergstein 47 TABLE OF CONTENTS Page 1. Restrictions on Transfer of Common Stock............................... 1 1.1. Restrictions on Transfers by Kelso........................... 1 1.2. Restrictions on Transfers by Carousel........................ 2 1.3. Restrictions on Transfers by MJD Partners and Bugger......... 2 1.4. Restrictions on Transfers by MJD Principals.................. 3 1.5. De Minimis Transfers......................................... 4 1.6. Restrictions on Transfers by Management Stockholders......... 4 1.7. Treatment of Certain Bergstein Family Members................ 5 2. Sales by MJD Partners to Third Parties................................. 5 2.1. General...................................................... 5 2.2. Right of First Refusal....................................... 6 2.3. Tag-Along Rights............................................. 8 3. Sales by Investor Stockholders to Third Parties........................ 8 3.1. General...................................................... 8 3.2. Right of First Offer......................................... 8 3.3. Tag-Along Rights............................................. 10 3.4. Drag-Along Rights............................................ 10 4. Management Stockholders................................................ 11 4.1. Sale by Management Stockholders to the Company............... 11 4.2. Notice to the Company........................................ 11 4.3. Right of the Company to Purchase............................. 11 4.4. Notice to Management Stockholders............................ 12 4.5. Payment...................................................... 12 4.6. Appraisal.................................................... 14 4.7. Fair Market Value............................................ 14 4.8. Notice to Stockholders....................................... 15 4.9. Acknowledgment of Status..................................... 15 5. Involuntary Transfers.................................................. 15 6. Auction Sale Procedure................................................... 16 6.1. General......................................................... 16 6.2. Retention of Investment Bank.................................... 16 6.3. Preparation of Confidential Memorandum.......................... 17 6.4. Auction Procedures.............................................. 17 6.5. Selection of Bid................................................ 17 6.6. Negotiation of Sale Agreement................................... 17 6.7. Information Regarding Auction................................... 18 6.8. Right of Remaining Stockholders to Bid.......................... 18 6.9. Cooperation..................................................... 18 7. Prohibited Purchases..................................................... 19 8. Issuance of Additional Shares of Common Stock............................ 20 8.1. Preemptive Rights of the Investor Stockholders and MJD Partners............................................................ 20 8.2. Investments made before the end of the First Investment Period.............................................................. 20 8.3. Investments made after the end of the First Investment Period.............................................................. 21 8.4. Participation by Carousel, Kelso and MJD Partners............... 21 8.5. New Investments................................................. 22 9. Election of Directors.................................................... 23 9.1. Initial Board Make-Up of the Company............................ 23 9.2. Board Make-Up of the Company following a Board Event............ 23 9.3. Five Year Plan and Annual Business Plan......................... 23 9.4. Records and Reports, etc........................................ 23 9.5. Board Meetings, Committees, etc................................. 25 9.6. Board Make-Up of the Company's Subsidiaries..................... 25 9.7. Irrevocable Proxy............................................... 25 10. Actions Requiring Approval of the Investor Stockholders................. 25 10.1. General........................................................ 25 10.2. After Additional Investments................................... 27 11. Exit Payments........................................................... 27 11.1. General........................................................ 27 11.2. Equitable Allocations.......................................... 28 11.3. Procedures for Payment; Characterization of Exit Payments; Tax Reporting...................................................... 28 11.4. Limitation..................................................... 29 11.5. Permitted Assignees............................................ 29 ii 12. Stock Certificate Legends............................................... 29 13. Absence of Other Arrangements........................................... 30 14. New Management Stockholders............................................. 31 15. Parties................................................................. 31 15.1. Assignment by the Company...................................... 31 15.2. Assignment Generally........................................... 31 15.3. Termination.................................................... 32 15.4. Agreements to Be Bound......................................... 32 16. Defined Terms........................................................... 33 17. Miscellaneous........................................................... 37 17.1. Recapitalizations, Exchanges, etc. Affecting the Common Stock.............................................................. 37 17.2. Non-Competition Agreement...................................... 38 17.3. No Third Party Beneficiaries................................... 38 17.4. Mechanics of Payment........................................... 38 17.5. Further Assurances............................................. 39 17.6. Amendment and Modification..................................... 39 17.7. Governing Law.................................................. 39 17.8. Invalidity of Provision........................................ 39 17.9. Notices........................................................ 39 17.10. Headings; Execution in Counterparts........................... 42 17.11. Injunctive Relief............................................. 42 17.12. Entire Agreement.............................................. 43 iii SCHEDULES Schedule A Management Stockholders EXHIBITS Exhibit A Investment Guidelines Exhibit B Five Year Plan Exhibit C Spousal Waiver Exhibit D Amended and Restated Management Agreement iv ================================================================================ STOCKHOLDERS' AGREEMENT OF MJD COMMUNICATIONS, INC. Dated as of July 31, 1997 ================================================================================ Schedule A Management Stockholders ----------------------- John P. Duda Lisa R. Hood Eugene B. Johnson Walter E. Leach, Jr. Peter G. Nixon Michael J. Stein Jack H. Thomas Exhibit A Investment Guidelines --------------------- 1. The proposed investment shall be an investment in a rural local exchange carrier. 2. The projected pre-tax internal rate of return for the proposed investment shall be 30% or more based on projections presented to and accepted by the Investor Stockholders. 3. The proposed investment shall be recommended by Johnson and Thomas. Exhibit B Five Year Plan -------------- See attached. Exhibit B Five Year Plan MJD - EXISTING PROPERTIES Financial Projections
As of Recap 7/1/97-12/31/97 1998 1999 ----------- --------------- ---- ---- Operating Revenues 20,902,164 44,119,699 45,852,920 Operating Expenses Cash Operating Expenses (management fee elim.) 9,838,927 20,205,319 20,773,048 Depreciation 3,916,230 8,035,373 8,127,624 ----------------------------------------------------------- Total Operating Expenses 13,755,157 28,240,692 28,900,672 ----------------------------------------------------------- Operating Income 7,147,008 15,879,007 16,952,248 ----------------------------------------------------------- Other Income and Expense Annual Monitoring Fee (Kelso/Carousel) (50,000) (100,000) (100,000) Amortization Expense (1,042,105) (2,084,207) (2,084,207) Other Non-Oper. Inc./Exp. 272,200 282,683 283,546 Interest and Dividend Income 479,424 798,734 820,725 Interest Expense (5,559,917) (10,797,358) (10,305,676) ----------------------------------------------------------- Total Other Income and Expense (5,900,398) (11,900,148) (11,385,612) ----------------------------------------------------------- Net Income Before Taxes 1,246,609 3,978,859 5,566,636 Income Tax (Expense) Benefit* 246,655 (1,994,260) (2,598,202) Net Income 1,493,264 1,984,599 2,968,435 =========================================================== Retained Earnings - Beginning of Period (28,794,796) (27,301,532) (25,316,933) Dividends Paid 0 0 0 ----------------------------------------------------------- Retained Earnings - End of Period (27,301,532) (25,316,933) (22,348,499) =========================================================== EBITDA 11,063,238 23,914,380 25,079,872 Growth in EBITDA 4.87%
2000 2001 2002 ---- ---- ---- Operating Revenues 47,667,506 49,520,763 51,403,345 Operating Expenses Cash Operating Expenses (management fee elim.) 21,350,846 21,949,142 22,548,161 Depreciation 8,223,472 8,325,070 8,432,275 ----------------------------------------------------- Total Operating Expenses 29,574,318 30,274,212 30,980,436 ----------------------------------------------------- Operating Income 18,093,188 19,246,551 20,422,909 ----------------------------------------------------- Other Income and Expense Annual Monitoring Fee (Kelso/Carousel) (100,000) (100,000) (100,000) Amortization Expense (2,084,207) (2,084,207) (1,955,212) Other Non-Oper. Inc./Exp. 284,434 285,346 286,284 Interest and Dividend Income 769,187 687,572 585,463 Interest Expense (9,701,990) (8,985,603) (7,940,254) ----------------------------------------------------- Total Other Income and Expense (10,832,577) (10,196,892) (9,123,719) ----------------------------------------------------- Net Income Before Taxes 7,260,611 9,049,659 11,299,190 Income Tax (Expense) Benefit* (3,245,738) (3,926,798) (4,741,678) Net Income 4,014,873 5,122,861 6,557,512 ===================================================== Retained Earnings - Beginning of Period (22,348,499) (18,333,626) (13,210,765) Dividends Paid 0 0 0 ----------------------------------------------------- Retained Earnings - End of Period (18,333,626) (13,210,765) (6,653,253) ===================================================== EBITDA 26,316,660 27,571,620 28,855,184 Growth in EBITDA 4.93% 4.77% 4.66%
* Year 1 Income Tax Expense includes the effect of the subordinated debt extinguishment. Includes all properties and subsidiaries of MJD Communications, Inc. and its subsidiaries through July 31, 1997 (including without limitation the acquisition of Chautauqua Erie Telephone Corporation) but not other pending acquisitions (including without limitation C-R Communications, Inc. and Taconic Telephone Corp.) Exhibit C Spousal Waiver -------------- _________________ [insert name of spouse] hereby waives and releases any and all equitable or legal claims and rights, actual, inchoate or contingent, which ___________ [insert he or she] may acquire with respect to the disposition, voting or control of the shares of Common Stock subject to the Stockholders' Agreement of MJD Communications, Inc., dated as of July 31, 1997, as the same shall be amended from time to time, except for rights in respect of the proceeds of any disposition of such Common Stock. ------------------------- [signature of spouse] EXHIBIT D AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT BETWEEN MJD COMMUNICATIONS, INC. AND MJD PARTNERS, INC. AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (the "Agreement"), --------- dated as of July 31, 1997, between MJD PARTNERS, INC. ("Partners"), a Delaware -------- corporation and general partner of MJD Partners, L.P., and MJD COMMUNICATIONS, INC. ("MJD"), a Delaware corporation. --- WHEREAS, MJD and Partners are party to a Management Services Agreement, dated as of January 1, 1997 (the "Original Management Services ---------------------------- Agreement"); - --------- WHEREAS, MJD requires certain management services, as further specified in this Agreement, in order that it may provide said services to its subsidiaries in order that such subsidiaries may provide telecommunications services which are safe, reasonable and adequate, at rates which are just and reasonable; WHEREAS, Partners has access to the necessary experienced personnel to provide the management services under this Agreement which MJD requires, and MJD desires that Partners provide such services pursuant to the terms of this Agreement; WHEREAS, the parties hereto desire to amend and restate the Original Management Agreement as herein provided; NOW, THEREFORE, in consideration of the mutual covenants and undertakings herein contained, MJD and Partners agree as follows: 1. Operation. MJD hereby appoints and engages Partners to provide --------- certain management services and Partners hereby agrees to be accessible to MJD and undertake management services, including, but not limited to, the following services ("Management Services"), for and on behalf of MJD and its subsidiaries, ------------------- to the extent requested by MJD, it being understood by the parties hereto that the services to be provided under this Agreement are primarily with regard to administrative, financing, strategic planning, merger and acquisition activity, tax planning and similar services, subject to the limitations set forth herein and in accordance with policies established by the Board of Directors of MJD (the "Board"): ----- (a) oversee, maintain and supervise the engineering and operations of MJD and its subsidiaries in accordance with usual and customary standards of efficient operation and maintenance; 2 (b) monitor payment of all expenses and capital expenditures arising from or in connection with the operation, maintenance or repair of MJD's and its subsidiaries' operations; (c) supervise the maintenance of proper records and books of account to insure full and true entries in accordance with good accounting practice and, in accordance with the applicable system of accounts, as prescribed by all applicable regulatory bodies, of all the dealings, business and affairs of MJD and its subsidiaries, which records and books of account shall be kept separate from the records and books of account of Partners. Both parties, through authorized representatives, shall at all times during reasonable business hours have access to and the right to inspect and make copies of any or all such books, records and accounts; (d) advise and assist MJD and its subsidiaries regarding corporate and financial structure and regarding obtaining financing for operations and long- term corporate strategies of MJD and its subsidiaries, including, but not limited to, securing Financing and negotiating and structuring the terms of such financing; (e) advise and assist MJD and its subsidiaries regarding human resources and benefits matters; 3 (f) advise and assist MJD and its subsidiaries regarding cost studies, settlement and administration; (g) develop and monitor comprehensive management systems for MJD and its subsidiaries; (h) maintain and monitor, on behalf of MJD and its subsidiaries, compliance with all federal, state and local governmental and regulatory regulations, including, but not limited to, preparation and filing of all materials with appropriate federal, state and local regulatory agencies and departments; and (i) perform the services herein specified, as well as any other management services incidental to the foregoing or any management services requested by MJD in a faithful, diligent and able manner and render such reports to the Board from time-to-time as such shall be called for by the Board. Partners shall not be liable for any loss or injury resulting directly or indirectly from Management Services rendered under this Agreement, except for any such loss or injury resulting from the gross negligence or willful misconduct of Partners. In performing its duties hereunder, Partners shall comply with all applicable laws and regulatory requirements now or 4 hereafter in force, and all franchises or other governmental authorizations now or hereafter granted with respect to MJD and its subsidiaries. 2. Payment. On or before the 14th day after the close of each month, ------- Partners shall bill MJD $75,000 as the cost for rendering Management Services for such month (the "Management Fee"). Such $75,000 payment shall be solely to -------------- compensate the stockholders of Partners for their time and effort expended in rendering Management Services. All reasonable travel expenses incurred by Jack H. Thomas ("Thomas") or Eugene B. Johnson ("Johnson") on behalf of Partners in ------ ------- providing Management Services shall be paid directly by MJD. 3. Division and Distribution of the Management Fee. Each of the ----------------------------------------------- stockholders of Partners shall be entitled, on an annual basis, to receive the following portion of the Management Fee: Thomas shall be entitled to an annual salary of $300,000, plus welfare benefits and perquisites comparable to those in effect on the date hereof; Johnson shall be entitled to an annual salary of $240,000, plus welfare benefits and perquisites comparable to those in effect on the date hereof; Bugger Associates, Inc. ("Bugger") shall be entitled to ------ $120,000 pursuant to the terms of the Consulting Agreement, dated as of July 31, 1997, between Bugger and Partners, substantially in the form attached hereto as Exhibit A; and Meyer Haberman ("Haberman") shall be entitled to $40,000. Bugger -------- and Haberman shall each be entitled to receive its portion of the Management Fee in any combination of the following: (i) benefits, including coverage under health, disability, retirement or life insurance plans 5 maintained by MJD or any of its subsidiaries, (ii) cash and (iii) other perquisites. Any remaining portion of the Management Fee shall be divided among the stockholders of Partners as agreed to by such stockholders. Any increase in the Management Fee above $900,000 per annum shall be paid or distributed to the stockholders of Partners as directed by the Board with the prior written consent of Kelso Investment Associates V, L.P. ("KIA V") and Carousel Capital Partners, ----- L.P. ("Carousel"). -------- 4. Independent Contractor. Partners is, and at all times shall be, ---------------------- an independent contractor and not a co-venturer, employee, representative or agent of MJD. Partners shall be liable for, and shall pay, all employment income and other taxes associated with the rendering of Management Services hereunder. Without limiting the effect of Section 17.2 of the Stockholders' Agreement, dated as of July 31, 1997, as the same shall be amended from time to time (the "Stockholders' Agreement"), among MJD, Carousel, KIA V, Kelso Equity Partners V, ----------------------- L.P., Partners, MJD Partners, Inc., Bugger, Daniel G. Bergstein, Haberman, Johnson, Thomas and the other stockholders of MJD, neither Partners nor the stockholders of Partners may, directly or indirectly, engage in other businesses or services which (a) directly compete with MJD and its subsidiaries or (b) involve the ownership (other than as a holder of not in excess of 2% of the outstanding voting shares of any publicly traded company), operation or management of local exchange carriers or related or competitive businesses; provided, however, that Bugger, Daniel G. Bergstein and Haberman may each engage - -------- ------- in any of the foregoing as long as Bugger, Daniel G. Bergstein or Haberman, as the case may be, has first provided MJD with a 6 reasonable opportunity to acquire such business or service and MJD has declined such opportunity. 5. Indemnity. MJD hereby agrees to indemnify and hold harmless --------- Partners against any and all losses, claims, damages or liability, including costs of defense and reasonable attorneys' fees, that arise as a result of the rendering of Management Services hereunder and shall reimburse Partners for any legal or other expenses reasonably incurred in connection with investigating or defending against any such loss, damage, liability or action, except for any such loss, claim, damage or liability resulting from the gross negligence or willful misconduct of Partners. MJD hereby agrees, as promptly as possible after receipt of written notice of the commencement of any action against it with respect to Management Services, to notify Partners in writing of the commencement of such action. 6. Amendment. This Agreement may only be amended in accordance with --------- Section 10.1 of the Stockholders' Agreement. 7. Assignment. Neither party shall have the right to assign this ---------- Agreement without the consent in writing of the other party. 8. Successors. This Agreement shall be binding upon the parties ---------- hereto, their legal representatives, successors and assigns. 7 9. Governing Law. It is understood and agreed that the construction ------------- and interpretation of this Agreement shall at all times and in all respects be governed by the laws of the State of North Carolina, without considering its laws or rules related to choice of law. 10. Severability. The provisions of this Agreement shall be deemed ------------ severable, and the invalidity or unenforceability of any one or more of the provisions hereof shall not affect the validity and enforceability of the other provisions hereof. 11. Term. This Agreement shall be effective on July 31, 1997, and ---- shall remain in force until January 1, 2002. Thereafter, the Agreement shall be automatically renewed on the same terms and conditions for successive one-year terms, provided that either party may terminate this Agreement on the expiration of the original term or any renewal term upon three months prior written notice to the other party. 8 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth above. MJD PARTNERS, INC. By: /s/ Eugene Johnson ------------------------- Name: Eugene Johnson Title: Senior VP MJD COMMUNICATIONS, INC. By: /s/ Eugene Johnson -------------------------- Name: Eugene Johnson Title: Senior VP 9 EXHIBIT A TO AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT* CONSULTING AGREEMENT This CONSULTING AGREEMENT (the "AGREEMENT") is made and entered into as of this 31st day of July, 1997 by and between MJD PARTNERS, INC., a Delaware corporation (the "COMPANY"), and BUGGER ASSOCIATES, INC., a Delaware corporation (the "CONSULTING COMPANY"). In consideration of the terms and conditions of this Agreement, the parties hereto agree as follows: 1. ENGAGEMENT. The Company agrees to retain the services of the ---------- Consulting Company as provided for in this Agreement, and the Consulting Company agrees to make available the services of Daniel G. Bergstein (the "CONSULTANT") for such purpose, on a non-exclusive basis upon the terms and conditions as set forth in this Agreement. 2. TERM OF AGREEMENT. The term of this Agreement shall commence as ----------------- of July 31, 1997, and shall continue in effect until July 30, 1998 (the "INITIAL TERM"), and shall automatically be extended for successive periods of one year each thereafter (each, a "RENEWAL PERIOD"), unless terminated pursuant to Section 6 hereof (the "TERM"); provided, however, that at the option of either -------- ------- the Company or the Consulting Company, the Term shall not be extended for a successive Renewal Period and this Agreement shall terminate at the expiration of the Initial Term or the then current Renewal Period, as applicable, upon written notice to the other party delivered no less than three (3) calendar months prior to such scheduled expiration. 3. DUTIES. The Consulting Company agrees to provide the services of ------ the Consultant for general consulting services and advice to the Company. The Consulting Company agrees to provide the services of the Consultant as reasonably requested from time to time by the Company. 4. COMPENSATION. The Company shall pay an annual consulting fee for ------------ the consulting services provided hereunder in the amount of $120,000 for the Initial Term and for each Renewal Period (the "ANNUAL CONSULTING FEE"), payable monthly in installments of $10,000 each. Subject to the provisions of Section 6, the monthly installments of the Annual Consulting Fee shall be paid on or before the 14th day after the close of each month. - ----------- * This document is Exhibit A to the Amended and Restated Management Services Agreement, which Amended and Restated Management Services Agreement is Exhibit D to Exhibit 10.10 to the Registration Statement. 5. EXPENSES. The Company agrees to pay for or reimburse the -------- Consulting Company for out-of-pocket business costs or expenses incurred by the Consultant in connection with the performance of his duties under this Agreement. It is anticipated that such expenses will not exceed $30,000 during the Initial Term or any Renewal Period; provided, further, that the Company -------- ------- shall not be obligated to reimburse the Consulting Company for any costs or expenses which cannot be deducted from the Company's income for purposes of calculating its U.S. income tax. Reimbursement for expenses shall be made only once each month within a reasonable time after the submission of an expense report by the Consulting Company or the Consultant to the Company, including appropriate vouchers and receipts evidencing expenses for which reimbursement is requested. 6. TERMINATION. ----------- This Agreement and the Term shall terminate automatically (i) on the last day of the month in which the Consultant dies; (ii) upon the termination of the Management Services Agreement dated as of July 31, 1997, by and between MJD Communications, Inc. and the Company; and (iii) in the event the Consultant shall not be able to perform his duties hereunder for a period of 12 consecutive months. 7. INDEMNIFICATION. The Company agrees to indemnify the Consulting --------------- Company and the Consultant for all liability resulting from acts or omissions of the Consulting Company or the Consultant related to this Agreement to the fullest extent permitted by law (including reasonable attorneys' fees and expenses), other than any liability resulting from the gross negligence or willful misconduct of the Consulting Company or the Consultant. Any payments to be made by the Company under this paragraph shall be made as the expenses are incurred. 8. GOVERNING LAW AND JURISDICTION. This Agreement shall be governed ------------------------------ by the substantive laws of the State of New York (without giving effect to its conflict of law rules). 9. ENTIRE AGREEMENT. The parties hereto acknowledge and agree that ---------------- this Agreement constitutes the complete agreement between them and that no oral modification of this Agreement is permissible. The parties hereto acknowledge and agree that in executing this Agreement they do not rely and have not relied on any representation or statement not contained in this Agreement. -2- 10. SAVINGS CLAUSE. In the event that any provision of this -------------- Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. -3- IN WITNESS WHEREOF, the parties hereto have signed this Agreement on the day and year written above. MJD PARTNERS, INC. By:________________________ Name: Title: BUGGER ASSOCIATES, INC. By:________________________ Name: Title EX-10.23 4 FORM OF PURCHASE AGREEMENT & SUBORDINATION AGREEMENT EXHIBIT 10.23 DRAFT FORM DATED 9/30/98 OF PURCHASE AGREEMENT AND SUBORDINATION AGREEMENT ---------------------------------------------- This Purchase Agreement and Subordination Agreement (this "Agreement") --------- made as of the ____ day of September, 1998 by MJD Communications, Inc., a Delaware corporation, ("MJD") and Bankers Trust Company, a New York banking --- corporation ("BT") -- W I T N E S S E T H = = = = = = = = = = WHEREAS, BT has made a loan (the "Bergstein Loan") to Daniel G. -------------- Bergstein ("Bergstein") in the principal amount of up to $2,000,000 pursuant to --------- four (4) separate Time Promissory Notes each dated as of the date hereof and each evidencing the principal amount of $500,000 (as same may be amended or extended, the "Bergstein Notes"); and --------------- WHEREAS, BT has also made a loan (the "Haberman Loan"; the Bergstein ------------- Loan and the Haberman Loan herein, collectively, the "Loans") to Meyer Haberman ----- ("Haberman"; Bergstein, Haberman and JED (hereinafter defined) herein, -------- collectively, the "Obligors") in the aggregate principal amount of up to -------- $1,000,000 pursuant to two (2) separate Time Promissory Notes each dated as of the date hereof and each evidencing the principal amount of $500,000 (as same may be amended or extended, the "Haberman Notes"; the Bergstein Notes and the -------------- Haberman Notes herein, collectively, the "Notes"); and ----- WHEREAS, the collateral pledged to BT as security for the Bergstein Loan pursuant to four (4) separate Pledge Agreements dated as of the date hereof made by JED Communications Associates, Inc. ("JED") to BT (as same may be --- amended, the "Bergstein Pledge Agreements") consists of shares of stock in MJD, --------------------------- and the collateral pledged to BT as security for the Haberman Loan pursuant to two (2) separate Pledge Agreements dated as of the date hereof made by Haberman to BT (as same may be amended, the "Haberman Pledge Agreements"; the Bergstein -------------------------- Pledge Agreements and the Haberman Pledge Agreements herein, collectively, the "Pledge Agreements") consists of shares of stock in MJD (all shares of stock of - ------------------ MJD pledged to BT pursuant to the Pledge Agreements is herein referred to as the "MJD Stock", and together with any other collateral which may be pledged by --------- Obligors as security for the Loans, the "Collateral"); and ---------- WHEREAS, MJD desires to have the rights granted pursuant hereto with respect to the MJD Stock in the event of foreclosure by BT thereon and BT desires to assure some liquidity of the MJD Stock in the event of such a foreclosure, NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, MJD hereby covenants and agrees with BT as follows: 1. (a) BT and MJD agree that, subject to the terms and conditions hereof, BT, prior to foreclosure on MJD Stock after the occurrence of an Event of Default under any Note (as defined in such Note), shall, and shall be obligated to, sell and assign to MJD (without recourse, warranty or representation, express or implied, except for such warranties and representations as are expressly contained in this Agreement) and MJD, on the date and as otherwise hereinafter provided, shall, and shall be obligated to, purchase BT's right, title and interest in such Note or Notes, the Pledge Agreement or Pledge Agreements related thereto, the Collateral pledged under such Pledge Agreement or Pledge Agreements and all other instruments and documents, if any, relating, thereto (collectively, the "Purchase Documents"). ------------------ The purchase of the Purchase Documents shall occur on the date specified in a written notice from BT to MJD (the "Purchase Notice") which date shall be no --------------- earlier than thirty (30) days after the date of the Purchase Notice (such date, the "Purchase Date"). If, prior to the Purchase Date, the Note or Notes to be ------------- sold to MJD are "indefeasibly paid" (hereinafter defined) in full, the obligation to purchase the Purchase Documents relating thereto shall cease and terminate and neither party shall have any further rights or obligations hereunder with respect to such Note or Notes but each party's rights and obligations with respect to any other unpaid Notes shall remain in effect until this Agreement shall terminate as provided in Paragraph 14 hereof. In no event shall BT be under any obligation to sell any Purchase Documents to MJD if MJD shall fail to purchase such Purchase Documents on the Purchase Date in accordance herewith nor shall BT have any obligation thereafter to sell any other Note (and related Purchase Documents and Collateral) to MJD in the event of any such default by MJD. The foregoing provisions of this Paragraph 1(a) shall be applicable upon each and every occurrence prior to BT's foreclosure on MJD Stock as a result of an Event of Default under any Note. The terms "indefeasibly paid" as used in this Paragraph 1(a) and "indefeasible repayment" as used in Paragraph 14 mean that one (1) year has elapsed after such payment with no intervening bankruptcy or like proceeding having occurred with respect to the Obligor making such payment. (b) The purchase price ("Purchase Price") for any Purchase Documents -------------- shall be the lesser of (A) (i) one hundred percent (100%) of the then outstanding principal amount of the Note or Notes to be sold to MJD plus (ii) ---- accrued and unpaid interest payable in respect thereof to the date on which the Purchase Price is paid to BT as provided in subparagraph (d) hereof plus (iii) ---- all other obligations which are then owing to BT with respect to the Purchase Documents related thereto or (B) an aggregate of $2,000,000 in the case of the Bergstein Loan and all Purchase Documents related thereto, plus an aggregate of $1,000,000, in the case of the Haberman Loan and all Purchase Documents related thereto. (c) Anything herein to the contrary notwithstanding in no event shall MJD be obligated to pay more than an aggregate of $1,000,000 on account of the Purchase Price for Purchase Documents or, as provided in clause (g) below, the MJD Stock in any calendar year, it being understood and agreed that BT shall have the continuing right (and, prior to foreclosing on any MJD Stock, the obligation) at the beginning of any subsequent calendar year to require MJD to purchase any Note or Notes (and the related Purchase Documents) under which an Event of Default has occurred and is continuing or, as provided in clause (g) below, the MJD Stock subject to the foregoing $1,000,000 limitation for each such subsequent calendar year and the other terms and provisions hereof. BT shall have the sole right to select which of the Notes or, as provided in clause (g) below, the MJD Stock to sell to MJD in the event there is an Event of Default under Notes having an aggregate Purchase Price in excess of $1,000,000 in any one 2 calendar year. If BT shall continue to hold any of the Notes at the same time that MJD is also holding a Note, then the provisions of Paragraph 8 below shall be applicable. At such time as MJD is no longer restricted from purchasing Purchase Documents or MJD Stock, as the case may be, having an aggregate Purchase Price exceeding $1,000,000 (as such restriction is more fully described in Paragraph 13(f) hereof), then this Paragraph 1(c) shall no longer be of any force or effect. (d) Payment of any Purchase Price shall be made on the Purchase Date, in immediately available funds at BT's office at 280 Park Avenue, New York, New York 10017, Attention: The Private Bank. (e) Upon payment of the Purchase Price for Purchase Documents, BT will sell and assign to MJD, all of BT's right, title and interest in and to such Purchase Documents (including the Collateral related thereto) and BT will deliver to MJD the original of the applicable Note or Notes to be sold (or, if necessary, an Affidavit of Lost Note reasonably acceptable to MJD) and originals or certified copies of such other Purchase Documents relating thereto then in BT's possession. Notwithstanding anything to the contrary in this Agreement, the obligation of MJD to purchase the Purchase Documents or, as provided in clause (g) below, the MJD Stock shall be conditioned upon delivery to MJD of not fewer than (x) 5840 shares of MJD Stock issued to JED in the event MJD purchases all of the Bergstein Notes and related Purchase Documents (or a pro rata share --- ---- thereof if MJD purchases less than all of the Bergstein Notes) and (y) 2920 shares of MJD Stock issued to Haberman in the event MJD purchases both of the Haberman Notes and related Purchase Documents (or 1460 shares thereof if MJD purchases only one of the Haberman Notes), together with, in any case, the blank stock power or powers for the MJD Stock being delivered to MJD executed by the applicable Obligor at the time of the making of the applicable Loan. Any sale and assignment of Purchase Documents shall be pursuant to an endorsement of the applicable Note or Notes, an assignment of the applicable Pledge Agreement or Pledge Agreements and any other related Purchase Document then in effect (if any) and delivery of such MJD Stock and blank stock powers as and to the extent set forth above together with such other Collateral as may then be in BT's possession which secures the Note or Notes being sold to MJD. The sale and assignment of any Purchase Documents shall be without any recourse, representation or warranty expressed or implied by BT, except that BT shall represent and warrant the unpaid principal amount evidenced by the applicable Note or Notes, and that it has not sold or assigned or encumbered the related Purchase Documents (including the MJD Stock being delivered and other Collateral, if any), or any interest therein. (f) Except as set forth in Paragraph 1(e), BT shall make no representations or warranties, express or implied, to MJD. In no event shall BT have any responsibility in respect of the genuineness, validity or enforceability of the Purchase Documents or any of the instruments or documents referred to therein or herein, or any obligation to make any inquiry in respect of any thereof, as to all of which MJD shall have satisfied itself. MJD has reviewed the Purchase Documents which consist, as of the date hereof, of the Notes, the Pledge Agreements, the MJD Stock and blank stock powers. (g) (A) At MJD's option to be exercised by written notice to BT no later than ten (10) days after the date of any Purchase Notice, MJD may elect not to purchase the Purchase Documents which it is otherwise obligated to purchase but instead elect to purchase the 3 MJD Stock securing such Purchase Documents in which event BT agrees, subject to clause (g)(C) below, to exercise BT's remedies under such Purchase Documents to foreclose on the MJD Stock delivered to secure such Purchase Documents subject to the following conditions: (i) BT shall have, and at all times during any such foreclosure shall continue to have, the right to exercise its remedies under such Purchase Documents and applicable law; (ii) MJD shall pay all costs and expenses incurred by BT in connection with any such foreclosure and exercise by BT of its remedies under the Purchase Documents and indemnify and hold BT harmless from and against any loss, liability, cost, damage or claim arising by reason of the exercise of such remedies unless due to BT's gross negligence or willful misconduct; and (iii) without limiting clause (ii) above, any interest on the Note or Notes then being foreclosed at the rate in effect prior to a default thereunder which is not paid to BT (or if paid on other than the scheduled payment date under the Note or Notes, interest on such interest (to the extent permitted by law) at such rate until the date of payment) shall be paid by MJD to BT except that MJD shall not be obligated to pay any interest accruing from the date of the Purchase Notice to the date which is thirty (30) days thereafter. (B) At any foreclosure sale BT agrees to "bid in" the amount of the principal, interest and other amounts owed to it under the Note or Notes and related Purchase Documents being foreclosed. If BT shall be the successful bidder at any such foreclosure sale, BT agrees to sell its interest in the MJD Stock so foreclosed upon to MJD (without any representation or recourse whatsoever, express or implied) for the Purchase Price applicable to such Purchase Documents and related MJD Stock plus such additional amounts for which MJD is obligated to pay pursuant to clauses (ii) and (iii) above. The limitation set forth in Paragraph 1(c) shall be applicable to the Purchase Price (but not the amounts owed under clause (ii) and (iii)) which MJD is obligated to pay under this Paragraph 1(g). BT shall have the sole right to select which Note or Notes and related Purchase Documents are to be foreclosed upon in the event there is an Event of Default under Notes having an aggregate Purchase Price in excess of $1,000,000 and shall also have the sole right to direct and control the foreclosure proceeding and other remedial action but BT agrees to act in a commercially reasonable manner with respect thereto. In any event and regardless of whether MJD shall have the right to require BT to exercise its remedies as set forth in this Paragraph 1(g), BT shall give notice to MJD of any foreclosure on MJD Stock at the same time that BT is required to give such notice to the applicable Obligor. If MJD shall default in its obligations under this Paragraph 1(g), then the rights of MJD under this Paragraph 1(g) shall no longer be applicable. MJD hereby releases BT from any claim, loss, cost or damage, including any right to purchase the affected Note or Notes, Purchase Documents and related Collateral thereunder, if (A) BT is not the successful bidder at any such foreclosure sale, and (B) as a result of any of the conditions, limitations, circumstances or events set forth in Paragraphs 1(f), 2, 3 or 4 hereof, BT fails or is unable to foreclose on any MJD Stock. (C) In lieu of foreclosing on MJD Stock Purchase as set forth above in clause (B) of this Paragraph 1(g), BT shall have the right in its sole and absolute discretion to require the applicable Obligor to sell such MJD Stock to MJD at a per share price of $342.50, the proceeds 4 of which shall be applied, and accepted, as payment in full in respect of the principal and interest due under the applicable Note or Notes secured by such MJD Stock. The Obligors so agree to sell and MJD so agrees to buy such MJD Stock. At the time of receipt of such payment by BT, BT shall release its lien on the MJD Stock so sold. BT agrees to exercise this right by written notice to MJD and the applicable Obligor within thirty (30) days after BT's receipt of the notice from MJD referred to in the first sentence of this Paragraph 1(g). (h) The obligations of MJD under this Paragraph 1 are herein called the "Obligations". ----------- 2. No irregularity, invalidity or unenforceability of all or any part of any Purchase Document or any of the other instruments or documents referred to therein or herein shall affect, impair or be a defense to MJD's Obligations hereunder. Except as otherwise provided in this Agreement, MJD's Obligations shall be absolute and unconditional, without regard (i) to the regularity, validity or unenforceability of any Purchase Document, or the instruments or documents referred to therein or herein or any other circumstance, similar or dissimilar, including, without limitation, liens, charges, encumbrances, taxes, assessments, agreements, violations of law, or similar or dissimilar circumstances affecting any Purchase Document or any Collateral; (ii) to the existence or good standing or priority of any lien or security interest securing any Note, any failure or defect in recording any such lien or security interest or any assignment of lien or security interest or perfecting such lien or security interest; (iii) to any default by any Obligor under any Purchase Document, this Agreement or any of the instruments or documents referred to herein or therein, or any insolvency event related to or the disaffirmance of any of such person's or entity's obligations in connection therewith, or any failure by BT to enforce or require compliance with the obligations of any Obligor or any other person under any Purchase Document or any of the instruments or documents referred to herein or therein, or any failure by BT to take any action permitted or required to be taken by it under any Purchase Document, or any setoff, counterclaim, deduction or other right which, for any reason whatsoever, MJD or any other person may have against BT, or any act or circumstance that may constitute failure of consideration, commercial frustration of purpose or impossibility of performance of this Agreement or any other circumstance or cause whatsoever. 3. MJD hereby consents that from time to time, before or after any default by any Obligor, with or without notice to or assent from MJD: (a) any security (including the Collateral) at any time held by or available to BT for any obligation of any Obligor under the Purchase Documents, or any security at any time held by or available to BT for any obligation of any other person or party primarily, secondarily or otherwise liable for all or any portion of the indebtedness evidenced by any Note and/or any other obligations of any Obligor or any other person or party, other than BT, under any of the Purchase Documents, may be accelerated, settled, exchanged, surrendered or released and BT may fail to set off and may release, in whole or in part, any balance of any deposit account or credit on its books in favor of any Obligor, or of any such other person or party; (b) any obligation of the Obligors under the Purchase Documents, or of any such other person or party, may be changed, altered, renewed, extended, continued, 5 accelerated, surrendered, compromised, settled, waived or released in whole or in part, or any default with respect thereto waived; and (c) BT may extend further credit in any manner whatsoever to the Obligors, and generally deal with the Obligors or any of the above-mentioned security (including the Collateral), deposit account, credit on its books or the Obligors as BT may see fit; and MJD shall remain bound in all respects under this Agreement, without any loss of any rights by BT and without affecting the Obligations, notwithstanding any such exchange, surrender, release, change, alteration, renewal, extension, continuance, compromise, waiver, inaction, extension of further credit or other dealing. Notwithstanding anything herein to the contrary, BT shall not, without the prior written consent of MJD, agree to any waiver or amendment of the Purchase Documents that would (i) reduce the interest rate payable with respect to the Notes, or (ii) release shares of the MJD Stock below the amount required to be delivered by BT to MJD pursuant to Paragraph 1(e) hereof or (iii) extend the maturity date set forth in any of the Notes for final repayment thereof. 4. MJD confirms that its decision to enter into this Agreement is based on its own investigation and judgment with respect to (i) the creditworthiness of the Obligors and any other person or entity, (ii) the economic value of the Collateral, (iii) the value, extent and adequacy of the Collateral, (iv) the adequacy and enforceability of the Purchase Documents, (v) the desirability of purchasing the Purchase Documents, and (vi) all other aspects of the transaction contemplated under the Purchase Documents and hereunder. MJD agrees and confirms that the Obligations shall be and are irrevocable and unconditional and there are no conditions which must be satisfied, or documents which must be executed or delivered prior to MJD's obligation to purchase any Purchase Documents as provided herein, except as otherwise provided in this Agreement. 5. MJD acknowledges and confirms to BT that MJD has not been induced to execute and deliver this Agreement as a result of, and is not relying upon, any representations, warranties, agreements or conditions, whether express or implied or written or oral, by BT, or any other person or entity. Without limiting the generality of the foregoing or any other provisions of this Agreement, insofar as MJD is concerned: (a) BT is not obligated to give or to continue any financial accommodations to the Obligors or any other person or entity or to change or extend the time of payment of, or renew or alter, any liability of the Obligors or any other person or entity, any security therefor or any liability incurred directly or indirectly in respect thereof; (b) no person or entity, including, without limitation, BT, has made any representations to MJD as to any matter which may affect or in any way relate to the financial condition, relationships or transactions of the Obligors or any other person, including, without limitation, the business, assets liabilities, type or value of any security therefor, financial condition, management or control of the Obligors or any other person or entity; (c) BT is not obligated to notify MJD or any other person or entity of any change in the business, assets, liabilities, type or value of any security therefor, financial 6 condition, management or control the Obligors of any other person or entity, and none of such changes shall release or otherwise impair any of the rights of BT against MJD; (d) no failure by BT to obtain, perfect, protect, insure or realize upon any security for any of the liabilities of the Obligors or of any other person or entity and no other act or failure to act by BT shall release or otherwise impair any of the obligations of MJD hereunder. 6. MJD shall reimburse and save BT harmless against liability for the payment of all costs and expenses arising in connection with the enforcement of or preservation of any of BT's rights under this Agreement, including, without limitation, the reasonable fees and expenses of BT's counsel. 7. MJD hereby waives notice of acceptance of this Agreement and of the making of the Loan or any advance thereof by BT to any Obligor and any demand under this Agreement, except as specifically provided herein. MJD further waives any right to require that any action be brought against any Obligor or any other person or party or to require that resort be had to any security, Collateral or to any balance of any deposit account or credit on the books of BT in favor of either Obligor or any other person or party prior to a demand of MJD hereunder. 8. (a) So long as BT shall continue to hold any Note while MJD shall also hold any Note (any such Note, the Purchase Documents related thereto and the portion of the Loans, all interest thereon and all other amounts owed in connection therewith which are held by MJD, the "Subordinate Loan"), each ---------------- Obligor and MJD hereby agree that the Subordinate Loan and all terms and provisions thereof and the rights of MJD to the Collateral securing the Subordinate Loan (the "Subordinate Collateral") are expressly subordinate and ---------------------- junior in right of payment (as defined in clause (b) below) to the Loans and to the terms and provisions thereof and the rights of BT to the Collateral. (b) "Subordinate and junior in right of payment" shall mean that: (i) MJD shall not, without the express prior written consent of BT in each instance which may be given or withheld in the sole discretion of BT, take, demand or receive from any Obligor, and, anything in any document or instrument evidencing, or agreement with respect to, the Subordinate Loan to the contrary notwithstanding, no Obligor will make, give or permit, directly or indirectly, by set-off, redemption, purchase or in any other manner, any payment, prepayment or security for the whole or any part of the Subordinate Loan (including, without limitation, the scheduled repayments set forth in Section 2.3 of each Note), unless and until this Agreement shall terminate as provided in Paragraph 14 hereof; and (ii) MJD shall not enforce or take any action to enforce or collect the Subordinate Loan or make any claim whatsoever against the Subordinate Collateral or any portion thereof, accelerate the scheduled maturities of any amount owing under the Subordinate Loan and/or enforce any lien or security interest securing the Subordinate Loan, and/or exercise any of its claims, rights, remedies or powers, for payment of money or otherwise with respect to the Subordinate Loan and/or exercise any other right or remedy MJD may have, without the prior written consent of BT in each instance which may be given or withheld in the sole discretion of BT. 7 (c) In furtherance of the foregoing subordination, MJD hereby assigns to BT all payments of principal, interest, fees, expenses and other amounts ("Proceeds") that may become due and payable to MJD in respect of the -------- Subordinate Loan or the Subordinate Collateral. In the event that any Proceeds are made payable to MJD in violation of clauses (a) and (b) above despite such direction, MJD hereby irrevocably appoints BT as its attorney-in-fact to endorse the name of MJD on any check or other instrument representing Proceeds that may be payable to MJD. (d) MJD will not, without the prior written consent of BT in each instance, which may be given or withheld in the sole discretion of BT, transfer, sell or assign the Subordinate Loan or any interest therein, whether absolutely or as collateral security. (e) MJD hereby covenants that it will not commence, or join with any other creditor in commencing, any bankruptcy, reorganization, readjustment of debt or any dissolution, receivership, liquidation or insolvency proceedings with respect to any Obligor prior to payment in full of the applicable Loan. In the event of any dissolution, winding up, liquidation, readjustment, reorganization or other similar proceedings relating to any Obligor or to their property (whether voluntary or involuntary, partial or complete, and whether in bankruptcy, insolvency or receivership, or upon an assignment for the benefit of creditors, or any other marshalling of the assets and liabilities of any Obligor, or any sale of all or substantially all of the assets of any Obligor, or otherwise), (x) the Loan shall first be paid in full before MJD shall be entitled to receive or retain any payment or distribution in respect of the Subordinate Loan of any kind or character, whether in cash, property or securities and (y) MJD authorizes BT in the name of MJD or otherwise, to demand, sue for, collect, receive and give receipt for any and all payments or distributions of any kind or character, whether in cash, property or securities, in respect of the Subordinate Loan to which MJD would be entitled if the Subordinate Loan were not subordinated pursuant to this Agreement, and file all claims, proofs of debt, petitions and other documents in the form required in such statutory or nonstatutory proceedings for the full outstanding amount of the Subordinate Loan and prove, and vote or consent in any such proceedings with respect to, any and all such claims of MJD relating to the Subordinate Loan as BT may deem advisable. Under the circumstances set forth in this Paragraph, MJD agrees duly and promptly to take such action as may be requested at any time and from time to time by BT, to file appropriate proofs of claim in respect of the Subordinate Loan, and to execute and deliver such powers of attorney, assignments or proofs of claim or other instruments as may be requested by BT, in order to enable BT to enforce any and all claims upon or in respect of the Subordinate Loan and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or in respect of the Subordinate Loan. 9. Each reference herein to BT shall be deemed to include its successors and assigns, who shall be bound by and in whose favor the provisions of this Agreement shall also inure. Each reference herein to MJD shall be deemed to include the successors and assigns of MJD, each of whom shall be bound by and in whose favor the provisions of this Agreement shall also inure, provided, however, that MJD shall in no event nor under any circumstance have the right, without obtaining the prior written consent of BT, to assign or transfer MJD's obligations and liabilities under this Agreement, in whole or in part, to any other person, party or entity. Without limiting the foregoing, the agreements and obligations on the part of MJD herein contained shall remain in force and application notwithstanding the merger, consolidation, 8 reorganization or absorption thereof, and the term "MJD" shall include such new entity, but the old entity shall not thereby be released from any obligations or liabilities hereunder. 10. No delay on the part of BT in exercising any right or remedy under this Agreement or failure to exercise the same shall operate as a waiver in whole or in part of any such right or remedy. No notice to or demand on MJD shall be deemed to be a waiver of the obligations of MJD or of the right of BT to take further action without notice or demand as provided in this Agreement. No course of dealing between MJD and BT shall change, modify or discharge, in whole or in part, this Agreement or any obligations of MJD hereunder. 11. This Agreement may only be modified, amended, changed or terminated by an agreement in writing signed by the party to be charged therewith. No waiver of any term, covenant or provision of this Agreement shall be effective unless given in writing by the party entitled to the benefit of such term, covenant or provision and if so given shall only be effective in the specific instance in which given. 12. This Agreement sets forth the entire agreement and understanding of BT and MJD with respect to the matters covered by this Agreement and MJD and BT acknowledge that no oral or other agreements, understandings, representations or warranties exist with respect to this Agreement or with respect to the obligations of MJD or BT under this Agreement, except those specifically set forth in this Agreement. 13. (a) Each of MJD and BT represents and warrants to the other (as applicable) that: (i) this Agreement constitutes the legal, valid and biding obligation of MJD or BT, as the case may be, enforceable against such party in accordance with its terms except as such enforcement may be limited by bankruptcy, insolvency or other similar laws and subject to general principles of equity; (ii) MJD is duly organized, validly existing and in good standing as a corporation under the law of the State of Delaware; (iii) BT is duly organized, validly existing and in good standing as a corporation under the laws of the State of New York; (iv) neither the execution or delivery of this Agreement nor the consummation by MJD or BT, as the case may be, of the transactions contemplated hereby nor compliance with the terms and provisions hereof by such party will violate, contravene or cause a default under its constituent documents or any applicable provision of law or any applicable regulation or other manifestation of governmental action or any agreement or document to which such party may be bound; (v) all necessary approvals, consents, licenses, registrations and validations of any governmental regulatory body, including, without limitation, approvals required to permit MJD or BT, as the case may be, to execute and carry out the provisions of this Agreement, for the validity of the obligations of such party hereunder and for the making of any 9 payment or remittance of any funds required to be made by such party under this Agreement, have been obtained and are in full force and effect; (vi) MJD represents and warrants to BT that pursuant to a loan agreement to which it is subject, MJD is, and pursuant to an indenture to which it is subject MJD may be, required to limit its aggregate Purchase Price for MJD Stock in any calendar year to $1,000,000 and MJD shall promptly advise BT at such time as MJD is no longer so restricted; and (vii) MJD and each Obligor represents and warrants to BT that there is no restriction or limitation on the assignment of the MJD Stock to BT pursuant to the Pledge Agreements, or to any foreclosure thereon or subsequent sale thereof, which has not been waived arising by reason of the constituent documents of MJD or any agreement to which MJD or any Obligor is a party (including under the stockholders' agreement among, inter alia, the parties) or ----- ---- to which any of such parties is bound or to which any of such parties otherwise has knowledge and, in confirmation thereof, MJD hereby irrevocably waives any right of first refusal, right of first offer or other rights it may have under the stockholder' agreement referred to above. (b) MJD and the Obligors agree that: (i) Upon notice to MJD that an Event of Default has occurred under any Note that BT shall be entitled to exercise the voting and other rights of the applicable Obligor with respect to the MJD Stock securing such Note as and to the extent set forth in 5(a) of the Pledge Agreements; (ii) All dividends, distributions and other payments on the MJD Stock, and copies of all notices, communications and other information with respect to the MJD Stock otherwise forwarded to the record holder thereof shall also be forwarded to BT at: Bankers Trust Company One Bankers Trust Plaza, 14/th/ Floor Loan Center Mail Stop 2144 New York, New York 10006 Attn: Errol Harris, Vice President 14. So long as BT has made no demand on MJD hereunder at such time, this Agreement and MJD's Obligations shall terminate six (6) months after the final, indefeasible repayment of all Loans and other amounts owed to BT in connection therewith and the termination of any right of any Obligor to borrow under their respective Notes. In the event any Loan is not paid when due, BT agrees to use commercially reasonable efforts to obtain such payment so long as MJD is not in default of its obligations hereunder. 15. Any notice, request or demand given or made under this Agreement shall be in writing and shall be hand delivered or sent by Federal Express or other reputable courier service or by postage prepaid registered or certified mail, return receipt requested or by facsimile, and shall be deemed given (a) when received at the following addresses if hand delivered or if sent by Federal Express or other reputable courier service, and (b) three (3) business days after being 10 postmarked and addressed as follows if sent by registered or certified mail, return receipt requested and (c) when sent if by facsimile at the number set forth below: If to BT: Bankers Trust Company 280 Park Avenue, 6 West New York, New York 10017 Attn: The Private Bank Ned Kane, Principal Fax No. (212) 454-4740 If to MJD: MJD Communications Inc. 521 E. Morehead Street, Suite 250 Charlotte, NC 28202 Attn: Walter E. Leach, Jr. Fax No. (704) 344-8121 With a copy of any demand for payment or notice of default to: Paul, Hastings, Janofsky & Walker LLP 319 Park Avenue New York, New York 10022 Attn: Neil A. Torpey, Esq. Fax No. (212) 319-4090 Each party to this Agreement may designate a change of address by notice given, as herein provided, to the other party fifteen (15) days prior to the date such change of address is to become effective. 16. THIS AGREEMENT IS, AND SHALL BE DEEMED TO BE, A CONTRACT ENTERED INTO UNDER AND PURSUANT TO THE LAWS OF THE STATE OF NEW YORK AND SHALL BE IN ALL RESPECTS GOVERNED, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. 17. Each party hereto agrees to submit to personal jurisdiction in the State of New York in any action or proceeding arising out of this Agreement. In furtherance of such agreement, each party hereto agrees and consents that without limiting other methods of obtaining jurisdiction, personal jurisdiction over such party in any such action or proceeding may be obtained within or without the jurisdiction of any court located in New York and that any process or notice of motion or other application to any such court in connection with any such action or proceeding may be served upon such party by registered or certified mail to, or by 11 personal service at, the last known address of such party, whether such address be within or without the jurisdiction of any such court. 18. MJD acknowledges that this Agreement and the Obligations are and shall at all times continue to be absolute, irrevocable and unconditional in all respects except as otherwise specifically provided herein, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to this Agreement, the Obligations or the obligations of any other person or party relating to this Agreement or with respect to the indebtedness evidenced by any Note, including, but not limited to, a foreclosure of any security interest in the Collateral, or the filing of a petition under Title 11 of the United States Code with regard any Obligor, and MJD absolutely, unconditionally and irrevocably waives any and all right to assert or interpose any defense, setoff, counterclaim or crossclaim of any nature whatsoever with respect to this Agreement or the Obligations (provided, however, that the foregoing shall not be deemed a waiver of the right of MJD to raise any defense or assert any compulsory counterclaim maintained in a court of the United States, or of the State of New York if such defense is inextricably linked to the subject action or if such counterclaim is compelled under local law or rule of procedure, nor shall the foregoing be deemed a waiver of the right of MJD to bring any separate action or proceeding asserting any claim of any nature whatsoever against BT which would otherwise have constituted a defense, setoff, counterclaim or crossclaim, other than a defense, setoff, counterclaim or crossclaim existing on or before the date hereof all of which having been irrevocably waived). 19. This Agreement may be executed in one or more counterparts by some or all of the parties hereto, each of which counterparts shall be an original and all of which together shall constitute a single agreement. The failure of any party listed below to execute this Agreement, or any counterpart hereof, or the ineffectiveness for any reason of any such execution, shall not relieve the other signatories from their obligations hereunder. 20. MJD HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES, AND BT BY ITS ACCEPTANCE OF THIS AGREEMENT IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR COUNTERCLAIM ARISING IN CONNECTION WITH, OUT OF OR OTHERWISE RELATING TO THIS AGREEMENT. 12 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement the day and year first above set forth. MJD COMMUNICATIONS, INC. By:_______________________ Name: Title AGREED AND CONSENTED TO: BANKERS TRUST COMPANY By:__________________________ Name Title: ACKNOWLEDGED AND AGREED TO: _____________________________ Meyer Haberman JED COMMUNICATIONS ASSOCIATES, INC. By: _________________________ Name: Title: _____________________________ Daniel G. Bergstein STATE OF ) ss.: COUNTY OF On the ____ day of September, 1998, before me personally came __________________ , to me known, who, being by me duly sworn, did depose and say: that he resides at _______________________________________________ that he is the ______________ [title] of MJD Communications, Inc., the corporation described in the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation. _________________________________ Notary Public STATE OF ) ss.: COUNTY OF On the ____ day of September, 1998, before me personally came __________________ , to me known, who, being by me duly sworn, did depose and say: that he resides at _______________________________________________ that he is the ______________ [title] of JED Communications Associates, Inc., the corporation described in the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation. _________________________________ Notary Public STATE OF _____________ ) ) ss.: COUNTY OF ___________ ) On the _______ day of September, 1998 before me personally came Meyer Haberman, to me known and known to me to be the individual described in and who executed the foregoing instrument and acknowledged to me that he executed the same. _________________________ Notary Public STATE OF _____________ ) ) ss.: COUNTY OF ___________ ) On the _______ day of September, 1998 before me personally came Daniel G. Bergstein, to me known and known to me to be the individual described in and who executed the foregoing instrument and acknowledged to me that he executed the same. _________________________ Notary Public EX-12 5 RATIO OF EARNINGS TO FIXED CHARGES CALCULATION EXHIBIT 12 Sheet 1 MJD Communications, Inc Computation of Ratio of Earnings to Fixed Charges
Year ended December 31, ---------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------------- --------------- --------------- --------------- --------------- INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 1,235,115 1,951,149 1,030,846 1,422,181 4,661,050 PLUS: FIXED CHARGES 800,392 3,812,248 7,455,477 9,822,754 9,602,786 -------------- --------------- --------------- --------------- --------------- EARNINGS (AS DEFINED) 2,035,507 5,763,397 8,486,323 11,244,935 14,263,836 ============== =============== =============== =============== =============== INTEREST EXPENSE 791,365 3,771,606 7,267,372 9,605,063 9,293,104 RENT EXPENSE (INTEREST PORTION) 9,027 40,642 164,657 186,741 257,341 CAPITALIZED INTEREST - - 23,448 30,950 52,341 -------------- --------------- --------------- --------------- --------------- TOTAL FIXED CHARGES 800,392 3,812,248 7,455,477 9,822,754 9,602,786 ============== =============== =============== =============== =============== "EARNINGS" DIVIDED BY FIXED CHARGES 2.5 1.5 1.1 1.1 1.5 ============== =============== =============== =============== =============== Six Months Pro Forma Ended ----------------------------------------------- June 30, Year Ended December 31, 1997 -------------------------------- ----------------------------------------------- Completed Acquisitions, New Credit Facility As Adjusted 1997 1998 and Offering for Utilities --------------- --------------- ------------------------ --------------------- INCOME FROM CONTINUING OPERATIONS BEFORE TAXES 1,916,457 594,557 (5,395,599) (7,556,475) PLUS: FIXED CHARGES 4,127,054 9,915,591 30,187,909 36,232,321 --------------- --------------- ------------------------ --------------------- EARNINGS (AS DEFINED) 6,043,511 10,510,148 24,792,310 28,675,846 =============== =============== ======================== ===================== INTEREST EXPENSE 3,998,383 9,706,729 29,704,427 35,646,252 RENT EXPENSE (INTEREST PORTION) 128,671 184,733 394,632 485,487 CAPITALIZED INTEREST - 24,129 88,850 100,582 --------------- --------------- ------------------------ --------------------- TOTAL FIXED CHARGES 4,127,054 9,915,591 30,187,909 36,232,321 =============== =============== ======================== ===================== "EARNINGS" DIVIDED BY FIXED CHARGES 1.5 1.1 0.8 0.8 =============== =============== ======================== ===================== Pro Forma ------------------------------ Six Months Ended June 30, 1998 ------------------------------ As Adjusted for Utilities ------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE TAXES (5,954,821) PLUS: FIXED CHARGES 18,449,253 ------------------------- EARNINGS (AS DEFINED) 12,494,432 ========================= INTEREST EXPENSE 18,043,798 RENT EXPENSE (INTEREST PORTION) 366,177 CAPITALIZED INTEREST 39,278 ------------------------- TOTAL FIXED CHARGES 18,449,253 ========================= "EARNINGS" DIVIDED BY FIXED CHARGES 0.7 =========================
Page 1 EX-23.2 6 CONSENT OF MOSS ADAMS, LLP, INDEPENDENT AUDITORS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the application of our report dated February 11, 1998 on the financial statements of Ellensburg Telephone Company for purposes of inclusion in Amendment No. 3 to the Registration Statement on Form S-4 of MJD Communications, Inc. We also consent to the reference to our firm as experts. Moss Adams LLP Seattle, Washington September 28, 1998 EX-23.3 7 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 24, 1997, with respect to the financial statements of Chautauqua & Erie Telephone Corporation included in Amendment No. 3 to the Registration Statement and related prospectus of MJD Communications, Inc. for the registration of $200 million of its Senior Subordinated Notes. /s/ Ernst & Young LLP September 28, 1997 Buffalo, New York EX-23.4 8 CONSENT OF KIESLING ASSOCIATES LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in this Amendment No. 3 to the Registration Statement of MJD Communications, Inc. on Form S-4 of our report on the audit of the financial statements of Big Sandy Telecommunications, Inc. dated February 6, 1996 and to the reference to our Firm under the caption "Experts" in such Registration Statement. /s/ Kiesling Associates LLP Madison, Wisconsin September 28, 1998 EX-23.5 9 CONSENT OF BERRY, DUNN, MCNEIL & PARKER EXHIBIT 23.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We have issued our report dated February 12, 1998 (except for Notes 3, 13 and 14, which are dated May 17, 1998, July 31, 1998 and March 27, 1998, respectively) on our audits of the consolidated financial statements of Utilities, Inc. and Subsidiaries contained in Amendment No. 3 to the Registration Statement and Prospectus. We consent to the use of the aforementioned report in Amendment No. 3 to the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." /s/ Berry, Dunn, McNeil & Parker Portland, Maine September 28, 1998 EX-23.6 10 CONSENT OF KPMG PEAT MARWICK EXHIBIT 23.6 ACCOUNTANTS' CONSENT The Board of Directors Taconic Telephone Corp.: We consent to the inclusion of our report dated March 6, 1998 on the consolidated financial statements of Taconic Telephone and subsidiaries, as of December 31, 1996 and 1997, and for each of the years in the three-year period ended December 31, 1997 in Amendment No. 3 to the Offering Memorandum for $200,000,000 Senior Subordinated Notes (due 2008) of MJD Communications, Inc., dated September 30, 1998. /s/ KPMG Peat Marwick LLP Albany, New York September 28, 1998 EXHIBIT 23.6 ACCOUNTANTS' CONSENT The Board of Directors MJD Communications, Inc.: We consent to the use of our reports included herein and to reference to our Firm under the headings "Summary Consolidated Financial and Operating Data," "Selected Consolidated Financial and Operating Data" and "Experts" in Amendment No. 3 to the Registration Statement on Form S-4. /s/ KPMG Peat Marwick LLP Lincoln, Nebraska September 28, 1998 EX-27 11 FINANCIAL DATA SCHEDULE
5 YEAR 6-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 JUN-30-1998 6,822,462 14,045,260 0 0 8,361,982 23,647,667 49,204 443,592 736,509 1,519,494 17,140,868 44,406,115 130,494,110 254,753,602 69,287,220 132,163,415 144,612,779 370,714,076 17,033,168 25,639,929 0 0 130,164 0 0 0 881 1,811 (10,939,659) 18,781,612 144,612,779 370,714,076 42,972,318 35,261,844 42,972,318 35,261,844 0 0 30,533,066 25,719,820 19,299 0 0 0 9,293,104 9,706,729 4,661,050 594,557 1,875,634 389,152 2,785,416 205,405 0 0 3,611,624 2,520,943 0 0 (887,843) (2,352,061) 0.00 0.00 0.00 0.00
-----END PRIVACY-ENHANCED MESSAGE-----