-----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, DKw9L7QVRC/j4UBf0mHxTBUcmd1yaGS1dxHKnSG88k1Z1BuWuS+Utg1g5aiHZNin rcV2Kahqnq9SHFQeO4Radw== 0000020520-00-000004.txt : 20000324 0000020520-00-000004.hdr.sgml : 20000324 ACCESSION NUMBER: 0000020520-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS UTILITIES CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11001 FILM NUMBER: 576031 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 STREET 2: P O BOX 3801 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2033298800 MAIL ADDRESS: STREET 1: HIGH RIDGE PARK BLDG NO 3 CITY: STAMFORD STATE: CT ZIP: 06905 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 CITIZENS UTILITIES COMPANY FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number 001-11001 ----------------- --------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 CITIZENS UTILITIES COMPANY -------------------------- (Exact name of registrant as specified in its charter) Delaware 06-0619596 - ---------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3 High Ridge Park P.O. Box 3801 Stamford, Connecticut 06905 --------------------------- (Address, zip code of principal executive offices) Registrant's telephone number, including area code: (203) 614-5600 ---------------
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.25 per share New York Stock Exchange Guarantee of Convertible Preferred Securities of Citizens Utilities Trust New York Stock Exchange Citizens Convertible Debentures N/A Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P. N/A - -------------------------------------------------------------------------------- ------------------------------------- (Title of each class) (Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 29, 2000 was $3,895,575,671. The number of shares outstanding of the registrant's Common Stock as of February 29, 2000 was 262,924,506. DOCUMENTS INCORPORATED BY REFERENCE The Proxy Statement for the registrant's 2000 Annual Meeting of Stockholders to be held on May 18, 2000 is incorporated by reference into Part III of this Form 10-K. TABLE OF CONTENTS
Page ---- PART I - -------- Item 1. Description of Business 2 General Development of Business 2 Financial Information about Industry Segments 2 Narrative Description of Business 3 Communications 3 Electric Lightwave 5 Acquisitions and Investments 8 General 8 Financial Information about Foreign and Domestic Operations and Export Sales 9 Item 2. Description of Property 9 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to Vote of Security Holders 11 Executive Officers 11 PART II - -------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25 Item 8. Financial Statements and Supplementary Data 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III Incorporation by Reference to the 2000 Proxy Statement 25 - -------- PART IV - -------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25 Signatures 29 Index to Consolidated Financial Statements F-1
-1- PART I Item 1. Description of Business ----------------------- This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially from those expressed or implied in the statements. Further discussion regarding forward-looking statements, including the factors which may cause actual results to differ from such statements, is located in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report. (a) General Development of Business ------------------------------- The "Company" includes Citizens Utilities Company and its subsidiaries except where the context or statement indicates otherwise. The Company provides, through subsidiaries, communications services primarily to rural and suburban customers throughout the United States, and competitive local exchange carrier (CLEC) services to retail business customers and to other communications carriers through its 82% owned subsidiary, Electric Lightwave Inc. (ELI). The Company was incorporated in Delaware in 1935 to acquire the assets and business of a predecessor public utility corporation. Since then, the Company has grown as a result of investment in owned operations and from numerous acquisitions of additional communications and public utility operations. During 1998, the Company announced its intent to separate its telecommunications and public utility operations into two stand-alone publicly traded companies. This separation was being made in recognition of the different investment features, performance criteria, capital structures, dividend policies, customer requirements and regulatory designs of each business, and would allow each business to pursue its own strategy and compete more effectively in its respective markets. During 1999, opportunities became available to acquire telephone access lines that meet the Company's investment criteria while the private market valuations for public utility operations increased. Accordingly, the Company abandoned its separation strategy and announced its intention to acquire telephone access lines and divest its public utility operations by sale. The Company continues to expand through internal investment in its telephone and CLEC operations and acquisition of additional communications operations. The Company's new subsidiary, Citizens Capital Ventures will explore opportunities to build and support internet based communications solutions to achieve synergies with the systems and content sides of our business. To enable the strategy, the Company has assembled a management team skilled in wireline, wireless, cable and Internet technology and marketing skills. Between May and December 1999, the Company announced that it had entered into agreements to purchase approximately 911,000 telephone access lines for $2.8 billion (See Acquisitions and Investments in section (c) below). In October 1999, the Company announced the sale of its water and wastewater treatment businesses for $835 million and in February 2000 announced the sale of its electric businesses for $535 million. The proceeds from these sales, along with the planned sale of the Company's gas businesses, will be used to permanently fund telephone access line purchases. The Company's financial resources and operating performance enable it to make the investments and conduct the operations necessary to serve growing areas and to expand through acquisitions. (b) Financial Information about Industry Segments --------------------------------------------- The Company traditionally measured its segments by service (Communications, ELI, Gas, Electric, Water and Wastewater). The Gas, Electric, Water and Wastewater segments have been discontinued and are no longer presented. As the Company becomes solely a telecommunications provider, the measurement of segments will evolve to be more representative of the Company's business activities. Note 16 of the Notes to Consolidated Financial Statements included herein sets forth financial information about industry segments of the Company for the last three fiscal years. -2- (c) Narrative Description of Business --------------------------------- COMMUNICATIONS - -------------- Through its subsidiaries, collectively known as Citizens Communications, the Company provides both regulated and competitive communications services to residential, business and wholesale customers. Communications services consist of local network services, network access services, long distance services, directory advertising, centrex, custom calling and caller ID services, paging, cellular, Internet access, voice mail and conference calling and cable television services. The Company provides local network services to the following approximate number of access lines in the following states: Local Network State Access Lines ------ ------------ New York 330,500 West Virginia 152,200 Arizona 147,900 California 136,500 Tennessee 101,800 Nevada 27,300 Wisconsin 25,700 Utah 22,800 Idaho 21,100 Oregon 14,800 Montana 8,600 New Mexico 6,200 Pennsylvania 1,400 -------- Total 996,800 ======== The Company provides network access services and billing and collections services primarily to AT&T Corporation, MCI WorldCom, Inc. and Sprint Corporation. The Company is also enhancing its network support systems to offer local resale capabilities in its local exchange franchise serving areas to emerging CLECs. The Company owns a one-third interest and is general managing partner of Mohave Cellular, a cellular limited partnership, currently operating twelve cell sites in Arizona. By year-end 2000 the partnership expects to be operating seven additional sites. Strategy The Company's traditional telephone operations and those of ELI will be operated in close conjunction with each other to become a total communications provider of voice, data, text and image services to enable our communities to have 24-hour access to the world, with the Company having the ability to satisfy all of its customer's communications needs. The Company is increasing service levels, product availability and adding customers through customer growth, acquisitions and the planned expanded use of ELI's national broadband network (see ELI discussion). To better serve our expanding customer base, the Company is migrating to a regional operational structure. This will put management and operating resources closer to the customer and solidify commitments to communities served. Regulatory Environment Local Exchange Competition - -------------------------- The Telecommunications Act of 1996 (the 1996 Act), which became law in February 1996, is dramatically changing the telecommunications marketplace, including the rural areas served by the Company. The Federal Communications Commission (FCC) and many state regulatory agencies are conducting extensive rule-making proceedings to implement the Act. New and proposed FCC and state rules have impacted, and will continue to impact, the Company's operations. The primary thrust of the 1996 Act was to open local telecommunications markets to competition while preserving universal telecommunications service. The 1996 Act and subsequent FCC interconnection decisions established the relationships between Incumbent Local Exchange Carriers (ILECs), such as the Company and -3- Competitive Local Exchange Carriers (CLECs), such as the Company's subsidiary ELI, and the mechanisms for competitive market entry. Though smaller carriers like Citizens, who serve predominantly rural markets, did receive a qualified exemption from some of the technical requirements imposed upon all ILECs for interconnection arrangements, the Company did not receive an exemption from interconnection or local exchange competition in general. The exemption, which is known as the rural telephone company exemption, continues until a bona fide request for interconnection is received from a CLEC, and a state regulatory commission with jurisdiction determines that discontinuance of the exemption is warranted. The state commission must determine that discontinuing the exemption will not adversely impact the availability of universal service in the state nor impose an undue economic hardship on the Company, and that the requested interconnection is technically feasible. Under the 1996 Act and subsequent FCC rules, a CLEC can compete using one or more of three mechanisms. The first is by construction of its own local exchange facilities, in which case the ILEC's sole obligation is interconnection for purposes of traffic interchange. The second allows CLECs to purchase unbundled network elements (UNEs) at cost from the ILEC and assemble them into local exchange services and/or supplement the facilities it already owns. The third is by resale of the ILEC's retail services purchased at wholesale rates from the ILEC. Since passage of the 1996 Act, Citizens has received over 172 requests for interconnection. Over 50 individual competitors are operating in the Company's markets. These competitors are mainly serving internet service providers and a few large business customers. Some competitors have taken advantage of the ILEC's requirement to pay the CLEC reciprocal compensation for traffic delivered to the CLEC. The explosion of the internet has provided CLECs with an immediate mechanism to build traffic and reciprocal compensation revenues. The Company's rural markets have limited the impact of reciprocal compensation, but additional threats are expected as CLECs begin to move into second and third tier markets. In 1999, the Company paid approximately $160,000 in reciprocal compensation. However, the Company has signed additional reciprocal compensation agreements and has several pending that will increase reciprocal compensation in 2000. While Citizens Communications is a reciprocal compensation payor, ELI is a reciprocal compensation receiver. The Company expects the impact of reciprocal compensation in the future to be somewhat mitigated by lower interconnection rates and the spread of Digital Subscriber Line (DSL) and other network services that allow customers to obtain a direct link to the internet at a lower cost. These types of non-switch arrangements are not expected to be subject to reciprocal compensation. After being overturned by the United States Court of Appeals for the Eighth Circuit, the FCC's rules providing guidance to the states on the minimum required UNEs and the pricing of interconnection services were reinstated by the United States Supreme Court (the Court) in 1999. The Court's decision also remanded to the FCC for further consideration the articulation of the minimum required UNEs. Late in 1999, the FCC issued its order on the remand. That order designated almost all of the earlier designated UNEs as a minimum requirement and promulgated several new ones. Of the newly designated UNEs, the one that could have the greatest impact upon the Company is known as line sharing. Line sharing requires the Company to make the necessary arrangements to allow competitive DSL providers to access the data portion of each of the Company's local dial tone lines. What this means is that competitors could provide DSL service to Company's customers without having to also provide voice grade services. Universal Service Reform - ------------------------ Under the 1996 Act, the FCC was charged with the task of transforming the historical implicit subsidy mechanisms into an explicit arrangement, which would be funded in a nondiscriminatory manner by all telecommunications providers. Historically, ILEC rates for non-basic services were set high to offset below cost rates for basic services, predominantly local residential services. However, regulatory and legislative mandates combined with competitive pressures dictate that prices for all telecommunications services become more aligned with their cost. In October 1999, the FCC established a new universal service mechanism for non-rural carriers. As a rural carrier, the Company is not subject to the new mechanism, and will continue to receive universal service funds under the current embedded cost based universal service fund. In 2000, the FCC is expected to begin reviewing alternatives for a new universal service program for rural carriers. Price Cap Reform - ---------------- Price cap regulation is a form of rate regulation in which the interstate rates of affected ILECs are subject to maximums that are periodically adjusted according to a mechanism contained in the FCC's rules. The mechanism adjusts rates each year by the inflation rate less a productivity factor known as the X-factor. The FCC last set the X-factor at 6.5% effective on July 1, 1996 by the Price Cap Reform Order issued in May 1997. Price cap carriers are allowed to retain all earnings generated by operating at or below the capped rates. In this manner, affected ILECs are rewarded for achieving operating efficiencies. The Company has elected to be subject to price cap regulation. -4- In 1999 the Court, in a decision that will take effect on April 1, 2000, vacated the FCC's May 1997 Price Cap Reform Order. The Court found that the FCC had not properly supported their calculation of the 6.5% X-factor and then remanded the calculation of the X-factor to the FCC for further consideration and articulation. The FCC is currently reviewing this matter and is expected to issue an order before April 1, 2000 establishing a revised X-factor. The revised factor should become effective on July 1, 2000. It is possible, but unlikely that, the new factor will be retroactively applied to July 1, 1996. Regional Bell Operating Company Long Distance Entry - --------------------------------------------------- Under the 1996 Act the Regional Bell Operating Companies (RBOCs) were precluded from competing in most long distance markets until they satisfied the state regulatory authority with jurisdiction and the FCC that their markets had been sufficiently opened to local exchange competition. In October 1999, the New York Public Service Commission (NYPSC) determined that Bell Atlantic's markets in the state were sufficiently open to local exchange competition, and recommended to the FCC that Bell Atlantic be granted approval to enter all long distance markets in the state. In December 1999, the FCC concurred and allowed Bell Atlantic to begin offering all long distance services to its customers in New York. Since the Company currently offers long distance service in New York, it is possible that the entry of Bell Atlantic into this market could impact the Company's operations. The FCC and other states may take similar actions for other RBOCs and states during 2000. Competition As discussed more fully in Regulatory Environment, in each of the Company's markets, there is the potential for competition from several sources including, but not limited to, other ILECs for local network services; CLECs for enhanced data and Internet services; Long distance providers including AT&T Corporation, MCI WorldCom and Sprint Corporation, as well as, other communications businesses who provide an array of other communications services including cable television companies (CATVs), electric utilities, international carriers, satellite carriers, teleports, microwave carriers, wireless telephone system operators and private networks built by large end users. Although the potential for competition exists in many forms, the Company is the dominant ILEC in all of its service territories, and believes itself to be well positioned to manage competitive threats. ELECTRIC LIGHTWAVE - ------------------ ELI is a facilities-based integrated communications provider providing a broad range of communications services to businesses. ELI provides the full range of products and services, including switched local and long distance voice services, enhanced data communications services and dedicated point-to-point services, in the western United States. ELI markets in the western United States to retail business customers, who are primarily communications-intensive organizations, and nationally to wholesale customers, who are communications carriers themselves. ELI currently provides the full range of its services in seven major cities and their surrounding areas, including: Boise, Idaho Phoenix, Arizona Portland, Oregon Sacramento, California Salt Lake City, Utah Seattle, Washington Spokane, Washington The major cities include an extensive network of approximately 1,871 route miles of fiber optic cable installed to create a series of Synchronous Optical Network (SONET) rings, which provide a higher degree of stability and dependability. Switched service, including local dial tone, is provided from 8 Nortel DMS 500 switches in the primary major cities. ELI also has transmission equipment colocated with switches of the ILEC at 55 locations. -5- ELI has broadband data points of presence in its major cities as well as other strategic cities across the United States, including: Atlanta, Georgia Austin, Texas Chicago, Illinois Cleveland, Ohio Dallas, Texas Denver, Colorado Houston, Texas Las Vegas, Nevada Los Angeles, California New York, New York Philadelphia, Pennsylvania San Diego, California San Francisco, California Washington, D.C. ELI has developed an Internet backbone network with 42 routers providing Internet connectivity in each of its markets, including presence at all major network access points and over 125 "peering arrangements" with other Internet backbone service providers. A peering arrangement is an agreement where Internet backbone service providers agree to allow each other direct access to Internet data contained on their networks. In addition, ELI's broadband network consists of 32 frame relay switches, 23 Asynchronous Transfer Mode (ATM) switches and 77 network-to-network interfaces. National and international coverage is provided through strategic relationships with other communications providers. ELI owns or leases broadband long-haul fiber optic network connections between its major cities in the west and its strategic markets across the nation. By carrying traffic on ELI's own facilities, ELI is able to maximize the utilization of its network facilities and minimize network access and certain interconnection costs. As of December 31, 1999, ELI operated long-haul networks with a total route mileage of 2,181 miles, including routes between Phoenix and Las Vegas; Portland and Seattle; Portland and Spokane; Portland and Eugene; Portland and Boise and Boise and Salt Lake City. During 1998, ELI began construction of what it believes will be the largest ringed SONET in the western United States. The approximately 3,200 mile self-healing ring is expected to be completed in 2000 and will connect Portland, Sacramento, San Francisco, Los Angeles, Las Vegas, Salt Lake City and Boise and will include Dense Wave Division Multiplexing (DWDM) equipment. DWDM is a technique for transmitting 16 or more different light-wave frequencies on a single fiber to increase transmission capacity. In the development of ELI's long-haul facilities, ELI has formed strategic relationships with utility companies that enable ELI to (i) utilize existing rights-of-way and fiber optic facilities, (ii) leverage their construction expertise and local permitting experience and (iii) minimize capital requirements in order for ELI to extend its network infrastructure more quickly and economically. In addition to the long-haul agreements, another agreement provides for a fiber optic network in the Phoenix, Arizona metropolitan area. ELI entered into a fiber-swap agreement during 1999 which exchanges unused fiber on its network for unused fiber on another carrier's network. This exchange will provide ELI with a fiber route from Salt Lake City to Denver and continuing on to Dallas. ELI anticipates incorporating the other carrier's fiber into its network during 2000. US West Communications, Inc. (US West) accounted for approximately 19% of ELI's revenue in 1999. The revenue from US West consisted primarily of reciprocal compensation relating to the transport and termination of traffic between US West's network and ELI's network and an 18 month take-or-pay agreement. The following table represents certain operating information relating to ELI: 1999 1998 1997 ---- ---- ---- Route miles* 4,052 3,091 2,494 Fiber miles* 214,864 181,368 140,812 Buildings connected 824 766 610 Access line equivalents 161,555 74,924 34,328 Switches and routers installed: Voice 8 7 5 Frame Relay 32 23 20 Internet 42 24 17 ATM 23 14 8 Customers 2,371 1,644 1,165 * Route miles and fiber miles also include those to which ELI has exclusive use pursuant to license and lease arrangements. -6- Strategy While ELI expects additional network growth in 2000, especially with the completion of its long-haul routes, the primary focus in the next year is targeted at increasing the use of its installed asset base. ELI expects a substantial portion of its growth to come from increased penetration of existing on-net buildings, a focus on sales to customers that are connected to the network and an increase in market share in ELI's seven major cities and surrounding areas. ELI anticipates a higher volume of sales to other carriers with the completion of its long-haul routes. Regulatory Environment As a common carrier, ELI is subject to federal, state and local regulation. The FCC exercises jurisdiction over all interstate communications services. State commissions retain jurisdiction over all intrastate communications services. Local governments may require ELI to obtain licenses or franchises regulating the use of public rights-of-way necessary to install and operate its networks. Telecommunications Act of 1996 - ------------------------------ With the passage of the Telecommunications Act of 1996, the increase in customer demand for enhanced broadband data services and the development of competitive public data and voice networks, ELI has substantially expanded the breadth of its product offering and its geographic reach in the last five years. This includes expanding the number of local fiber networks from two to seven cities in the west and development of the data and Internet network across the U.S. (See additional information related to Telecommunications Act of 1996 in Communications section above). ELI has various interconnection agreements in the states in which it operates. These agreements govern reciprocal compensation relating to the transport and termination of traffic between the ILEC's and ELI's networks. On February 25, 1999, the FCC issued a Declaratory Ruling and Notice of Proposed Rulemaking that categorized calls terminated to Internet Service Providers (ISPs) as "largely" interstate in nature, which could have the effect of precluding these calls from reciprocal compensation charges. However, the ruling stated that ILECs are bound by the existing interconnection agreements and the state decisions that have defined them. The FCC gave the states authority to interpret existing interconnection agreements. Since the FCC order, Oregon, Washington, California and Arizona have ruled that calls terminated to ISPs should be included in the calculation to determine reciprocal compensation. State Regulation - ---------------- Most state public utilities commissions require communications providers, such as ELI, to obtain operating authority prior to initiating intrastate services. Most states also require the filing of tariffs or price lists and/or customer-specific contracts. In the states in which ELI currently operates, ELI is not subject to rate-of-return or price regulation. ELI is subject, however, to state-specific quality of service, universal service, periodic reporting and other regulatory requirements, although the extent of such requirements is generally less than that applicable to ILECs. Competition ILEC Competition - ---------------- ELI faces significant competition from the ILECs in each of its facilities-based markets. The ILECs currently dominate the local exchange market and are a de facto monopoly provider of local switched voice services. Primary ILEC competitors are US West, PacBell and GTE Corp. (GTE). ILECs have long-standing relationships with their customers and have financial and technical resources substantially greater than those available to ELI. CLEC Competition - ---------------- Facility-based operational CLEC competitors in ELI's markets include, among others: AT&T Local Services, GST Telecommunications, MCI WorldCom, Inc. and NEXTLINK Communications. In each of the markets in which ELI operates, at least one other CLEC, and in some cases several other CLECs, offer many of the same local communications services, generally at similar prices. -7- Competition From Others - ----------------------- Potential and actual new market entrants in the local communications services business include RBOCs entering new geographic markets, Inter Exchange Carriers (IXCs), CATVs, electric utilities, international carriers, satellite carriers, teleports, microwave carriers, wireless telephone system operators and private networks built by large end users. In addition, the current trend of business combinations and alliances in the communications industry, including mergers between RBOCs, may increase competition for ELI. With the passage of the 1996 Act and the entry of RBOCs into the long distance market, IXCs may be motivated to construct their own local facilities or otherwise acquire the right to use local facilities and/or resell the local services of ELI's competitors. Network Services - ---------------- Competition for network services is based on price, quality, network reliability, customer service, service features and responsiveness to the customer's needs. ELI's fiber optic networks provide both diverse access routing and redundant electronics, which affords ELI a competitive advantage. High-Speed Data Service - ----------------------- Competitors for high-speed data services include major IXCs, other CLECs and various providers of niche services (e.g., Internet access providers, router management services and systems integrators). The interconnectivity of ELI's markets may create additional competitive advantages over other data service providers that must obtain local access from the ILEC or another CLEC in each market or that cannot obtain intercity transport rates on terms as favorable as those available to ELI. Internet Services - ----------------- The market for Internet access and related services in the United States is extremely competitive, with barriers to entry related to capital costs, bandwidth capacity and internal provisioning and operations processes. Competition is expected to intensify as existing services and network providers and new entrants compete for customers. In addition, new enhanced Internet services such as managed router service and web hosting are constantly under development in the market, and additional innovation in this market is expected by a range of competitors. ELI's current and future competitors include communications companies, including the RBOCs, IXCs, CLECs and CATVs, and other Internet access providers. ACQUISITIONS AND INVESTMENTS - ---------------------------- In January 1999, Centennial Cellular Corp. was merged into a corporation created by Welsh, Carson, Anderson & Stowe. The Company received approximately $205,600,000 in cash for all its Common Stock interests and approximately $17,500,000 related to accrued dividends on the preferred stock. On May 27, September 21 and December 16, 1999, the Company announced that it had entered into definitive agreements with GTE to purchase approximately 366,000 (as of December 31, 1999) access lines located in Arizona, California, Illinois, Minnesota and Nebraska. The aggregate purchase price is expected to be approximately $1,171,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. On June 16, 1999, the Company announced that it had entered into definitive agreements with US West providing for the purchase of approximately 545,000 (as of December 31, 1999) telephone access lines located in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. In October 1999, Century Communications Corporation (Century) was merged into Adelphia Communication Corporation (Adelphia). The Company received approximately $213,000,000 of proceeds, including approximately $39,000,000 in cash and $174,000,000 in shares of Adelphia Class A Common Stock, for the Company's interest in Century and for the Company's interest in a cable joint venture with Century. GENERAL - ------- Order backlog is not a significant consideration in the Company's businesses and the Company has no contracts or subcontracts which may be subject to renegotiation of profits or termination at the election of the Federal government. The Company holds franchises from local governmental bodies which are of varying duration. The Company also holds Certificates granted by various state commissions which are generally of indefinite duration. The Company has no special working capital practices, and the Company's research and development -8- activities are not material. The Company holds no patents, trademarks, licenses or concessions that are material. The Company had approximately 6,700 employees, of which 4,900 were associated with continuing operations and 1,800 were associated with discontinued operations, at December 31, 1999. (d) Financial Information about Foreign and Domestic Operations and Export Sales ---------------------------------------------------------------------------- In 1995, the Company made an initial investment in and entered into definitive agreements with Hungarian Telephone and Cable Corp. (HTCC). The investment in HTCC had declined in value during 1998 and in the fourth quarter of 1998 management determined that the decline was other than temporary. As a result, the Company recognized a loss of $31,900,000 in the HTCC investment in Other income (loss), net in the 1998 statements of income and comprehensive income. In May 1999, in connection with HTCC's debt restructuring, the Company cancelled a note obligation from HTCC to the Company and a seven-year consulting services agreement in exchange for the issuance by HTCC to the Company of 1,300,000 shares of HTCC Common Stock and 30,000 shares of HTCC's 5% convertible preferred stock. Each share of HTCC convertible preferred stock has a liquidation value of $70 and is convertible at the option of the Company into 10 shares of HTCC Common Stock. To the extent the 1,300,000 HTCC common shares and the 300,000 HTCC common shares underlying the HTCC convertible preferred stock do not achieve an average market closing price of at least $7 per share for the twenty trading days ending March 31, 2000, HTCC has agreed to issue additional HTCC convertible preferred shares with a value equal to any such shortfall. As of March 15, 2000, the stock was trading at $8 13/16 per share. At December 31, 1999, the Company owns approximately 19% of the HTCC shares presently outstanding. The Company's investment in HTCC is classified as an available for sale security and accounted for using the cost method of accounting. Additionally, the Company has exercised its right to nominate one member of the Board of Directors of HTCC. Item 2. Description of Property ----------------------- The Administrative Office of the Company is located at 3 High Ridge Park, Stamford, CT 06905 and is leased. The operations support office for Citizens Communications relocated from a leased facility in Dallas, Texas in November 1999 to a new 250,000 square foot owned facility located in Legacy Park at 5600 Headquarters Drive, Plano, TX 75024. The new facility accommodates approximately 1,100 employees and has the acreage necessary for phased expansion up to 750,000 square feet. Citizens Communications is expanding its Call Center operations to meet the needs arising from the integration of access lines being purchased from US West and GTE. New leased call center facilities are currently under construction in Elk Grove, CA and Gloversville, NY. Also under renovation is an 81,700 square foot facility that was purchased in Kingman, AZ for call center expansion. The Company is evaluating an additional call center facility in the Midwest region of the country. The operations support office for ELI is located at 4400 NE 77th Avenue, Vancouver, WA 98662 in an approximately 98,000 square foot office building which is owned. This building is fully utilized, and ELI leases an additional 93,000 square feet of office space in Vancouver. In addition, ELI has leased local office space in various markets throughout the United States, and also maintains a warehouse facility in Portland, Oregon. ELI leases network hub and network equipment installation sites in various locations throughout the areas in which ELI provides services. The office, warehouse and other facilities leases expire on various dates through October 2008. Citizens Communications and ELI own property including: telecommunications outside plant, central office, fiber-optic and microwave radio facilities. (See description of business for listing of locations). -9- Item 3. Legal Proceedings ----------------- In November 1995, the Company's Vermont electric division was permitted an 8.5% rate increase. Subsequently, the Vermont Public Service Board (VPSB) called into question the level of rates awarded the Company in connection with its formal review of allegations made by the Department of Public Service (the DPS), the consumer advocate in Vermont and a former Citizens employee. The major issues in this proceeding involved classification of certain costs to property, plant and equipment accounts and the Company's Demand Side Management program. In addition, the DPS believed that the Company should have sought and received regulatory approvals prior to construction of certain facilities in prior years. On June 16, 1997, the VPSB ordered the Company to reduce its rates for Vermont electric service by 14.65% retroactive to November 1, 1995 and to refund to customers, with interest, all amounts collected since that time in excess of the rates authorized by the VPSB. In addition, the VPSB assessed statutory penalties totaling $60,000 and placed the Company on regulatory probation for a period of at least five years. During this probationary period, the Company could lose its franchise to operate in Vermont if it violates the terms of probation prescribed by the VPSB. The VPSB prescribed final terms of probation in its final order issued September 15, 1998. In October 1998, the Company filed an appeal in the Vermont Supreme Court challenging certain of the penalties imposed by the VPSB. The appeal has been fully briefed and argued and the Company is awaiting the Court's decision. In August 1997, a lawsuit was filed in the United States District Court for the District of Connecticut (Leventhal vs. Tow, et al.) against the Company and five of its officers, one of whom is also a director, on behalf of all persons who purchased or otherwise acquired Series A and Series B shares of Common Stock of the Company between September 5, 1996 and July 11, 1997, inclusive. On February 9, 1998, the plaintiffs filed an amended complaint. The complaint alleged that Citizens and the individual defendants, during such period, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based upon certain public statements made by the Company, which are alleged to be materially false or misleading, or are alleged to have failed to disclose information necessary to make the statements made not false or misleading. The plaintiffs sought to recover unspecified compensatory damages. The Company and the individual defendants believed the allegations are unfounded and filed a motion to dismiss on March 27, 1998 and on March 30, 1999 the Court dismissed the action. On April 29, 1999 the plaintiffs filed a notice of appeal with the Court of Appeals for the Second Circuit. The parties have entered into a settlement stipulation which is subject to the District Court's approval. In March 1998, a lawsuit was filed in the United States District Court for the District of Connecticut (Ganino vs. Citizens Utilities Company, et al.), against the Company and three of its officers, one of whom is also a director, on behalf of all purchasers of the Company's Common Stock between May 6, 1996 and August 7, 1997, inclusive. The complaint alleges that the Company and the individual defendants, during such period, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading public statements concerning the Company's relationship with a purported affiliate, Hungarian Telephone and Cable Corp. (HTCC), and by failing to disclose material information necessary to render prior statements not misleading. The plaintiff seeks to recover unspecified compensatory damages. The Company and the individual defendants believe that the allegations are unfounded and filed a motion to dismiss. The plaintiff requested leave to file an amended complaint and an amended complaint was served on the Company on July 24, 1998. The Company's motion to dismiss the amended complaint was filed on October 13, 1998 and the Court dismissed the action with prejudice on June 28, 1999. The Plaintiffs filed a notice of appeal with the Court of Appeals for the Second Circuit, briefing has been completed and oral argument has been scheduled for April 10, 2000. In November 1998, a class action lawsuit was filed in state District Court for Jefferson Parish, Louisiana, against the Company and three of its subsidiaries: LGS Natural Gas Company, LGS Intrastate, Inc. and Louisiana General Service Company. The lawsuit alleges that the Company and the other named defendants passed through in rates charged to Louisiana customers certain costs that plaintiffs contend were unlawful. The lawsuit seeks compensatory damages in the amount of the alleged overcharges and punitive damages equal to three times the amount of any compensatory damages, as allowed under Louisiana law. In addition, the Louisiana Public Service Commission has opened an investigation into the allegations raised in the lawsuit. The Company and its subsidiaries believe that the allegations made in the lawsuit are unfounded and the Company will vigorously defend its interests in both the lawsuit and the related Commission investigation. In addition, the Company is party to various other legal proceedings arising in the normal course of business. The outcome of individual matters is not predictable. However, management believes that the ultimate resolution of all such matters, including those discussed above, after considering insurance coverages, will not have a material adverse effect on the Company's financial position, results of operations, or its cash flows. -10- Item 4. Submission of Matters to Vote of Security Holders ------------------------------------------------- None in fourth quarter 1999. Executive Officers - ------------------ Information as to Executive Officers of the Company as of March 1, 2000 follows:
Name Age Current Position and Office ---- -- --------------------------- Leonard Tow 71 Chairman of the Board and Chief Executive Officer Rudy J. Graf 50 President and Chief Operating Officer Robert Braden 54 Vice President, Business Development John H. Casey, III 43 Vice President and Chief Operating Officer, Communications Sector Robert J. DeSantis 44 Vice President and Chief Financial Officer Michael G. Harris 53 Vice President, Engineering and New Technology F. Wayne Lafferty 39 Vice President, Regulatory Affairs J. Michael Love 48 Vice President and President, Citizens Public Services Sector L. Russell Mitten 48 Vice President, General Counsel and Assistant Secretary Livingston E. Ross 51 Vice President and Chief Accounting Officer Scott N. Schneider 42 Executive Vice President and President, Citizens Capital Ventures David B. Sharkey 50 Vice President and Chief Operating Officer, Electric Lightwave Sector Steven D. Ward 33 Vice President, Information Technology There is no family relationship between any of the officers of the Registrant. The term of office of each of the foregoing officers of the Registrant will continue until the next annual meeting of the Board of Directors and until a successor has been elected and qualified. LEONARD TOW has been associated with the Registrant since April 1989 as a Director. In June 1990, he was elected Chairman of the Board and Chief Executive Officer. He was also Chief Financial Officer from October 1991 through November 1997. He was a Director and Chief Executive Officer of Century Communications Corp. from its incorporation in 1973 and Chairman of its Board of Directors from October 1989 until October 1999. He is Director of Hungarian Telephone and Cable Corp., Chairman of the Board of Electric Lightwave, Inc. and is a Director of the United States Telephone Association. RUDY J. GRAF has been associated with the Registrant since September 1999. He is currently President and Chief Operating Officer of the Registrant. He is also Director and Chief Executive Officer of Electric Lightwave, Inc. Prior to joining the Registrant, he was Director, President and Chief Operating Officer of Centennial Cellular Corp. and Chief Executive Officer of Centennial DE Puerto Rico from November 1990 to August 1999. ROBERT BRADEN has been associated with the Registrant since November 1999. He was elected as Vice President, Business Development in February 2000. Prior to joining the Registrant, he was Vice President, Business Development at Century Communications Corp. from January 1999 to October 1999. He was Senior Vice President, Business Development at Centennial Cellular Corp. from June 1996 to January 1999 and held other officer positions with Centennial since November 1993. JOHN H. CASEY, III has been associated with the Registrant since November 1999. He is currently Vice President of the Company and Chief Operating Officer of the Communications Sector. Prior to joining the Registrant, he was Vice President, Operations from January 1995 to January 1997 and then Senior Vice President, Administration of Centennial Cellular until November 1999. ROBERT J. DESANTIS has been associated with the Registrant since January 1986. He was Vice President and Treasurer since October 1991, and Vice President and Chief Financial Officer since November 1997. He is currently Chief Financial Officer, Vice President and Treasurer of Electric Lightwave, Inc. MICHAEL G. HARRIS has been associated with the Registrant since December 1999. He is currently Vice President, Engineering and New Technology. Prior to joining the Registrant, he was Senior Vice President, Engineering of Centennial Cellular -11- from August 1991 to December 1999. He was also Senior Vice President, Engineer- ing of Century Communications Corp. from June 1991 to October 1999. F. WAYNE LAFFERTY has been associated with the Registrant since 1994. He was elected Vice President, Regulatory Affairs in February 2000. Prior to that date, he served as Vice President of the Communications subsidiaries since January 1998. Since 1995, he has held senior positions overseeing regulatory affairs of the Communications subsidiaries of the Registrant. J. MICHAEL LOVE has been associated with the Registrant since May 1990 and from November 1984 through January 1988. He was Vice President, Corporate Planning from March 1991 through January 1997. He was appointed Vice President, Public Services in January 1997. In January 1999, he was also appointed President, Citizens Public Services Sector. L. RUSSELL MITTEN has been associated with the Registrant since June 1990. He was General Counsel until June 1991. He has been Vice President, General Coun- sel and Assistant Secretary since June 1991. LIVINGSTON E. ROSS has been associated with the Registrant since August 1977. He was Vice President and Controller from December 1991 through December 1999. He is currently Vice President and Chief Accounting Officer. SCOTT N. SCHNEIDER has been associated with the Registrant since October 1999. He is currently Executive Vice President and President, Citizens Capital Ventures, a wholly owned subsidiary of Citizens. He has been a Director of Electric Lightwave, Inc. since December 1999. Prior to joining the Registrant, he was Director (from October 1994 to October 1999), Chief Financial Officer (from December 1996 to October 1999), Senior Vice President and Treasurer (from June 1991 to October 1999) of Century Communications Corp. He also served as Director, Chief Financial Officer, Senior Vice President and Treasurer of Centennial Cellular from August 1991 to October 1999. DAVID B. SHARKEY has been associated with the Registrant since August 1994 as President of Electric Lightwave, Inc. He has been President and Chief Operating Officer of Electric Lightwave, Inc. since October 1997 and is Director of Electric Lightwave, Inc. Additionally, he has been Vice President and Chief Operating Officer, Electric Lightwave Sector of the Registrant since February 2000. Prior to joining Electric Lightwave, Inc., he was Vice President and General Manager of Metromedia Paging, a wireless company headquartered in New Jersey, from August 1989 through July 1994. STEVEN D. WARD has been associated with the Registrant since January 2000 and was elected Vice President, Information Technology in February 2000. Prior to joining the Registrant, he was Vice President, Information Systems for Century Communications Corp. from June 1996 to December 1999 and Director, Information Services from March 1991 to June 1996. -12- PART II ------- Item 5.Market for the Registrant's Common Equity and Related Stockholder Matters ------------------------------------------------------------------------- PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the New York Stock Exchange under the symbol CZN. The following table indicates the high and low prices per share as taken from the daily quotations published in "The Wall Street Journal" during the periods indicated. Prior year prices have been adjusted for stock dividends declared through December 31, 1998, rounded to the nearest 1/16th. (See Note 9 of Notes to Consolidated Financial Statements.) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------- ----------------- ----------------- ---------------- High Low High Low High Low High Low ---- --- ---- --- ---- --- ---- --- 1999: - ---- CZN $8 1/2 $7 1/4 $11 1/2 $7 11/16 $12 7/16 $10 7/8 $14 5/16 $10 15/16 1998: - ---- CZN $10 7/8 $8 7/8 $11 3/16 $9 1/2 $10 $6 7/8 $9 1/16 $7 1/4
As of February 29, 2000, the approximate number of record security holders of the Company's Common Stock was 41,020. This information was obtained from the Company's transfer agent. DIVIDENDS The amount and timing of dividends payable on Common Stock are within the sole discretion of the Company's Board of Directors. The Board of Directors had undertaken an extensive review of the Company's dividend policy in conjunction with its strategic plans to become a telecommunications company. Resulting from this review, the Board concluded that the Company discontinue dividends after the payment of the December 1998 stock dividend. Quarterly stock dividends declared and issued on Common Stock were .75% for each quarter of 1998. RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED SECURITIES None -13- Item 6. Selected Financial Data ($ in thousands, except for per-share amounts) ----------------------------------------------------------------------
Year Ended December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Revenues (1) $ 1,087,428 $ 932,858 $ 860,332 $ 786,307 $ 616,747 Income (loss) before discontinued operations and cumulative effect of change in accounting principle $ 117,127 $ 22,866 $ (3,923) $ 150,300 $ 117,501 Basic income (loss) per-share of Common Stock before discontinued operations and cumulative effect of change in accounting principle (2) $ .45 $ .09 $ (.02) $ .58 $ .47 Net income $ 144,486 $ 57,060 $ 10,100 $ 178,660 $ 159,536 Basic net income per common share (2) $ .55 $ .22 $ .04 $ .68 $ .64 Stock dividends declared on Common Stock (3) - 3.03% 5.30% 6.56% 6.35% As of December 31, --------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Total assets $ 5,771,745 $ 5,292,932 $ 4,872,852 $ 4,523,148 $ 3,918,187 Long-term debt $ 2,107,460 $ 1,775,338 $ 1,583,902 $ 1,409,512 $ 1,095,211 Equity(4) $ 2,121,185 $ 1,994,021 $ 1,880,461 $ 1,879,433 $ 1,559,913 (1) Represents revenues from continuing operations. (2) 1997, 1996 and 1995 are adjusted for subsequent stock dividends. (3) Compounded annual rate of quarterly stock dividends. (4) Includes Company Obligated Mandatorily Redeemable Convertible Preferred Securities.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- This annual report on Form 10-K contains forward-looking statements that are subject to risks and uncertainties which could cause actual results to differ materially from those expressed or implied in the statements. All forward-looking statements (including oral representations) are only predictions or statements of current plans, which are constantly under review by the Company. All forward-looking statements may differ from actual future results due to, but not limited to, changes in the economy of the Company's markets, the nature and pace of technological changes, the number and effectiveness of competitors in the Company's markets, changes in legal and regulatory policy, success in overall strategy, the Company's ability to identify future markets and successfully expand existing ones, the mix of products and services offered in the Company's target markets, remaining Y2K issues, the effects of acquisitions and dispositions and the ability to effectively integrate businesses acquired. Readers should consider these important factors in evaluating any statement in this Form 10-K or otherwise made by the Company or on its behalf. The following information should be read in conjunction with the consolidated financial statements and related notes to the consolidated financial statements included in this report. The Company has no obligation to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances. (a) Liquidity and Capital Resources ------------------------------- The Company considers its operating cash flows and its ability to raise debt and equity capital as the principal indicators of its liquidity. For the twelve months ended December 31, 1999, the Company used cash flow from operations and proceeds from net financings and advances from parties desiring utility services to fund capital expenditures. Funds requisitioned from the Industrial Development Revenue Bond construction fund trust accounts were used to partially fund the construction of utility plant. In October 1999, the Company arranged for a committed $3,000,000,000 revolving bank credit facility. This credit facility is in addition to credit commitments under which the Company may borrow up to $400,000,000. There were no amounts outstanding under these commitments at December 31, 1999. ELI has committed revolving lines of credit with commercial banks under which it may borrow up to $400,000,000. The Company has guaranteed all of ELI's obligations under these revolving lines of credit. As of December 31, 1999, $260,000,000 was outstanding under ELI's revolving lines of credit. -14- In April 1999, ELI completed an offering of $325,000,000 of five-year senior unsecured notes. The notes have an interest rate of 6.05% and mature on May 15, 2004. The Company has guaranteed the payment of principal and any premium and interest on the notes when due. Net capital expenditures, by sector, have been and are budgeted as follows:
Actual Budget -------------------------------------- 2000 1999 1998 1997 ------- ------- ------- ------- ($ in thousands) Communications (1) $ 396,800 $ 227,200 $ 201,400 $ 263,000 ELI (2) 200,000 245,700 200,000 124,500 General 3,000 6,700 25,100 33,300 -------- -------- -------- -------- $ 599,800 $ 479,600 $ 426,500 $ 420,800 Discontinued operations (3) $ 169,900 $ 135,800 $ 95,500 $ 103,700 -------- -------- -------- -------- $ 769,700 $ 615,400 $ 522,000 $ 524,500 ======== ======== ======== ========
(1) Includes approximately $30,500,000 and $7,700,000 in 1999 and 1998, respectively, for the construction of an operations support office. Includes $176,000,000 in 2000 for the properties to be acquired from GTE and US West. (2) Includes approximately $38,000,000 and $60,000,000 in 2000 and 1999, respectively, of non-cash capital lease additions. (3) The 2000 budget assumes full year ownership of discontinued opera- tions and includes approximately $41,900,000 for a special water pipeline project. The Company anticipates that the funds necessary for its 2000 capital expenditures will be provided from operations; from advances of Rural Utilities Service loan contracts; from commercial paper notes payable; from debt, equity and other financing at appropriate times and from short-term borrowings under bank credit facilities. Until disposed, the Company's discontinued operations capital expenditures will also be funded through requisitions of Industrial Development Revenue Bond construction fund trust accounts and from parties desiring utility service. Upon disposition, the Company will receive reimbursement of certain 1999 actual and all 2000 budgeted water and wastewater and electric sector capital expenditures pursuant to the terms of the respective sales agreements for these businesses. Acquisitions - ------------ On May 27, September 21, and December 16, 1999, the Company announced that it had entered into definitive agreements to purchase from GTE Corp. (GTE) approximately 366,000 telephone access lines (as of December 31, 1999) in Arizona, California, Illinois, Minnesota and Nebraska for approximately $1,171,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. On June 16, 1999, the Company announced that it had entered into definitive agreements to purchase from US West Communications, Inc. (US West) approximately 545,000 telephone access lines (as of December 31, 1999) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. The Company expects to temporarily fund these telephone access line purchases with cash and investment balances and proceeds from commercial paper issuances, backed by the committed bank credit facilities. Permanent funding is expected to be from cash and investment balances and the proceeds from the divestiture of the Company's public services businesses. Divestiture - ----------- On August 24, 1999, the Company's Board of Directors approved a plan of divestiture for the Company's public services properties, which include gas, electric and water and wastewater businesses. The proceeds from the sales of the public services properties will be used to fund the telephone access line purchases. The Company has accounted for the planned divestiture of the public services properties as a discontinued operation. Discontinued operations in the consolidated statements of income and comprehensive income reflect the results -15- of operations of the public services properties including allocated interest expense for the periods presented. Interest expense was allocated to the discontinued operations based on the outstanding debt specifically identified with these businesses. On October 18, 1999, the Company announced that it had agreed to sell its water and wastewater operations to American Water Works, Inc. for an aggregate purchase price of $835,000,000. The transaction is expected to close in 2000 following regulatory approvals. On February 15, 2000, the Company announced that it had agreed to sell its electric utility operations. The Arizona and Vermont electric divisions will be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) Electric Division will be sold to Kauai Island Electric Co-op for an aggregate purchase price of $535,000,000. The transactions are expected to close in 2000 following regulatory approvals. Sale of Investments - ------------------- In January 1999, Centennial Cellular Corp. (Centennial) was merged with CCW Acquisition Corp., a company organized at the direction of Welsh, Carson, Anderson & Stowe. The Company was a holder of 1,982,294 shares of Centennial Class B Common Stock. In addition, as a holder of 102,187 shares of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the Company was required to convert the preferred stock into approximately 2,972,000 shares of Class B Common Stock. The Company received approximately $205,600,000 in cash for all of its Common Stock interests and approximately $17,500,000 related to accrued dividends on the preferred stock. The Company realized and reported a pre-tax gain of approximately $69,500,000 in the first quarter 1999 in Investment income. On October 1, 1999, Adelphia Communication Corp. (Adelphia) was merged with Century Communications Corp. (Century). The Company owned 1,807,095 shares of Century Class A Common Stock. Pursuant to this merger agreement, Century Class A Common shares were exchanged for $10,832,000 in cash and 1,206,705 shares of Adelphia Class A Common Stock (for a total market value of $79,600,000 based on Adelphia's October 1, 1999 closing price of $57.00). The Company realized and reported a pre-tax gain of approximately $67,600,000 in the fourth quarter of 1999 in Investment income. A subsidiary of the Company, in a joint venture with a subsidiary of Century, owned and operated four cable television systems in southern California serving over 90,000 basic subscribers. In July 1999, the Company entered into a separate agreement with Adelphia to sell its interest in the joint venture. Pursuant to this agreement on October 1, 1999, the Company received approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A Common Stock (for a total market value of $133,300,000 based on Adelphia's October 1, 1999 closing price of $57.00). The Company realized and reported a pre-tax gain of approximately $83,900,000 in the fourth quarter of 1999 in Investment income. Hungarian Telephone and Cable Corp. - ----------------------------------- In May 1999, in connection with HTCC's debt restructuring, the Company cancelled a note obligation from HTCC to the Company and a seven-year consulting services agreement in exchange for the issuance by HTCC to the Company of 1,300,000 shares of HTCC Common Stock and 30,000 shares of HTCC's 5% convertible preferred stock. Each share of HTCC convertible preferred stock has a liquidation value of $70 and is convertible at the option of the Company into 10 shares of HTCC Common Stock. To the extent the 1,300,000 HTCC common shares and the 300,000 HTCC common shares underlying the HTCC convertible preferred stock do not achieve an average market closing price of at least $7 per share for the twenty trading days ending March 31, 2000, HTCC has agreed to issue additional HTCC convertible preferred shares with a value equal to any such shortfall. As of March 15, 2000, the stock was trading at $8 13/16 per share. Regulatory Environment - ---------------------- In December 1999, the Company entered into an agreement (the Agreement) with the Staff and Consumer Advocate Division of the West Virginia Public Service Commission (WVPSC) to continue the Company's incentive regulation Plan (IRP) through 2002. Under the Agreement the Company will reduce access and other service rates by $3.5 million annually beginning in February 2000. In return the Company will be free of earnings regulation for three years and have some pricing flexibility for non-basic services. Impact of Year 2000 - ------------------- The Y2K issue resulted from computer programs using a two-digit format, as opposed to four, to indicate the year. Such computer systems were unable to interpret dates beyond the year 1999, which could have caused system failures or other computer errors. In late 1997, the Company developed a program to address the Y2K issue. The program was designed to protect the safety and continuity of the Company's service delivery and support capabilities, computer systems and -16- other critical functions. The Company's Y2K program addressed problems that could arise: (1) in Information Technology (IT) areas including information systems and technologies; (2) in non-IT areas such as communications networks and switches, utility control and monitoring systems, premises, facilities and general business equipment; and (3) due to suppliers of products and services not being Y2K compliant. Each of the Company's sectors had a program office that managed the progress of the Y2K efforts. The Company had determined priorities for taking corrective actions on mission critical systems and products so as to ensure continued delivery of core business activities. The Company's systems, products and services proved Y2K ready, as there were no system or customer impacting failures on mission critical systems. The Company's successful entry into the year 2000 was a culmination of a two-year preparation program. The Y2K plan called for inventory, assessment, renovation and testing to ensure that the impact to our business would be minimal and manageable. The Company will continue to monitor Y2K related exposures both internally and with its suppliers, customers and other business partners. The Company's Y2K efforts were essentially complete by the end of the third quarter of 1999. The completion of the Company's Y2K efforts coupled with its contingency plans ensured that the established and expected levels of customer service were maintained without interruption during the millennium transition. For the twelve months ended December 31, 1999, the Company spent approximately $23,495,000 on its Y2K efforts of which $16,089,000 related to continuing operations and $7,406,000 related to discontinued operations. For the twelve months ended December 31, 1999, continuing operations Y2K efforts include approximately $15,628,000 on IT efforts and $461,000 on non-IT efforts. For the twelve months ended December 31, 1999, discontinued operations Y2K efforts include approximately $2,835,000 on IT efforts and $4,571,000 on non-IT efforts. The Company expects to spend an additional $1,600,000 in 2000 on its remaining Y2K efforts. Certain state regulatory commissions where the Company operates have issued orders allowing the deferral of Y2K costs for consideration in future rate proceedings. In accordance with these orders, the Company has deferred approximately $5,767,000 of the $23,495,000 1999 Y2K expenses, of which $3,000,000 are related to its continuing operations and $2,767,000 are related to its discontinued operations. New Accounting Pronouncements - ----------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. In May 1999, the FASB issued SFAS 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which deferred the effective date of SFAS 133 by one year. This statement makes SFAS 133 effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company has not fully evaluated the impact of the adoption of SFAS 133. -17- (b) Results of Operations --------------------- REVENUES -------- Telecommunications revenues increased $154.6 million, or 17%, in 1999 and $72.5 million, or 8%, in 1998. The increase in 1999 was primarily due to increased communications network access services revenues and ELI revenues. The increase in 1998 was primarily due to increased communications network access services revenues and ELI local telephone services revenues.
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------ ----------- ------- Communications revenues ($ in thousands) - ------------------------ Network access services $ 503,365 17% $ 432,018 7% $ 403,990 Local network services 287,616 10% 262,239 5% 250,521 Long distance and data services 76,495 (21%) 96,584 6% 90,747 Directory services 33,449 6% 31,691 (1%) 31,982 Other 48,343 8% 44,914 (8%) 48,922 Eliminations (46,031) 42% (32,407) 37% (23,573) -------- -------- -------- Total $ 903,237 8% $ 835,039 4% $ 802,589 ======== ======== ========
Network access services revenues increased $71.3 million, or 17%, in 1999 primarily due to increased minutes of use, increased special access revenues, a universal service fund settlement and the acquisition of Rhinelander Telecommunications, Inc. (RTI) in November 1998. Network access services revenues increased $28 million, or 7%, in 1998 primarily due to increased special access revenues resulting from the introduction of the DS3 product, increased circuit demand due to Internet growth and increased minutes of use, partially offset by an FCC mandated interstate switched access rate reduction which became effective July 1, 1997. Local network services revenues increased $25.4 million, or 10%, in 1999 primarily due to business and residential access line growth, increased customer calling features and private line sales and the acquisition of RTI. Local network services revenues increased $11.7 million, or 5%, in 1998 primarily due to business and residential access line growth and increased custom calling features and private line sales. Long distance and data services revenues decreased $20.1 million, or 21%, in 1999 primarily due to the elimination of long distance product offerings to out-of-territory customers, partially offset by increased long distance minutes of use by in-territory customers. Long distance and data services revenues increased $5.8 million, or 6%, in 1998 primarily due to the curtailment of certain communications sector long distance service operations in adjacent markets beginning in 1997. The directory services revenues increased $1.8 million, or 6%, in 1999 primarily due to the acquisition of RTI and increased advertising revenue. Other revenues increased $3.4 million, or 8%, in 1999 primarily due to increased billing and collections revenues, partially offset by the phasing out of certain surcharges resulting from rate case decisions in California and New York. Other revenues decreased $4 million, or 8%, in 1998 primarily due to the phasing out of certain surcharges resulting from rate case decisions in California and New York. Eliminations represent network access revenues received by the Company's local exchange operations from its long distance operations and ELI. -18-
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------ ----------- ------- ELI revenues ($ in thousands) - ------------ Network services $ 53,249 46% $ 36,589 9% $ 33,522 Local telephone services 77,591 103% 38,169 261% 10,565 Long distance services 26,698 117% 12,309 51% 8,140 Data services 29,470 113% 13,813 56% 8,857 Eliminations (2,817) (8%) (3,061) (8%) (3,341) -------- -------- -------- Total $ 184,191 88% $ 97,819 69% $ 57,743 ======== ======== ========
Network services revenues increased $16.7 million, or 46%, in 1999 primarily due to network expansion and sales of additional circuits to new and existing customers. Network services revenues increased $3.1 million, or 9%, in 1998 primarily due to sales of additional circuits to new and existing customers, partially offset by the expiration of a short-term contract with a significant customer. Local telephone services revenues increased $39.4 million, or 103%, in 1999 primarily due to increased reciprocal compensation revenues resulting from the establishment of interconnection agreements in several new states and increased traffic. In addition, increased sales of the integrated service digital network (ISDN) product to the ISPs and increased access line equivalents contributed to the increase. Local telephone services revenues increased $27.6 million, or 261%, in 1998 primarily due to increased reciprocal compensation revenues, increased access line equivalents and increased sales of the ISDN product. Long distance services revenues increased $14.4 million, or 117%, in 1999 primarily due to increased revenues resulting from the bundling of sales of long distance with other products, the addition of new customers and increased prepaid services revenue. The Company exited the prepaid services market in the third quarter of 1999, a result of the decision to focus on higher margin products. Long distance services revenues increased $4.2 million, or 51%, in 1998 primarily due to increased prepaid services minutes processed resulting from new customers and increased revenues resulting from bundling of sales of long distance with other products. The increase in retail long-distance revenues were partially offset by a decrease in wholesale long distance revenues primarily due to the elimination of a large customer with credit problems. Data services revenues increased $15.7 million, or 113%, in 1999 primarily due to increased sales of Internet and frame relay services in new and existing markets. Data services revenues increased $5 million, or 56%, in 1998 primarily due to increased sales of Internet and frame relay services in new and existing markets, and the introduction of new products such as ATM and RSVP. Eliminations reflect revenues received by ELI from the Company's communications operations. -19- NETWORK ACCESS EXPENSE ----------------------
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------ ----------- ------- ($ in thousands) Network access $ 160,267 14% $ 140,471 3% $ 136,971 Eliminations (48,848) 38% (35,468) 32% (26,914) -------- --------- -------- Total $ 111,419 6% $ 105,003 (5%) $ 110,057 ======== ========= ========
Network access expense increased $19.8 million, or 14%, in 1999 primarily due to expenses related to the ELI national data expansion, partially offset by decreased communications sector long distance minutes of use from out-of-territory long distance customers. Network access expense increased $3.5 million, or 3%, in 1998 primarily due to ELI revenue growth, ELI national data expansion efforts, and significant growth in ELI long distance services, partially offset by lease terminations as a result of the curtailment of certain communications sector long distance service operations in 1997. Eliminations represent network access expense incurred by the Company's long distance operation for services provided by its local exchange operations and expense incurred by the Company's communications operations for services provided by ELI. DEPRECIATION AND AMORTIZATION EXPENSE -------------------------------------
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------ ----------- ------- ($ in thousands) Depreciation and amortization $ 262,430 32% $ 198,658 7% $ 186,530
Depreciation and amortization expense increased $63.8 million, or 32%, in 1999 primarily due to increased property, plant and equipment and the acquisition of RTI in November 1998. The increase also includes $4.8 million of accelerated depreciation related to the change in useful life of an operating system in the communications sector. Depreciation and amortization expense increased $12.1 million, or 7%, in 1998 primarily due to increased property, plant and equipment balances. -20- OTHER OPERATING EXPENSES ------------------------
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------ ----------- ------ ($ in thousands) Operating expenses $ 569,163 28% $ 444,385 (12%) $ 503,762 Taxes other than income 64,469 15% 55,843 - 55,871 Sales and marketing 71,879 52% 47,325 (14%) 54,893 -------- -------- -------- Total $ 705,511 29% $ 547,553 (11%) $ 614,526 ======== ======== ========
Operating expenses increased $124.8 million, or 28%, in 1999. Of this increase, $52.3 million was due to the following items: asset impairment charges of $36.1 million related to the discontinuation of the development of certain operational systems and certain regulatory assets deemed to be no longer recoverable; restructuring charges allocated to continuing operations of $4.1 million related to the Company's corporate office; pre-acquisition integration costs of $3.9 million; separation costs allocated to continuing operations of $3.5 million and costs associated with an executive retirement agreement allocated to continuing operations of $4.7 million. The remaining $72.5 million increase is primarily due to Y2K costs, the full year impact of RTI and ELI expenses relating to the expansion of data services and product exit costs. Operating expenses decreased $59.4 million, or 12%, in 1998 primarily due to 1997 pre-tax charges to earnings, partially offset by increased ELI operating costs, Y2K costs and separation costs allocated to continuing operations. Taxes other than income increased $8.6 million, or 15%, in 1999 primarily due to increases in payroll and property taxes. Sales and marketing expenses increased $24.6 million, or 52%, in 1999 primarily due to increased personnel and product advertising to support the delivery of services in existing and new markets including the expansion of ELI data services and products. Sales and marketing expenses decreased $7.6 million, or 14%, in 1998 primarily due to the curtailment of certain communications sector long distance service operations in adjacent markets beginning in 1997. INCOME FROM OPERATIONS ----------------------
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ----------- ------ ----------- ------ ($ in thousands) Communications $ 103,727 (34%) $ 157,567 6,207% $ (2,580) ELI (95,659) (26%) (75,923) (58%) (48,201) -------- -------- -------- Income (loss) from operations $ 8,068 (90%) $ 81,644 261% $ (50,781) ======== ======== ========
Income from operations decreased $73.6 million, or 90%, in 1999. Of this decrease, $57.1 million was due to the following items: asset impairment charges of $36.1 million, restructuring charges allocated to continuing operations of $4.1 million, pre-acquisition integration costs of $3.9 million, separation costs allocated to continuing operations of $3.5 million, costs associated with an executive retirement agreement allocated to continuing operations of $4.7 million and accelerated depreciation of $4.8 million. The remaining decrease is primarily due to increased ELI losses and $9.1 million of increased Y2K costs. Income from operations increased $132.4 million, or 261%, in 1998 primarily due to 1997 pre-tax charges to earnings, partially offset by increased ELI losses, Y2K costs and separation costs. -21- INVESTMENT AND OTHER INCOME ---------------------------
1999 1998 1997 -------------------- ----------------------- -------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------- ----------- -------- ($ in thousands) Non operating gain on sale of subsidiary stock $ - N/A $ - N/A $ 78,734 Investment income 243,621 660% 32,038 (4%) 33,397 Other income (loss), net (20) 100% (26,746) (434%) 7,999 ------- ------- ------- $ 243,601 4,503% $ 5,292 (96%) $ 120,130 ======= ======= =======
The non operating gain on sale of subsidiary stock in 1997 of $78.7 million represents the pre-tax gain on the ELI initial public offering of 8,000,000 shares of Class A Common Stock at a price of $16 per share on November 24, 1997. Investment income increased $211.6 million, or 660%, in 1999. Of this increase, $221 million was due to the $69.5 million gain on the sale of the Company's investment in Centennial in January 1999, the $67.6 million gain on the sale of the Company's investment in Century in October 1999 and the $83.9 million gain on the sale of the Company's investment in the cable joint venture in October 1999. Investment income decreased $1.4 million, or 4%, in 1998 primarily due to lower average investment balances. Other income (loss), net increased $26.7 million, or 100%, in 1999 and decreased $34.7 million, or 434%, in 1998 primarily due to the recognition of a $31.9 million loss resulting from the decline in value of the HTCC investment in 1998. MINORITY INTEREST -----------------
1999 1998 1997 -------------------- ----------------------- -------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------- ----------- -------- ($ in thousands) Minority interest $ 23,227 66% $ 14,032 2,076% $ 645
Minority interest is a result of ELI's initial public offering in November 1997 and it represents the minority's share of ELI's loss before income tax. INTEREST EXPENSE ----------------
1999 1998 1997 -------------------- ----------------------- -------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------- ----------- -------- ($ in thousands) Interest expense $ 86,972 28% $ 67,944 3% $ 65,779
Interest expense increased $19 million, or 28%, in 1999 primarily due to increased ELI net borrowings, partially offset by decreased short-term debt balances. Interest expense increased $2.2 million, or 3%, in 1998 primarily due to increased ELI net borrowings, partially offset by an increase in the debt component of AFUDC. -22- INCOME TAXES ------------
1999 1998 1997 -------------------- ----------------------- ------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------- ----------- ------- ($ in thousands) Income taxes $ 64,587 1,536% $ 3,948 105% $ 1,928
Income taxes increased $60.6 million, or 1,536%, in 1999 primarily due to increased taxable income and an increase in the effective tax rate. The effective tax rate for 1999 reflects the impact of increased pre-tax income resulting from the sale of investments included in Investment income. Income taxes increased $2 million, or 105%, in 1998 primarily due to an increase in pre-tax income. DISCONTINUED OPERATIONS -----------------------
1999 1998 1997 -------------------- ----------------------- -------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------- ----------- -------- ($ in thousands) Revenues $ 613,216 1% $ 609,514 14% $ 533,287 Operating income $ 82,179 (15%) $ 96,525 45% $ 66,623 Net income $ 27,359 (25%) $ 36,528 160% $ 14,023
Revenues from discontinued operations increased $3.7 million, or 1%, in 1999 primarily due to increased consumption and customer growth in the electric sector, partially offset by lower purchased gas and fuel costs passed on to customers in the gas and electric sectors and a decrease in customer usage due to warmer weather conditions in the gas sector. Revenues from discontinued operations increased $76.2 million, or 14%, in 1998 primarily due to the acquisition in October 1997 of The Gas Company (TGC) and increased consumption and customer growth in the gas and water/wastewater sectors, partially offset by a decrease in gas revenues resulting from warmer weather conditions and lower purchased gas and fuel costs passed on to customers in the gas and electric sectors. Operating income from discontinued operations decreased $14.3 million, or 15%, and net income from discontinued operations decreased $9.2 million, or 25%, in 1999 primarily due to restructuring charges, separation costs, costs associated with an executive retirement agreement, commission ordered customer refunds in Arizona and increased Y2K costs, partially offset by an increase in gross margins and a decrease in income taxes. Operating income from discontinued operations increased $29.9 million, or 45%, and net income from discontinued operations increased $22.5 million, or 160%, in 1998 primarily due to the 1997 charges to earnings, partially offset by Y2K and separation costs. -23- NET INCOME AND NET INCOME PER COMMON SHARE ------------------------------------------
1999 1998 1997 -------------------- ----------------------- -------- Change from Change from Amount Prior year Amount Prior year Amount ------ ---------- ------- ----------- -------- ($ in thousands) Net Income $144,486 153% $ 57,060 465% $ 10,100 Net Income Per Common Share $ .55 150% $ .22 450% $ .04
1999 net income and net income per share were impacted by the following after tax items: gains on the sales of investments of $136.4 million, or 52(cent) per share, asset impairment charges of $22.3 million, or 9(cent) per share, an executive retirement agreement of $4.1 million, or 2(cent) per share, restructuring charges of $3.6 million, or 1(cent) per share, separation costs of $3.1 million, or 1(cent) per share, accelerated depreciation of $3 million, or 1(cent) per share, and pre-acquisition integration costs of $2.4 million, or 1(cent) per share. 1999 net income and net income per share were also impacted by after tax net losses from ELI of $54.1 million, or 21(cent) per share, and after tax Y2K costs of $12.2 million, or 5(cent) per share. 1998 net income and net income per share were impacted by the following after tax items: the non-cash write down of the Company's investment in HTCC of $19.7 million, or 7(cent) per share, the cumulative effect of a change in accounting principle at ELI of $2.3 million, or 1(cent) per share, and separation costs of $1.3 million, or 1(cent) per share. 1998 net income and net income per share were also impacted by after tax net losses from ELI of $34.8 million, or 14(cent) per share, and after tax Y2K costs of $5.3 million, or 2(cent) per share. 1997 net income was impacted by after tax charges to earnings of $135.1 million of which $105.1 million related to continuing operations and $30 million to discontinued operations. For continuing operations, the charges resulted from a re-evaluation of certain business strategies including its out-of-territory long distance aggressive growth strategy, accounting policy changes at ELI in anticipation of its initial public offering and curtailment of certain employee benefit plans. For discontinued operations, the charges resulted from public utility regulatory commission orders and the curtailment of certain employee benefit plans. -24- Item 7A. Quantitative and Qualitative Disclosures about Market Risk --------------------------------------------------------------- The Company is exposed to the impact of interest rate and market risks. In the normal course of business, the Company employs established policies, procedures and internal processes to manage its exposure to interest rate and market risks. The Company's objective in managing its interest rate risk is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve these objectives, the Company maintains fixed rate debt on a majority of its borrowings and refinances debt when advantageous. In an effort to reduce interest rate risk ELI issued fixed interest rate $325 million, five-year senior unsecured notes in April 1999 that are guaranteed by the Company. The net proceeds from the issuance were used to repay outstanding borrowings under ELI's floating rate bank credit facility. The Company maintains a portfolio of investments consisting of both equity and debt financial instruments. The Company's equity portfolio is primarily comprised of investments in communications companies. The Company's bond portfolio consists of government, corporate and municipal fixed-income securities. The Company does not hold or issue derivative or other financial instruments for trading purposes. The Company purchases monthly gas futures contracts to manage well-defined commodity price fluctuations, caused by weather and other unpredictable factors, associated with the Company's commitments to deliver natural gas to certain industrial customers at fixed prices. This derivative financial instrument activity relates to the discontinued operations and is not material to the Company's consolidated financial position, results of operations or cash flows. Item 8. Financial Statements and Supplementary Data ------------------------------------------- The following documents are filed as part of this Report: 1.Financial Statements, See Index on page F-1. 2.Supplementary Data, Quarterly Financial Data is included in the Financial Statements (see 1. above). Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None PART III -------- The Company intends to file with the Commission a definitive proxy statement for the 2000 Annual Meeting of Stockholders pursuant to Regulation 14A not later than 120 days after December 31, 1999. The information called for by this Part III is incorporated by reference to that proxy statement. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) The exhibits listed below are filed as part of this Report: Exhibit No. Description - ----- ----------- 3.200.1 Restated Certificate of Incorporation of Citizens Utilities Company, with all amendments to May 21, 1998, as restated July 2, 1998. 3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities Company, with all amendments to May 20, 1999, (incorporated by reference to Exhibit 3.200.2 to the Registrant's Quarterly Report on Form 10-Q for the six months ended June 30, 1999, File No. 001-11001). 4.100.1 Indenture of Securities, dated as of August 15, 1991, to Chemical Bank, as Trustee, (incorporated by reference to Exhibit 4.100.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No. 001-11001). 4.100.2 First Supplemental Indenture, dated August 15, 1991, (incorporated by reference to Exhibit 4.100.2 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No. 001-11001). -25- Exhibit No. Description - ------ ----------- 4.100.3 Letter of Representations, dated August 20, 1991, from Citizens Utilities Company and Chemical Bank, as Trustee, to Depository Trust Company (DTC) for deposit of securities with DTC, (incorporated by reference to Exhibit 4.100.3 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1991, File No. 001-11001). 4.100.4 Second Supplemental Indenture, dated January 15, 1992, to Chemical Bank, as Trustee, (incorporated by reference to Exhibit 4.100.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-11001). 4.100.5 Letter of Representations, dated January 29, 1992, from Citizens Utilities Company and Chemical Bank, as Trustee, to DTC, for deposit of securities with DTC, (incorporated by reference to Exhibit 4.100.5 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 001-11001). 4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical Bank, as Trustee, (incorporated by reference to Exhibit 4.100.6 to the Registrant's Form 8-K Current Report filed July 5, 1994, File No. 001-11001). 4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to Chemical Bank, as Trustee, (incorporated by reference to Exhibit 4.100.7 to Registrant's Form 8-K Current Report filed January 3, 1995, File No. 001-11001). 4.100.8 Fifth Supplemental Indenture, dated as of June 15, 1995, to Chemical Bank, as Trustee, (incorporated by reference to Exhibit 4.100.8 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001). 4.100.9 Sixth Supplemental Indenture, dated as of October 15, 1995, to Chemical Bank, as Trustee, (incorporated by reference to Exhibit 4.100.9 to Registrant's Form 8-K Current Report filed March 29, 1996, File No. 001-11001). 4.100.11 Seventh Supplemental Indenture, dated as of June 1, 1996, (incorporated by reference to Exhibit 4.100.11 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001). 4.100.12 Eighth Supplemental Indenture, dated as of December 1, 1996, (incorporated by reference to Exhibit 4.100.12 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 001-11001). 4.200.1 Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture trustee (incorporated by reference to Exhibit 4.200.1 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.2 First Supplemental Indenture dated as of January 15, 1996, between Citizens Utilities Company and Chemical Bank, as indenture trustee, (incorporated by reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.3 5% Convertible Subordinated Debenture due 2036, (contained as Exhibit A to Exhibit 4.200.2), (incorporated by reference to Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.4 Amended and Restated Declaration of Trust dated as of January 15, 1996, of Citizens Utilities Trust, (incorporated by reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.5 Convertible Preferred Security Certificate, (contained as Exhibit A-1 to Exhibit 4.200.4), (incorporated by reference to Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.6 Amended and Restated Limited Partnership Agreement dated as of January 15, 1996 of Citizens Utilities Capital L.P., (incorporated by reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.7 Partnership Preferred Security Certificate (contained as Annex A to Exhibit 4.200.6), (incorporated by reference to Exhibit 4.200.6 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.8 Convertible Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities Company and Chemical Bank, as guarantee trustee, (incorporated by reference to Exhibit 4.200.8 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.9 Partnership Preferred Securities Guarantee Agreement dated as of January 15, 1996 between Citizens Utilities Company and Chemical Bank, as guarantee trustee, (incorporated by reference to Exhibit 4.200.9 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). 4.200.10 Letter of Representations, dated January 18, 1996, from Citizens Utilities Company and Chemical Bank, as trustee, to DTC, for deposit of Convertible Preferred Securities with DTC, (incorporated by reference to Exhibit 4.200.10 to the Registrant's Form 8-K Current Report filed May 28, 1996, File No. 001-11001). -26- Exhibit No. Description - ------ ----------- 10.5 Participation Agreement between ELI, Shawmut Bank Connecticut, National Association, the Certificate Purchasers named therein, the Lenders named therein, BA Leasing & Capital Corporation and Citizens Utilities Company dated as of April 28, 1995, and the related operating documents (incorporated by reference to Exhibit 10.5 of ELI's Registration Statement on Form S-1 effective on November 21, 1997, File No. 333-35227). 10.6 Deferred Compensation Plans for Directors, dated November 26, 1984 and December 10, 1984, (incorporated by reference to Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1984, File No. 001-11001). 10.6.2 Non-Employee Directors' Deferred Fee Equity Plan dated as of June 28, 1994, with all amendments to May 5, 1997, (incorporated by reference to Exhibit A to the Registrant's Proxy Statement dated April 4, 1995 and Exhibit A to the Registrant's Proxy Statement dated March 28, 1997, respectively, File No. 001-11001). 10.16.1 Employment Agreement between Citizens Utilities Company and Leonard Tow, effective July 11, 1996, (incorporated by reference to Exhibit 10.16.1 to the Registrant's Quarterly Report on Form 10-Q for the nine months ended September 30, 1996, File No. 001-11001). 10.17 1992 Employee Stock Purchase Plan, (incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 001-11001). 10.18 Amendments dated May 21, 1993 and May 5, 1997, to the 1992 Employee Stock Purchase Plan, (incorporated by reference to the Registrant's Proxy Statement dated March 31, 1993 and the Registrant's Proxy Statement dated March 28, 1997, respectively, File No. 001-11001). 10.19 Citizens Executive Deferred Savings Plan dated January 1, 1996. 10.20 Citizens Incentive Plan restated as of March 21, 2000. 10.21 1996 Equity Incentive Plan and amendment dated May 5, 1997 to 1996 Equity Incentive Plan, (incorporated by reference to Exhibit A to the Registrant's Proxy Statement dated March 29, 1996 and Exhibit B to Proxy Statement dated March 28, 1997, respectively, File No. 001-11001). 10.22 Competitive Advance and Revolving Credit Facility Agreement between Citizens Utilities Company and Chase Manhattan Bank dated October 29, 1999. 10.24.1 Indenture from ELI to Citibank, N.A., dated April 15, 1999, with respect to ELI's 6.05% Senior Unsecured Notes due 2004, (incorporated by reference to Exhibit 10.24.1 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.24.2 First Supplemental Indenture from ELI, Citizens Utilities Company and Citizens Newco Company to Citibank, N.A. dated April 15, 1999, with respect to the 6.05% Senior Unsecured Notes due 2004, (incorporated by reference to Exhibit 10.24.2 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.24.3 Form of ELI's 6.05% Senior Unsecured Notes due 2004, (incorporated by reference to Exhibit 10.24.3 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.24.4 Letter of Representations to the Depository Trust Company dated April 28, 1999, with respect to ELI's 6.05% Senior Unsecured Notes due 2004, (incorporated by reference to Exhibit 10.24.4 of ELI's Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-23393). 10.25 Asset Purchase Agreements between Citizens Utilities Company and GTE Corporation dated May 27 and September 21, 1999. 10.26 Asset Purchase Agreements between Citizens Utilities Company and US West Communications, Inc. dated June 16, 1999. 10.27 Asset Purchase Agreements between Citizens Utilities Company and American Water Works dated October 15, 1999. 12 Computation of ratio of earnings to fixed charges (this item is included herein for the sole purpose of incorporation by reference). 21 Subsidiaries of the Registrant 23 Auditors' Consent 24 Powers of Attorney 27 Financial Data Schedule Exhibits 10.6, 10.6.2, 10.16.1, 10.17, 10.18, 10.19, 10.20 and 10.21 are management contracts or compensatory plans or arrangements. The Company agrees to furnish to the Commission upon request copies of the Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens Utilities Rural Company, Inc., to the United States of America (the Rural Utilities Services and Rural Telephone Bank) and the Mortgage Notes which that mortgage secures; and the several subsequent supplemental Mortgages and Mortgage Notes; copies of the instruments governing the long-term debt of Louisiana General Services, Inc.; copies of separate loan agreements and indentures governing various Industrial Development Revenue Bonds; copies of documents relating to indebtedness of subsidiaries acquired during 1996, 1997 and 1998, and copies of the credit agreement between Electric Lightwave, Inc. and Citibank, N. A. dated November 21, 1997. The Company agrees to furnish to the Commission upon request copies of schedules and exhibits to items 10.25, 10.26 and 10.27. -27- (b) Reports on Form 8-K: The Company filed on Form 8-K dated October 18, 1999, under Item 5 "Other Events" and Item 7 "Exhibits," a press release announcing that it had agreed to sell its water and wastewater operations to American Water Works, Inc. The Company filed on Form 8-K dated November 10, 1999, under Item 7 "Exhibits," a press release announcing financial results for third quarter ended September 30, 1999 and operating data. The Company filed on Form 8-K dated December 20, 1999, under Item 5 "Other Events" and Item 7 "Exhibits," a press release announcing a definitive agreement to purchase 106,850 telephone access lines from GTE Corp. -28- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CITIZENS UTILITIES COMPANY -------------------------- (Registrant) By: /s/ Leonard Tow ----------------------------- Leonard Tow Chairman of the Board; Chief Executive Officer; Member, Executive Committee and Director March 22, 2000 -29- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 22nd day of March 2000.
Signature Title --------- ----- /s/ Robert J. DeSantis Vice President and Chief Financial Officer - --------------------------------------- (Robert J. DeSantis) /s/ Livingston E. Ross Vice President and Chief Accounting Officer - --------------------------------------- (Livingston E. Ross) Norman I. Botwinik* Director - --------------------------------------- (Norman I. Botwinik) Aaron I. Fleischman* Member, Executive Committee and Director - --------------------------------------- (Aaron I. Fleischman) Stanley Harfenist* Member, Executive Committee and Director - --------------------------------------- (Stanley Harfenist) Andrew N. Heine* Director - --------------------------------------- (Andrew N. Heine) John L. Schroeder* Director - --------------------------------------- (John L. Schroeder) Robert D. Siff* Director - --------------------------------------- (Robert D. Siff) Robert A. Stanger* Member, Executive Committee and Director - --------------------------------------- (Robert A. Stanger) Charles H. Symington, Jr.* Director - --------------------------------------- (Charles H. Symington, Jr.) Edwin Tornberg* Director - --------------------------------------- (Edwin Tornberg) Claire L. Tow* Director - --------------------------------------- (Claire L. Tow) *By: /s/ Robert J. DeSantis -------------------------- (Robert J. DeSantis) Attorney-in-Fact
-30- CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Index to Consolidated Financial Statements
Item Page - ---- ---- Independent Auditors' Report F-2 Consolidated balance sheets as of December 31, 1999, 1998 and 1997 F-3 Consolidated statements of income and comprehensive income for the years ended December 31, 1999, 1998 and 1997 F-4 Consolidated statements of shareholders' equity for the years ended December 31, 1999, 1998 and 1997 F-6 Consolidated statements of cash flows for the years ended December 31, 1999, 1998 and 1997 F-7 Notes to consolidated financial statements F-8
F-1 Independent Auditors' Report The Board of Directors and Shareholders Citizens Utilities Company: We have audited the accompanying consolidated balance sheets of Citizens Utilities Company and subsidiaries as of December 31, 1999, 1998 and 1997, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our 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 Citizens Utilities Company and subsidiaries as of December 31, 1999, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. As discussed in Note 1(m) to the consolidated financial statements, the Company changed its method of accounting in 1998 to adopt the provisions of the American Institute of Certified Public Accountants Statement of Position (AICPA SOP) 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and AICPA SOP 98-5 "Reporting on the Costs of Start-up Activities." KPMG LLP New York, New York March 14, 2000 F-2 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999, 1998 and 1997 ($ in thousands)
1999 1998 1997 --------- --------- --------- Assets Current assets: Cash $ 37,141 $ 31,922 $ 35,163 Accounts receivable: Customers 213,457 175,074 170,191 Other 56,340 77,009 46,487 Less allowance for doubtful accounts 28,278 18,348 25,254 --------- ---------- --------- Net accounts receivable 241,519 233,735 191,424 Materials and supplies 12,624 13,706 11,411 Other current assets 17,340 27,199 43,871 --------- ---------- --------- Total current assets 308,624 306,562 281,869 --------- ---------- --------- Property, plant and equipment 4,458,654 4,045,752 3,576,434 Less accumulated depreciation 1,569,936 1,340,665 1,181,647 ---------- ---------- ----------- Net property, plant and equipment 2,888,718 2,705,087 2,394,787 ---------- ---------- ----------- Investments 591,386 464,146 447,695 Regulatory assets 184,942 189,866 194,257 Deferred debits and other assets 141,661 113,223 115,038 Assets of discontinued operations 1,656,414 1,514,048 1,439,206 ---------- ---------- ----------- Total assets $ 5,771,745 $ 5,292,932 $ 4,872,852 ========== ========== =========== Liabilities and Shareholders' Equity Current liabilities: Long-term debt due within one year $ 31,156 $ 7,672 $ 5,089 Short-term debt - 110,000 - Accounts payable 187,984 175,304 214,713 Income taxes accrued 75,161 53,599 45,064 Other taxes accrued 27,823 22,091 21,243 Interest accrued 30,788 27,459 24,841 Customers' deposits 32,842 30,797 19,401 Other current liabilities 81,258 63,676 74,907 --------- ---------- --------- Total current liabilities 467,012 490,598 405,258 Deferred income taxes 460,208 442,908 420,708 Customer advances for construction 172,067 187,502 151,307 Deferred credits and other liabilities 87,668 77,967 105,880 Contributions in aid of construction 7,764 7,407 6,604 Regulatory liabilities 27,000 19,120 20,881 Long-term debt 2,107,460 1,775,338 1,583,902 Liabilities of discontinued operations 310,269 268,286 261,225 Minority interest in subsidiary 11,112 29,785 36,626 Company obligated mandatorily redeemable convertible preferred securities * 201,250 201,250 201,250 Shareholders' equity 1,919,935 1,792,771 1,679,211 ---------- ---------- ---------- Total liabilities and shareholders' equity $ 5,771,745 $ 5,292,932 $ 4,872,852 ========== ========== ========== * Represents securities of a subsidiary trust, the sole assets of which are securities of a subsidiary partnership, substantially all the assets of which are convertible debentures of the Company. The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-3 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997 ($ in thousands, except for per-share amounts)
1999 1998 1997 --------- -------- -------- Revenues $1,087,428 $ 932,858 $ 860,332 Operating expenses: Network access 111,419 105,003 110,057 Depreciation and amortization 262,430 198,658 186,530 Other operating expenses 705,511 547,553 614,526 --------- -------- --------- Total operating expenses 1,079,360 851,214 911,113 --------- -------- --------- Income (loss) from operations 8,068 81,644 (50,781) Non operating gain on sale of subsidiary stock - - 78,734 Investment income 243,621 32,038 33,397 Other income (loss), net (20) (26,746) 7,999 Minority interest 23,227 14,032 645 Interest expense 86,972 67,944 65,779 --------- -------- ---------- Income before income taxes, dividends on convertible preferred securities, discontinued operations and cumulative effect of change in accounting principle 187,924 33,024 4,215 Income taxes 64,587 3,948 1,928 --------- -------- ---------- Income before dividends on convertible preferred securities, discontinued operations and cumulative effect of change in accounting principle 123,337 29,076 2,287 Dividends on convertible preferred securities, net of income tax benefit 6,210 6,210 6,210 --------- -------- ---------- Income (loss) before discontinued operations and cumulative effect of change in accounting principle 117,127 22,866 (3,923) Income from discontinued operations, net of tax 27,359 36,528 14,023 --------- -------- ---------- Income before cumulative effect of change in accounting principle 144,486 59,394 10,100 Cumulative effect of change in accounting principle, net of income tax benefit and related minority interest - 2,334 - --------- -------- ---------- Net income 144,486 57,060 10,100 Other comprehensive income (loss), net of tax and reclassification adjustments (41,769) 52,872 10,832 --------- -------- ---------- Total comprehensive income $ 102,717 $ 109,932 $ 20,932 ========= ======== ========== The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-4 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (Continued) ($ in thousands, except for per-share amounts)
Income (loss) before discontinued operations and 1999 1998 1997* cumulative effect of change in accounting -------- --------- --------- principle per common share: Basic $ .45 $ .09 $ (.02) Diluted $ .45 $ .09 $ (.02) Income from discontinued operations per common share: Basic $ .10 $ .14 $ .05 Diluted $ .10 $ .14 $ .05 Income before cumulative effect of change in accounting principle per common share: Basic $ .55 $ .23 $ .04 Diluted $ .55 $ .23 $ .04 Net income per common share: Basic $ .55 $ .22 $ .04 Diluted $ .55 $ .22 $ .04 * Adjusted for subsequent stock dividends. The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-5 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997 ($ in thousands, except for per-share amounts)
Accumulated Common Additional Other Total Stock Paid-In Retained Comprehensive Shareholders' ($.25) Capital Earnings Income (Loss) Equity ----------- ---------- -------- ----------- ----------- Balance January 1, 1997 $ 59,788 $ 1,381,341 $ 244,066 $ (7,012) $ 1,678,183 Acquisitions 604 2,736 8,318 11,658 Common stock buybacks (1,226) (47,326) (48,552) Stock plans 188 6,380 6,568 Stock issuances to fund EPPICS dividends 247 10,175 10,422 Net income 10,100 10,100 Other comprehensive income, net of tax and reclassi- 10,832 10,832 fication adjustment Stock dividends in shares of Common Stock 3,148 127,119 (130,267) - ---------- ---------- --------- ------------ ----------- Balance December 31, 1997 $ 62,749 $ 1,480,425 $ 132,217 $ 3,820 $ 1,679,211 ---------- ---------- --------- ------------ ----------- Acquisitions 133 2,150 2,283 Common stock buybacks (453) (14,370) (14,823) Stock plans 171 5,935 6,106 Stock issuances to fund EPPICS dividends 273 9,789 10,062 Net income 57,060 57,060 Other comprehensive income, net of tax and reclassi- fication adjustment 52,872 52,872 Stock dividends in shares of Common Stock 1,914 70,259 (72,173) - ----------- ---------- --------- ----------- ------------ Balance December 31, 1998 $ 64,787 $ 1,554,188 $ 117,104 $ 56,692 $ 1,792,771 ----------- ---------- --------- ----------- ------------ Common stock buybacks (157) (6,468) (6,625) Stock plans 638 20,475 21,113 Stock issuances to fund EPPICS dividends 251 9,708 9,959 Net income 144,486 144,486 Other comprehensive loss, net of tax benefit and reclassification adjustment (41,769) (41,769) ----------- ---------- --------- ------------- ------------ Balance December 31, 1999 $ 65,519 $ 1,577,903 $ 261,590 $ 14,923 $ 1,919,935 =========== ========== ========= ============= ============ The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-6 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 and 1997 ($ in thousands)
1999 1998 1997 ---------- --------- --------- Net cash provided by continuing operating activities $ 347,509 $ 156,098 $ 139,856 ---------- ---------- ---------- Cash flows used for investing activities: Securities matured 7,435 2,000 16,205 Securities sold 1,084,190 992,761 578,322 Securities purchased (1,068,450) (952,628) (434,030) Construction expenditures (484,776) (353,176) (414,656) Business acquisitions - (89,234) - Other (2,786) (1,052) 25,686 ---------- ----------- --------- (464,387) (401,329) (228,473) ---------- ----------- --------- Cash flows from financing activities: Long-term debt borrowings 341,471 242,647 143,801 Issuance of common stock 21,113 7,101 4,825 Issuance of subsidiary stock - - 118,554 Short-term debt borrowings (110,000) 42,000 - (repayments) Common stock buybacks to fund stock (6,625) (14,823) (48,552) dividends Long-term debt principal payments (45,286) (4,574) (3,234) Other (2,552) - (1,380) ---------- ---------- --------- 198,121 272,351 214,014 ---------- ---------- --------- Cash used for discontinued operations (76,024) (30,361) (114,464) ---------- ---------- --------- Increase (decrease) in cash 5,219 (3,241) 10,933 Cash at January 1, 31,922 35,163 24,230 ---------- ----------- ---------- Cash at December 31, $ 37,141 $ 31,922 $ 35,163 ========== =========== ========== The accompanying Notes are an integral part of these Consolidated Financial Statements.
F-7 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies: (a) Description of Business: ------------------------ The Company provides both regulated and competitive communications services to residential, business and wholesale customers through subsidiaries and Electric Lightwave, Inc. (ELI). ELI is a facilities based integrated communications provider providing a broad range of communications services throughout the United States. The Company is not dependent upon any single geographic area or single customer for its revenues. In May 1998, the Company announced its plans to separate its communications businesses and public services businesses into two stand-alone publicly traded companies. The Company discontinued its separation plans when opportunities became available in 1999 to acquire telecommunications properties. During 1999, the Company announced that it had entered into various agreements to purchase approximately 911,000 telephone access lines from GTE Corp. (GTE) and US West Communications, Inc. (US West) for approximately $2,821,000,000 in cash. In August 1999, the Company's Board of Directors approved a plan of divestiture by sale for the Company's public services properties, which include gas, electric and water and wastewater businesses. On October 18, 1999, the Company announced that it had agreed to sell its water and wastewater operations to American Water Works, Inc. for an aggregate purchase price of $835,000,000. The transaction is expected to close in 2000 following regulatory approvals. On February 15, 2000, the Company announced that it had agreed to sell its electric utility operations. The Arizona and Vermont electric divisions will be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) electric division will be sold to Kauai Island Electric Co-op for an aggregate purchase price of $535,000,000. The transactions are expected to close in 2000 following regulatory approvals. The Company expects to temporarily fund these telephone access line purchases with cash and investment balances and proceeds from commercial paper issuances, backed by committed bank credit facilities. Permanent funding is expected to be from cash and investment balances and the proceeds from the divestiture of the Company's public services businesses. (b) Principles of Consolidation and Use of Estimates: ------------------------------------------------ The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of Citizens Utilities Company and its subsidiaries. Certain reclassifications of balances previously reported have been made to conform to current presentation. 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 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. (c) Revenues: --------- The Company records revenues when services are provided. Certain communications revenues are estimated under cost separation procedures that base revenues on current operating costs and investments in facilities to provide such services. (d) Construction Costs and Maintenance Expense: ------------------------------------------- Property, plant and equipment are stated at original cost, including general overhead and an allowance for funds used during construction (AFUDC) for regulated businesses and capitalized interest for unregulated businesses. Maintenance and repairs are charged to operating expenses as incurred. 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 regulated services a fair return on and depreciation of such AFUDC included in plant in service. The amount of AFUDC relating to equity is included in other income, net ($2,547,000, $2,700,000 and $4,566,000 for 1999, 1998 and 1997, respectively) and the amount relating to borrowings is included as a reduction of interest expense ($2,330,000, $1,726,000 and $1,122,000 for 1999, 1998 and 1997, respectively). The book value, net of salvage, of routine property, plant and equipment dispositions is charged against accumulated depreciation for regulated operations. F-8 Capitalized interest for unregulated construction activities credited to interest expense related to ELI's capital expenditure program amounted to $8,681,000, $10,444,000 and $4,693,000 for 1999, 1998 and 1997, respectively. (e) Depreciation Expense: -------------------- Depreciation expense, calculated using the straight-line method, is based upon the estimated service lives of various classifications of property, plant and equipment and represents approximately 7%, 6% and 6% for 1999, 1998 and 1997, respectively, of the gross depreciable property, plant and equipment. (f) Regulatory Assets and Liabilities: --------------------------------- The Company's regulated operations are subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." SFAS 71 requires regulated entities to record regulatory assets and liabilities as a result of actions of regulators. The Company continuously monitor the applicability of SFAS 71 to its regulated operations. 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 to one or more of its regulated operations, the Company would be required to write off its regulatory assets and regulatory liabilities and would be required to adjust the carrying amount of any other assets, including property, plant and equipment, that would be deemed not recoverable related to those operations. 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. (g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of: -------------------------------------------------------------------------- The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceed the fair value. During the fourth quarter of 1999, the Company determined that certain long-lived assets in the Communications sector were impaired. As a result, the Company recorded $36,136,000 of pre-tax charges as part of other operating expenses, including approximately $15,369,000 related to a decision made by management to discontinue development of certain operational systems and approximately $20,767,000 related to certain regulatory assets deemed to be no longer recoverable. (h) Investments and Short-Term Debt: ------------------------------- Investments include high credit quality, short- and intermediate-term fixed-income securities (primarily state and municipal debt obligations) and equity securities. The Company classifies its investments at purchase as available-for-sale or held-to-maturity. The Company does not maintain a trading portfolio. Securities classified as available-for-sale are carried at estimated fair market value. These securities are held for an indefinite period of time, but might be sold in the future as changes in market conditions or economic factors occur. Net aggregate unrealized gains and losses related to such securities, net of taxes, are included as a separate component of shareholders' equity. Held-to-maturity securities represented those which the Company had the ability and intent to hold to maturity and were carried at amortized cost, adjusted for amortization of premiums/discounts and accretion over the period to maturity. Interest, dividends and gains and losses realized on sales of securities are reported in Investment income. The Company evaluates its investments periodically to determine whether any decline in fair value, below the amortized cost basis, is other than temporary. If the Company determines that a decline in fair value is other than temporary, the cost basis of the individual investment is written down to fair value which becomes the new cost basis. The amount of the write down is included in earnings as a loss. Commercial paper notes payable is classified as long-term debt when it is intended to be refinanced with long-term debt securities. In 1998, short-term debt represented commercial paper notes payable which were repaid in January 1999 with the proceeds from the sale of the Company's investment in Centennial Cellular Corp. (Centennial) (see Note 5). F-9 (i) Income Taxes, Deferred Income Taxes and Investment Tax Credits: -------------------------------------------------------------------- The Company and its subsidiaries are included in a consolidated federal income tax return. The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, de- ferred income taxes are recorded for the tax effect of temporary differences between the financial statement and the tax bases of assets and Liabilities using tax rates expected to be in effect when the tem- porary differences are expected to turn around. Regulatory assets and liabilities (see Note 1(f)) include income tax benefits previously flowed through to customers and from the allowance for funds used during con- struction, the effects of tax law changes and the tax benefit associated with unamortized deferred investment tax credits. These regulatory assets and liabilities represent the probable net increase in revenues that will be reflected through future ratemaking proceedings. The investment tax credits relating to regulated operations, as defined by applicable regulatory authorities, have been deferred and are being amortized to income over the lives of the related properties. (j) Employee Stock Plans: --------------------- The Company has various employee stock-based compensation plans. Awards under these plans are granted to eligible officers, management employees and non-management exempt and non-exempt employees. Awards may be made in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock or other stock based awards. The Company recognizes compensation expense in the financial statements only if the market price of the underlying stock exceeds the exercise price on the date of grant. The Company provides pro forma net income and pro forma net income per common share disclosures for employee stock option grants made in 1995 and future years based on the fair value of the options at the date of grant (see Note 10). Fair value of options granted is computed using the Black Scholes option pricing model. (k) Non Operating Gain on Subsidiary Stock and Minority Interest: ------------------------------------------------------------ On November 24, 1997, ELI completed an initial public offering (IPO) of 8,000,000 shares of its Class A Common Stock. The Company's policy is to account for sales of subsidiary stock as income statement transactions and as a result, in 1997, the Company recorded a pre-tax non operating gain of approximately $78,700,000 resulting from this transaction and continues to consolidate ELI. The Company retains approximately 98% of the voting interest and approximately 82% of the economic ownership in ELI. Minority interest represents the minority's share of ELI's loss before income tax benefit as of December 31, 1999. The Company will be able to record minority interest income only to the extent of the minority interest. If ELI becomes profitable, its earnings will be recognized in full by the Company until losses the Company recognized in excess of its economic ownership percentage are recovered. After such recovery, the Company will record minority interest expense on the consolidated statement of income and comprehensive income and will again record minority interest on its balance sheet. (l) Net Income Per Common Share: --------------------------- Basic net income per common share is computed using the weighted average number of common shares outstanding during the period being reported on. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock at the beginning of the period being reported on. Both Basic and Diluted net income per common share calculations for 1997 are presented with adjustments for subsequent stock dividends. There were no stock dividends declared in 1999 (see Note 14). (m) Changes in Accounting Principles: -------------------------------- In March 1998, the Accounting Standards Executive Committee of the AICPA released Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain costs for the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software and costs for the preliminary project stage and the post-implementation/operations stage of an internal-use computer software development project be expensed as incurred. Capitalized software costs included in construction work in progress reflect costs for internally developed and purchased software. The impact of the early adoption of SOP 98-1 was to capitalize approximately $6,100,000 in 1998 that would have been expensed had the Company not early adopted SOP 98-1. In April 1998, the Accounting Standards Executive Committee of the AICPA released SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that the unamortized portion of deferred start up costs be written off and reported as a change in accounting principle. Future costs of start-up activities should then be expensed as incurred. Certain third F-10 party direct costs incurred by ELI in connection with negotiating and securing initial rights-of-way and developing network design for new market clusters or locations had been capitalized by ELI in previous years and were being amortized over five years. The Company elected to early adopt SOP 98-5 effective January 1, 1998. The net book value of these deferred amounts was $3,394,000 which has been reported as a cumulative effect of a change in accounting principle in the statement of income and comprehensive income for the year ended December 31, 1998, net of an income tax benefit of $577,000 and the related minority interest of $483,000. (2) Property, Plant and Equipment: ----------------------------- The components of property, plant and equipment at December 31, 1999, 1998 and 1997 are as follows: 1999 1998 1997 --------- ---------- --------- ($ in thousands) Telephone outside plant $ 2,244,808 $ 2,067,566 $ 1,963,187 Telephone central office equipment 1,272,647 1,076,030 979,870 Information systems and other administrative assets 619,865 501,870 273,869 Construction work in progress 286,836 372,248 339,305 Other 34,498 28,038 20,203 ---------- --------- --------- $ 4,458,654 $ 4,045,752 $ 3,576,434 ========== ========== =========== (3) Mergers and Acquisitions: ------------------------- On May 27, September 21, and December 16, 1999, the Company announced that it had entered into definitive agreements to purchase from GTE approximately 366,000 telephone access lines (as of December 31, 1999) in Arizona, California, Illinois, Minnesota and Nebraska for approximately $1,171,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will begin closing in the third quarter 2000. On June 16, 1999, the Company announced that it had entered into a series of definitive agreements to purchase from US West approximately 545,000 telephone access lines (as of December 31, 1999) in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, North Dakota and Wyoming for approximately $1,650,000,000 in cash. The Company expects that these acquisitions, which are subject to various state and federal regulatory approvals, will occur on a state-by-state basis and will begin closing in the third quarter 2000. In November 1998, the Company acquired all of the stock of Rhinelander Telecommunication, Inc. (RTI) for approximately $84,000,000 in cash. RTI is a diversified telecommunications company engaged in providing local exchange, long distance, Internet access, wireless and cable television services to rural markets in Wisconsin. This transaction was accounted for using the purchase method of accounting and the results of operations of RTI have been included in the accompanying financial statements from the date of acquisition. In December 1997, the Company acquired Ogden Telephone Company (Ogden) in a stock for stock transaction. In 1997, the Company issued 2,308,262 shares of Common Stock to effect the merger. In 1998, 288,554 additional shares of the Company's Common Stock were issued in connection with this transaction. Ogden was an independent telephone operating company providing services to residential and commercial customers in Monroe County, New York. This transaction was accounted for using the pooling of interests method of accounting and the results of operations of Ogden have been included in the accompanying consolidated financial statements since the beginning of the 1997 year. The following pro forma financial information presents the combined results of operations of the Company and RTI as if the acquisition had occurred on January 1 of the year preceding the date of acquisition. The pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and RTI constituted a single entity during such periods. F-11
1998 1997 ---------- ---------- ($ in thousands, except for per share amounts) Revenues $ 950,000 $ 878,000 Net income $ 56,000 $ 9,000 Basic net income per common share $ .22 $ .03 Diluted net income per common share $ .22 $ .03
(4) Discontinued Operations: ----------------------- On August 24, 1999, the Company's Board of Directors approved a plan of divestiture by sale of the Company's public services properties, which include gas, electric and water and wastewater businesses. The proceeds from the sales of the public services properties will be used to fund the telephone access line purchases. The Company has accounted for the planned divestiture of the public services properties as a discontinued operation. Discontinued operations in the consolidated statements of income and comprehensive income reflect the results of operations of the public services properties including allocated interest expense for the periods presented. Interest expense was allocated to discontinued operations based on debt issued for these businesses. The debt presented in liabilities of discontinued operations represents only debt to be transferred pursuant to the water and wastewater and electric asset sale agreements. On October 18, 1999, the Company announced that it had agreed to sell its water and wastewater operations to American Water Works, Inc. for an aggregate purchase price of $835,000,000. The transaction is expected to close in 2000 following regulatory approvals. On February 15, 2000, the Company announced that it had agreed to sell its electric utility operations. The Arizona and Vermont electric divisions will be sold to Cap Rock Energy Corp. and the Kauai (Hawaii) electric division will be sold to Kauai Island Electric Co-op for an aggregate purchase price of $535,000,000. The transactions are expected to close in 2000 following regulatory approvals. Summarized financial information for the discontinued operations is set forth below:
1999 1998 1997 -------------------------------- ($ in thousands) Current assets $ 109,250 $ 107,478 $ 95,410 Net property, plant and equipment 1,459,958 1,343,536 1,273,006 Other assets 87,206 63,034 70,790 --------- --------- --------- Total assets $ 1,656,414 $1,514,048 $1,439,206 ========= ========= ========= Current liabilities $ 18,040 $ 17,133 $ 12,613 Long-term debt 133,817 124,908 122,630 Other liabilities 158,412 126,245 125,982 -------- -------- --------- Total liabilities $ 310,269 $ 268,286 $ 261,225 ======== ======== ========= Revenues $ 613,216 $ 609,514 $ 533,287 Operating income 82,179 96,525 66,623 Income taxes 14,230 18,389 5,455 Net income $ 27,359 $ 36,528 $ 14,023
F-12 (5) Investments: ------------- The components of investments at December 31, 1999, 1998 and 1997 are as follows: 1999 1998 1997 ----------------------------- ($ in thousands) State and municipal securities $ 233,021 $ 141,202 $ 212,743 Centennial Preferred Security - 107,679 107,679 Marketable equity securities 243,591 163,661 75,855 Joint Venture with subsidiary of Century - 49,385 49,196 Other fixed income securities 114,774 2,219 2,222 -------- -------- -------- Total $ 591,386 $ 464,146 $ 447,695 ======== ======== ======== In January 1999, Centennial was merged with CCW Acquisition Corp., a company organized at the direction of Welsh, Carson, Anderson & Stowe. The Company was a holder of 1,982,294 shares of Centennial Class B Common Stock. In addition, as a holder of 102,187 shares of Mandatorily Redeemable Convertible Preferred Stock of Centennial, the Company was required to convert the preferred stock into approximately 2,972,000 shares of Class B Common Stock. The Company received approximately $205,600,000 in cash for all of its Common Stock interests and approximately $17,500,000 related to accrued dividends on the preferred stock. The Company realized and reported a pre-tax gain of approximately $69,500,000 in the first quarter 1999 in Investment income. On October 1, 1999, Adelphia Communication Corp. (Adelphia) was merged with Century Communications Corp. (Century). The Company owned 1,807,095 shares of Century Class A Common Stock. Pursuant to this merger agreement, Century Class A Common shares were exchanged for $10,832,000 in cash and 1,206,705 shares of Adelphia Class A Common Stock (for a total market value of $79,600,000 based on Adelphia's October 1, 1999 closing price of $57.00). The Company realized and reported a pre-tax gain of approximately $67,600,000 in the fourth quarter of 1999 in Investment income. A subsidiary of the Company, in a joint venture with a subsidiary of Century, owned and operated four cable television systems in southern California serving over 90,000 basic subscribers. In July 1999, the Company entered into a separate agreement with Adelphia to sell its interest in the joint venture. Pursuant to this agreement on October 1, 1999, the Company received approximately $27,700,000 in cash and 1,852,302 shares of Adelphia Class A Common Stock (for a total market value of $133,300,000 based on Adelphia's October 1, 1999 closing price of $57.00). The Company realized and reported a pre-tax gain of approximately $83,900,000 in the fourth quarter of 1999 in Investment income. During 1999, the Company reclassified the cost related to the Company's joint venture with a subsidiary of Century from other assets to investments. Prior year presentations have been restated to conform to the current year presentation. The Chairman and Chief Executive Officer of the Company was also Chairman and Chief Executive Officer of Century prior to its merger with Adelphia. Centennial was a subsidiary of Century until it was sold. The following summarizes the amortized cost, gross unrealized holding gains and losses and fair market value for investments. Amortized Unrealized Holding Aggregate Fair Investment Classification Cost Gains (Losses) Market Value - ------------------------- ------------ ----- -------- -------------- ($ in thousands) As of December 31, 1999 - ----------------------- Available-For-Sale $ 567,208 $ 37,025 $ (12,847) $ 591,386 As of December 31, 1998 - ----------------------- Held-To-Maturity $ 107,679 $ 15,673 $ - $ 123,352 Available-For-Sale 215,228 100,329 (8,475) 307,082 Joint Venture with Century 49,385 - - 49,385 As of December 31, 1997 - ----------------------- Held-To-Maturity $ 107,679 $ 78,608 $ - $ 186,287 Available-For-Sale 284,630 19,673 (13,483) 290,820 Joint Venture with Century 49,196 - - 49,196 F-13 The amortized cost of held-to-maturity securities plus the aggregate fair market value of available-for-sale securities for each year presented above equals the total of investments presented in the foregoing investments table. Marketable equity securities for 1999, 1998 and 1997 include the Company's investment in Hungarian Telephone and Cable Corp. (HTCC). The Chairman and Chief Executive Officer of the Company is also a member of the Board of Directors of HTCC. In 1995, the Company made an initial investment in and entered into definitive agreements with HTCC. The investment in HTCC had declined in value during 1998 and in the fourth quarter of 1998 management determined that the decline was other than temporary. As a result, the Company recognized a loss of $31,900,000 in the HTCC investment in Other income (loss), net in 1998. In May 1999, in connection with HTCC's debt restructuring, the Company cancelled a note obligation from HTCC to the Company and a seven-year consulting services agreement in exchange for the issuance by HTCC to the Company of 1,300,000 shares of HTCC Common Stock and 30,000 shares of HTCC's 5% convertible preferred stock. Each share of HTCC convertible preferred stock has a liquidation value of $70 and is convertible at the option of the Company into 10 shares of HTCC Common Stock. To the extent the 1,300,000 HTCC common shares and the 300,000 HTCC common shares underlying the HTCC convertible preferred stock do not achieve an average market closing price of at least $7 per share for the twenty trading days ending March 31, 2000, HTCC has agreed to issue additional HTCC convertible preferred shares with a value equal to any such shortfall. At December 31, 1999, the Company owns approximately 19% of the HTCC shares presently outstanding. The Company's investment in HTCC is classified as an available for sale security and accounted for using the cost method of accounting. Additionally, the Company has exercised its right to nominate one member of the Board of Directors of HTCC. (6) Fair Value of Financial Instruments: ------------------------------------ The following table summarizes the carrying amounts and estimated fair values for certain of the Company's financial instruments at December 31, 1999, 1998 and 1997. For the other financial instruments, representing cash, accounts and notes receivables, short-term debt, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to the relatively short maturities of those instruments.
1999 1998 1997 --------------------- ----------------------- ------------------------ Carrying Carrying Carrying Amount Fair Value Amount Fair Value Amount Fair Value -------- ---------- --------- ---------- ------- ---------- ($ in thousands) Investments $ 591,386 $ 591,386 $ 464,146 $ 479,819 $ 447,695 $ 526,303 Long-term debt 2,107,460 2,046,541 1,775,338 1,884,631 1,583,902 1,665,897 EPPICS 201,250 226,909 201,250 171,566 201,250 192,194
The fair value of the above financial instruments are based on quoted prices at the reporting date for those financial instruments except for the investment in the Centennial Preferred Security and the Joint Venture with Century. The fair value of the Centennial Preferred Security was estimated to be its accreted value at December 31, 1997 and its conversion value at December 31, 1998. The fair value of the Joint Venture with Century was estimated to be its book value (see Note 5). F-14 (7) Long-term Debt: --------------
Weighted average December 31, interest rate at --------------------------------------- December 31, 1999 Maturities 1999 1998 1997 ----------------- --------- --------------------------------------- ($ in thousands) Debentures 7.34% 2001-2046 $ 1,000,000 $ 1,000,000 $ 1,000,000 Industrial development revenue bonds 5.39% 2015-2033 353,494 337,922 320,281 Senior unsecured notes 6.25% 2004-2012 361,000 36,000 36,000 ELI bank credit facility 6.63% 2002 260,000 284,000 60,000 Rural Utilities Service Loan Contracts 5.85% 2001-2027 87,100 91,078 87,053 Other long-term debt 8.86% 2000-2027 45,866 26,338 12,568 Commercial paper notes payable - - 68,000 ---------- ----------- ---------- Total long-term debt $ 2,107,460 $ 1,775,338 $ 1,583,902 ========== =========== ==========
The total principal amounts of industrial development revenue bonds were $369,935,000 in 1999 and 1998 and $349,935,000 in 1997. Funds from industrial development revenue bond issuances are held by a trustee until qualifying construction expenditures are made at which time the funds are released. The amounts presented in the table above represent funds that have been used for construction through December 31, 1999, 1998 and 1997, respectively. On December 31, 1997, certain commercial paper notes payable were classified as long-term debt because the obligations were refinanced with long-term debt securities. The Company has available lines of credit with financial institutions in the amounts of $3,000,000,000, with associated facility fees of 0.06% per annum and $200,000,000 with no associated facility fees, which expire on October 27, 2000, and another $200,000,000 with associated facility fees of 0.07625% per annum which expires on December 16, 2003. The terms of the latter line of credit provide the Company with extension options. There were no amounts outstanding under these commitments at December 31, 1999. ELI has committed lines of credit with commercial banks under which it may borrow up to $400,000,000 which are guaranteed by the Company and expire November 21, 2002. The ELI credit facility has an associated facility fee of 0.05% per annum. As of December 31, 1999, $260,000,000 was outstanding under ELI's lines of credit. In April 1999, ELI completed an offering of $325,000,000 of five-year senior unsecured notes. The notes have an interest rate of 6.05% and mature on May 15, 2004. The Company has guaranteed the payment of principal and any premium and interest on the notes when due. The Company's installment principal payments, capital leases and maturities of long-term debt for the next five years are as follows: 2000 2001 2002 2003 2004 ------- -------- -------- -------- -------- ($ in thousands) Installment principal payments $ 5,258 $ 4,839 $ 4,953 $ 5,051 $ 5,107 Capital leases 25,898 22,707 442 477 515 Maturities - 50,000 260,000 - 425,000 ------- --------- --------- -------- -------- $ 31,156 $ 77,546 $ 265,395 $ 5,528 $ 430,622 ======= ========= ========= ======== ======== Holders of certain industrial development revenue bonds may tender at par prior to maturity. The next tender date is April 1, 2001 for $14,400,000 of principal amount of bonds. The Company expects to remarket all such bonds which are tendered. In the years 1999, 1998 and 1997, interest payments on short- and long-term debt were $93,017,000, $77,038,000 and $69,566,000, respectively. F-15 (8) Company Obligated Mandatorily Redeemable Convertible Preferred Securities: -------------------------------------------------------------------------- During the first quarter of 1996, a consolidated wholly-owned subsidiary of the Company, Citizens Utilities Trust (the Trust), issued, in an underwritten public offering, 4,025,000 shares of 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 (Trust Convertible Preferred Securities or EPPICS), representing preferred undivided interests in the assets of the Trust, with a liquidation preference of $50 per security (for a total liquidation amount of $201,250,000). The proceeds from the issuance of the Trust Convertible Preferred Securities and a Company capital contribution were used to purchase $207,475,000 aggregate liquidation amount of 5% Partnership Convertible Preferred Securities due 2036 from another wholly owned consolidated subsidiary, Citizens Utilities Capital L.P. (the Partnership). The proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital contribution were used to purchase from the Company $211,756,050 aggregate principal amount of 5% Convertible Subordinated Debentures due 2036. The sole assets of the Trust are the Partnership Convertible Preferred Securities, and the Company's Convertible Subordinated Debentures are substantially all the assets of the Partnership. The Company's obligations under the agreements related to the issuances of such securities, taken together, constitute a full and unconditional guarantee by the Company of the Trust's obligations relating to the Trust Convertible Preferred Securities and the Partnership's obligations relating to the Partnership Convertible Preferred Securities. The $196,722,000 of net proceeds from the issuances was used to permanently fund a portion of previous acquisitions of telecommunications properties. In accordance with the terms of the issuances, the Company paid the 5% interest on the Convertible Subordinated Debentures in Citizens' Common Stock. During 1999, 1,004,961 shares of Common Stock were issued to the Partnership in payment of interest of which 976,464 shares were sold by the Partnership to satisfy cash dividend payment elections by the holders of the EPPICS. The sales proceeds and the remaining 28,497 shares of Common Stock were distributed by the Partnership to the Trust. During 1998, 1,093,274 shares of Common Stock were issued to the Partnership in payment of interest of which 1,009,231 shares were sold by the Partnership to satisfy cash dividend payment elections by the holders of the EPPICS. The sales proceeds and the remaining 84,043 shares of Common Stock were distributed by the Partnership to the Trust. During 1997, 986,579 shares of Common Stock were issued to the Partnership in payment of interest of which 952,007 shares were sold by the Partnership to satisfy cash dividend payment elections by the holders of the EPPICS. The sales proceeds and the remaining 34,572 shares of Common Stock were distributed by the Partnership to the Trust. The Trust distributed the cash and shares as dividends to the holders of the EPPICS in 1999, 1998 and 1997. (9) Capital Stock: -------------- The Company is authorized to issue up to 600,000,000 shares of Common Stock. Quarterly stock dividends had been declared and issued on Common Stock and shareholders had the option of enrolling in the "Common Stock Dividend Sale Plan." The plan offered shareholders the opportunity to have their stock dividends sold by the plan broker and the net cash proceeds of the sale distributed to them quarterly. The amount and timing of dividends payable on Common Stock are within the sole discretion of the Company's Board of Directors. The Board of Directors had undertaken an extensive review of the Company's dividend policy in conjunction with its review of strategic options for the Company in 1998. Resulting from this review, the Board concluded that the Company discontinue dividends after the payment of the December 1998 stock dividend. Quarterly and annual stock dividend rates declared and annual stock dividend cash equivalents (adjusted for all stock dividends declared through December 31, 1998, and rounded to the nearest 1/16th) considered by the Board have been as follows: Dividend Rates -------------------- 1998 1997 -------------------- First quarter .75% 1.6 % Second quarter .75% 1.6 % Third quarter .75% 1.0 % Fourth quarter .75% 1.0 % ------- -------- Total 3.0% 5.2 % ======= ======== Compounded Total 3.03% 5.30% ======= ======== Cash Equivalent 28 5/16(cent) 51 1/4(cent) ========================= F-16 The Company purchased 631,000 shares at a cost of $6,625,000 in 1999. The Company purchased 1,811,000 shares at a cost of $14,826,000 in 1998 and 4,904,000 shares at a cost of $48,552,000 in 1997 to pay common stock dividends. In December 1999, the Company's Board of Directors authorized the purchase, from time to time, of up to $100,000,000 worth of shares of the Company's common stock. The activity in shares of outstanding common stock during 1999, 1998 and 1997 is summarized as follows: Number of Shares ---------------- Balance at January 1, 1997 239,148,000 Acquisitions 2,417,000 Common stock dividends 12,591,000 Common stock buybacks (4,904,000) Common stock issued to fund EPPICS dividends 986,000 Stock plans 756,000 ----------- Balance at December 31, 1997 250,994,000 Acquisitions 532,000 Common stock dividends 7,657,000 Common stock buybacks (1,811,000) Common stock issued to fund EPPICS dividends 1,093,000 Stock plans 684,000 ----------- Balance at December 31, 1998 259,149,000 Common stock buybacks (631,000) Common stock issued to fund EPPICS dividends 1,005,000 Stock plans 2,553,000 ----------- Balance at December 31, 1999 262,076,000 =========== The Company has 50,000,000 authorized but unissued shares of preferred stock ($.01 par). (10) Stock Plans: ----------- At December 31, 1999, the Company had four stock based compensation plans and ELI had two stock based plans which are described below. The Company applies APB Opinion No. 25 and related interpretations in accounting for the employee stock plans. No compensation cost has been recognized in the financial statements for options issued pursuant to the Management Equity Incentive Plan (MEIP), Equity Incentive Plan (EIP), Employee Stock Purchase Plan (ESPP), ELI Employee Stock Purchase Plan (ELI ESPP) or ELI Equity Incentive Plan (ELI EIP) as the exercise price for such options was equal to the market price of the stock at the time of grant. Compensation cost recognized for the Company's Directors' Deferred Fee Equity Plan was $481,540, $463,798 and $352,017 in 1999, 1998 and 1997, respectively. Had the Company determined compensation cost based on the fair value at the grant date for its MEIP, EIP, ESPP, ELI ESPP and ELI EIP, the Company's pro forma Net income and Net income per common share would have been as follows: 1999 1998 1997 -------------------------- ($ in thousands) Net Income As reported $144,486 $57,060 $10,100 Pro forma 130,613 46,005 7,717 Net Income per common share As reported: Basic $.55 $.22 $.04 Diluted .55 .22 .04 Pro forma: Basic $.50 $.18 $.03 Diluted .50 .18 .03 The full impact of calculating compensation cost for stock options is not reflected in the pro forma amounts above because pro forma compensation cost only includes costs associated with the vested portion of options granted pursuant to the MEIP, EIP, ESPP, ELI ESPP and ELI EIP on or after January 1, 1995. F-17 In November 1998, the Compensation Committee of the Company's Board of Directors approved a stock option exchange program pursuant to which current employees of the Company (excluding senior executive officers) holding outstanding options, under the MEIP and EIP plans, with an exercise price in excess of $10.00 had the right to exchange their options for a lesser number of new options with an exercise price of $7.75. A calculation was prepared using the Black Scholes option pricing model to determine the exchange rate for each eligible grant in order to keep the fair value of options exchanged equal to the fair value of the options reissued. The exchanged options maintain the same vesting and expiration terms. This stock option exchange program had no impact on reported earnings and resulted in an aggregate net reduction in shares subject to option of 2,202,000 for both MEIP and EIP. In August 1998, the Compensation Committee of ELI's Board of Directors approved a stock option exchange program pursuant to which employees of ELI holding outstanding options with an exercise price in excess of $15.50 had the right to exchange all or half of their options for a lesser number of new options with an exercise price of $8.75. A calculation was prepared using the Black Scholes option pricing model to determine the exchange rate for each eligible grant in order to keep the fair value of options exchanged equal to the fair value of the options reissued. The repriced options maintain the same vesting and expiration terms. This stock option exchange program had no impact on reported earnings and resulted in a net reduction in shares subject to option of 546,000. Both ELI and the Company repriced these employee stock options in an effort to retain employees at a time when a significant percentage of employee stock options had exercise prices that were above fair market value. No compensation costs have been recognized in the financial statements as the exercise price was equal to the market value of the stock at the date of repricing. Management Equity Incentive Plan -------------------------------- Under the MEIP, awards of the Company's Common Stock may be granted to eligible officers, management employees and non-management exempt employees of the Company and its subsidiaries in the form of incentive stock options, non-qualified stock options, stock appreciation rights (SARs), restricted stock or other stock-based awards. The MEIP is administered by the Compensation Committee of the Board of Directors. The maximum number of shares of common stock which may be issued pursuant to awards at any time is 5% (13,103,812 as of December 31, 1999) of the Company's common stock outstanding. No awards will be granted more than 10 years after the effective date (June 22, 1990) of the MEIP. The exercise price of stock options and SARs shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the MEIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decreases the average exercise price of outstanding options. The following is a summary of share activity subject to option under the MEIP adjusted for subsequent stock dividends for 1997. There were no stock dividends declared in 1999. Shares Weighted Subject to Average Option Option Price Per Share ---------- --------------- Balance at January 1, 1997 10,800,000 $ 11.02 Options granted 1,641,000 8.53 Options exercised (106,000) 10.81 Options canceled,forfeited or lapsed (631,000) 11.03 --------- Balance at December 31, 1997 11,704,000 10.72 Options granted 1,869,000 7.75 Options exercised (29,000) 10.56 Options canceled,forfeited or lapsed (4,109,000) 11.09 ----------- Balance at December 31, 1998 9,435,000 9.91 Options granted 1,844,000 8.00 Options exercised (602,000) 8.20 Options canceled,forfeited or lapsed (396,000) 8.08 ----------- Balance at December 31, 1999 10,281,000 $ 9.73 =========== F-18 In 1998, as a result of the stock option exchange program approved by the Compensation Committee of the Board of Directors, a total of 3,801,000 options were eligible for exchange, of which 3,554,000 options were canceled in exchange for 1,869,000 new options with an exercise price of $7.75. The following table summarizes information about shares subject to options under the MEIP at December 31, 1999.
Options Outstanding Options Exercisable - ------------------------------------------------------------------ --------------------------- Weighted Average Weighted Number Range of Weighted Average Remaining Number Average Outstanding Exercise Price Excercise Price Life in Years Exercisable Exercise Price ----------- -------------- ---------------- ---------------- ----------- -------------- 14,000 $ 4 - 5 $ 4 5 14,000 $ 4 3,601,000 7 - 8 8 6 1,889,000 8 1,330,000 8 - 10 9 8 866,000 9 2,199,000 10 - 11 11 5 1,960,000 11 2,578,000 11 - 14 12 4 2,343,000 12 559,000 14 - 15 14 4 559,000 14 ---------- ---------- 10,281,000 $ 4 - 15 $ 10 5 7,631,000 $ 10 ========== ==========
The weighted average fair value of options granted during 1999, 1998 and 1997 were $3.17, $2.27 and $4.23, respectively. For purposes of the pro forma calculation, the fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997: 1999 1998 1997 ---- ---- ---- Dividend yield - - - Expected volatility 29% 26% 32% Risk-free interest rate 5.32% 4.43% 6.13% Expected life 6 years 4 years 7 years During 1996, the Company granted 566,694 shares (adjusted for subsequent stock dividends) of restricted stock awards to key employees in the form of the Company's Common Stock. None of the restricted stock may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse in January 2001. At December 31, 1999, 559,974 shares of restricted stock were outstanding. Compensation expense of $1,268,000, $1,288,000 and $1,302,000 for the years ended December 31, 1999, 1998 and 1997, respectively, has been recorded in connection with these grants. Equity Incentive Plan --------------------- In May 1996, the shareholders of the Company approved the EIP. Under the EIP, awards of the Company's Common Stock may be granted to eligible officers, management employees and non-management employees of the Company and its subsidiaries in the form of incentive stock options, non-qualified stock options, stock appreciation rights (SARs), restricted stock or other stock-based awards. The EIP is administered by the Compensation Committee of the Board of Directors. The maximum number of shares of common stock which may be issued pursuant to awards at any time is 12,858,000 shares, which has been adjusted for subsequent stock dividends for 1997. There were no stock dividends declared in 1999. No awards will be granted more than 10 years after the effective date (May 23, 1996) of the EIP. The exercise price of stock options and SARs shall be equal to or greater than the fair market value of the underlying common stock on the date of grant. Stock options are generally not exercisable on the date of grant but vest over a period of time. Under the terms of the EIP, subsequent stock dividends and stock splits have the effect of increasing the option shares outstanding, which correspondingly decrease the average exercise price of outstanding options. F-19 The following is a summary of share activity subject to option under the EIP adjusted for subsequent stock dividends for 1997. There were no stock dividends declared in 1999. Shares Weighted Subject to Average Option Option Price Per Share ---------- --------------- Balance at January 1, 1997 - $ - Options granted 2,197,000 8.55 Options canceled, forfeited or lapsed (3,000) 8.53 ---------- Balance at December 31, 1997 2,194,000 8.55 Options granted 4,683,000 9.34 Options canceled,forfeited or lapsed (2,745,000) 10.14 ---------- Balance at December 31, 1998 4,132,000 8.51 Options granted 3,487,000 8.64 Options exercised (361,000) 8.46 Options canceled, forfeited or lapsed (679,000) 8.40 ---------- Balance at December 31, 1999 6,579,000 $ 8.59 ========== As a result of the stock option exchange program approved by the Compensation Committee of the Board of Directors, a total of 2,453,000 options were eligible for exchange, of which 2,123,000 options were canceled in exchange for 1,606,000 new options with an exercise price of $7.75. The following table summarizes information about shares subject to options under the EIP at December 31, 1999.
Options Outstanding Options Exercisable - ----------------------------------------------------------------- ------------------------------ Weighted Average Number Range of Weighted Average Remaining Number Weighted Average Outstanding Exercise Price Exercise Price Life in Years Exercisable Exercise Price - ------------ -------------- ---------------- ---------------- ----------- ----------------- 3,625,000 $ 7 - 8 $ 8 9 635,000 $ 8 1,504,000 8 - 9 9 8 1,026,000 9 133,000 9 - 10 9 8 35,000 9 417,000 10 - 11 10 8 136,000 10 900,000 11 - 13 12 10 - - - ------------ --------- 6,579,000 $ 7 - 13 $ 9 9 1,832,000 $ 8 ============ =========
The weighted average fair value of options granted during 1999, 1998 and 1997 was $3.46, $3.54 and $4.25, respectively. For purposes of the pro forma calculation, the fair value of each option grant is estimated on the date of grant using the Black Scholes option pricing model with the following weighted average assumptions used for grants in 1999, 1998 and 1997: 1999 1998 1997 ---------------------------- Dividend yield - - - Expected volatility 29% 26% 32% Risk-free interest rate 5.47% 5.15% 6.14% Expected life 6 years 6 years 7 years During 1999, 1998 and 1997, the Company granted restricted stock awards to key employees in the form of the Company's Common Stock. The number of shares issued as restricted stock awards during 1999, 1998 and 1997 were 901,200, 464,409 and 23,018, respectively (adjusted for subsequent stock dividends in 1997). None of the restricted stock awards may be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily, by the employees until the restrictions lapse. The restrictions are both time and performance based. At December 31, 1999, 946,976 shares of restricted stock were outstanding. Compensation expense of $1,305,652, $808,000 and $27,000 for the years ended December 31, 1999, 1998 and 1997, respectively, has been recorded in connection with these grants. F-20 Employee Stock Purchase Plan ---------------------------- The Company's ESPP was approved by shareholders on June 12, 1992 and amended on May 22, 1997. Under the ESPP, eligible employees of the Company and its subsidiaries have the right to subscribe to purchase shares of Common Stock at the lesser of 85% of the mean between the high and low market prices on the first day of the purchase period or on the last day of the purchase period. An employee may elect to have up to 20% of annual base pay withheld in equal installments throughout the designated payroll-deduction period for the purchase of shares. The value of an employee's subscription may not exceed $25,000 in any one calendar year. An employee may not participate in the ESPP if such employee owns stock possessing 5% or more of the total combined voting power or value of the Company's capital stock. As of December 31, 1999, there were 6,407,195 shares of Common Stock reserved for issuance under the ESPP. These shares may be adjusted for any future stock dividends or stock splits. The ESPP will terminate when all shares reserved have been subscribed for and purchased, unless terminated earlier or extended by the Board of Directors. The ESPP is administered by the Compensation Committee of the Board of Directors. As of December 31, 1999, the number of employees enrolled and participating in the ESPP was 2,066 and the total number of shares purchased under the ESPP was 3,201,887. For purposes of the pro forma calculation, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black Scholes option pricing model with the following assumptions for subscription periods beginning in 1999, 1998 and 1997: 1999 1998 1997 ----------------------------- Dividend yield - - - Expected volatility 29% 26% 32% Risk-free interest rate 5.28% 4.91% 5.45% Expected life 6 months 6 months 6 months The weighted average fair value of those purchase rights granted in 1999, 1998 and 1997 was $2.52, $2.05 and $2.28, respectively. ELI Employee Stock Purchase Plan -------------------------------- The ELI ESPP was approved by shareholders on May 21, 1998. Under the ELI ESPP, eligible employees of ELI may subscribe to purchase shares of ELI Class A Common Stock at the lesser of 85% of the average of the high and low market prices on the first day of the purchase period or on the last day of the purchase period. An employee may elect to have up to 20% of annual base pay withheld in equal installments throughout the designated payroll-deduction period for the purchase of shares. The value of an employee's subscription may not exceed $25,000 in any one calendar year. An employee may not participate in the ELI ESPP if such employee owns stock possessing 5% or more of the total combined voting power or value of all classes of capital stock of ELI. As of December 31, 1999, there were 1,950,000 shares of ELI Class A Common Stock reserved for issuance under the ELI ESPP. These shares may be adjusted for any future stock dividends or stock splits. The ESPP will terminate when all shares reserved have been subscribed for and purchased, unless terminated earlier or extended by the Board of Directors. The ELI ESPP is administered by the Compensation Committee of ELI's Board of Directors. As of December 31, 1999, the number of employees enrolled and participating in the ELI ESPP was 691 and the total number of shares purchased under the ELI ESPP was 328,664. For purposes of the pro forma calculation, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black Scholes option pricing model with the following assumptions for subscription periods beginning in 1999 and 1998: 1999 1998 ---- ---- Dividend yield - - Expected volatility 66% 71% Risk-free interest rate 5.25% 4.92% Expected life 6 months 6 months The weighted average fair value of those purchase rights granted in 1999 and 1998 was $4.97 and $3.82, respectively. F-21 ELI Equity Incentive Plan ------------------------- In October 1997, the Board of Directors of ELI approved the ELI EIP. Under the ELI EIP, awards of ELI's Class A Common Stock may be granted to eligible directors, officers, management employees, non-management employees and consultants of ELI in the form of incentive stock options, non-qualified stock options, SARs, restricted stock or other stock-based awards. The ELI EIP is administered by the Compensation Committee of the ELI Board of Directors. The exercise price for such awards shall not be less than 85% or more than 110% of the average of the high and low stock prices on the date of grant. The exercise period for such awards is generally 10 years from the date of grant. ELI has reserved 6,670,600 shares for issuance under the terms of this plan. The following is a summary of share activity subject to option under the ELI EIP. Shares Weighted Subject to Average Option Option Price Per Share ---------- ------------- Balance at January 1, 1997 - $ - Options granted 2,326,000 16.00 ---------- Balance at December 31, 1997 2,326,000 16.00 Options granted 1,654,000 10.77 Options canceled, forfeited and lapsed (1,649,000) 16.21 ---------- Balance at December 31, 1998 2,331,000 12.14 Options granted 1,989,000 9.51 Options exercised (116,000) 9.73 Options canceled, forfeited and lapsed (680,000) 10.12 ---------- Balance at December 31, 1999 3,524,000 $ 10.96 ========== As a result of the stock option exchange program approved by the ELI Compensation Committee of the Board of Directors, a total of 2,212,000 options were eligible for exchange, of which 1,426,000 options were canceled in exchange for 880,000 new options in August 1998. The following table summarizes information about shares subject to options under the EIP at December 31, 1999.
Options Outstanding Options Exercisable - ------------------------------------------------------------------- ------------------------------ Weighted-Average Number Range of Weighted Average Remaining Number Weighted Average Outstanding Exercise Prices Exercise Price Life in Years Exercisable Excercise Price - ----------- --------------- ---------------- ---------------- ----------- ---------------- 41,000 $ 5 - 8 $ 7 9 12,000 $ 7 2,309,000 8 - 9 9 9 675,000 9 311,000 10 - 15 13 9 58,000 13 863,000 15 - 18 16 8 594,000 16 - ------------ --------- 3,524,000 $ 5 - 18 $ 11 9 1,339,000 $ 12 ============ =========
For purposes of the pro forma calculation, compensation cost is recognized for the fair value of the employees' purchase rights, which was estimated using the Black Scholes option pricing model with the following assumptions for subscription periods beginning in 1999, 1998 and 1997: 1999 1998 1997 ----------------------------- Dividend yield - - - Expected volatility 66% 71% 13% Risk-free interest rate 5.34% 5.44% 5.87% Expected life 6 years 6 years 7 years The weighted-average fair value of those options granted in 1999, 1998 and 1997 were $6.16, $6.94 and $5.13, respectively. F-22 ELI has granted 610,000 restricted stock awards to key employees in the form of Class A Common Stock since its IPO. These restrictions lapse based on meeting specific performance targets. At December 31, 1999, 581,000 shares of this stock were outstanding, of which 259,000 shares are no longer restricted. Compensation expense was recorded in connection with these grants in the amounts of $2,559,000, $4,666,000 and $219,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Directors' Deferred Fee Equity Plan ----------------------------------- The Company's Non-Employee Directors' Deferred Fee Equity Plan (the Directors' Plan) was approved by shareholders on May 19, 1995 and subsequently amended. The Directors' Plan includes an Option Plan, a Stock Plan and a Formula Plan. Through the Option Plan, an eligible director may elect to receive up to $30,000 per annum of his or her director's fees for a period of up to five years in the form of options to purchase Company common stock, the number of such options being equal to such fees divided by 20% of the fair market value of Company common stock on the effective date of the options and are exercisable at 90% of the fair market value of Company common stock on the effective date of the options. Through the Stock Plan, an eligible director may elect to receive all or a portion of his or her director's fees in the form of Plan Units, the number of such Plan Units being equal to such fees divided by the fair market value of Company common stock on certain specified dates. The Formula Plan provides each Director of the Company options to purchase 5,000 shares of common stock on the first day of each year beginning in 1997 and continuing through 2002 regardless of whether the Director is participating in the Option Plan or Stock Plan. In addition, on September 1, 1996, options to purchase 2,500 shares of common stock were granted to each Director. The exercise price of the options are 100% of the fair market value on the date of grant and the options are exercisable six months after the grant date and remain exercisable for ten years after the grant date. In the event of termination of Directorship, a Stock Plan participant will receive the value of such Plan Units in either stock or cash or installments of cash as selected by the Participant at the time of the related Stock Plan election. As of any date, the maximum number of shares of common stock which the Plan may be obligated to deliver pursuant to the Stock Plan and the maximum number of shares of common stock which shall have been purchased by Participants pursuant to the Option Plan and which may be issued pursuant to outstanding options under the Option Plan shall not be more than one percent (1%) of the total outstanding shares of Common Stock of the Company as of such date, subject to adjustment in the event of changes in the corporate structure of the Company affecting capital stock. There were 10 directors participating in the Directors' Plan in 1999. In 1999, the total Options and Plan Units earned were 153,969 and 15,027, respectively. In 1998, the total Options and Plan Units earned were 185,090 and 16,661, respectively. In 1997, the total Options and Plan Units earned were 188,838 and 18,817, respectively (adjusted for subsequent stock dividends). At December 31, 1999, 671,477 options were exercisable at a weighted average exercise price of $9.66. On December 31, 1999, the Option Plan and the Stock Plan of the Deferred Fee Equity Plan expired in accordance with the plan's terms. In replacement of these plans, the non-employee directors now have the choice to receive 50% or 100% of their future fees in either stock or stock units. If stock is elected, the stock will be purchased at the average of the high and low on the first trading date of the year (Initial Market Value). If the average price is lower on the last trading day of November (Final Market Value), an adjustment will be made by payment of additional stock to bring the shares paid up to the number of shares purchasable at the Final Market Price. If stock units are elected, they will be purchased at 85% of the Initial Market Value. In the event of a lower Final Market Value, an adjustment will be made by payment of additional stock to bring the shares paid up to the number of shares purchasable at the Final Market Price. Stock units (except in an event of hardship) are held by the Company until retirement or death. The Company had also maintained a Non-Employee Directors' Retirement Plan providing for the payment of specified sums annually to non-employee directors of the Company, or their designated beneficiaries, starting at their retirement, death or termination of directorship of each individual director. In 1999, the Company terminated this Plan. In connection with the termination, the value as of May 31, 1999, of the vested benefit of each non-employee director was credited to him/her in the form of stock units. Such benefit will be payable upon retirement, death or termination of the directorship. Each participant had until July 15, 1999 to elect whether the value of the stock units awarded would be payable in common stock of the Company (convertible on a one for one basis) or in cash. As of December 31, 1999, the liability for such payments was $3.7 million of which $1.6 million will be payable in stock (based on the July 15, 1999 stock price) and $2.1 million will be payable in cash. While the number of shares of stock payable to those directors electing to be paid in stock was fixed, the amount of cash payable to those directors electing to be paid in cash will be based on the number of stock units awarded times the stock price at the payment date. F-23 (11) 1999 Restructuring Charges: -------------------------- In the fourth quarter of 1999, the Company approved a plan to restructure the Company's corporate office activities. In connection with this plan, the Company recorded a pre-tax charge of $5,760,000 in other operating expenses. The restructuring results in the reduction of 49 corporate employees. As part of this process, certain job functions are being outsourced and others eliminated. All affected employees were communicated to in the early part of November 1999. As of December 31, 1999, approximately $221,000 of the costs had been paid and 17 employees were terminated. The remaining accrual of approximately $5,539,000 is recorded in other current liabilities. These costs are expected to be paid in 2000 and the remaining employees will be terminated in 2000. (12) 1997 Charges to Earnings: ------------------------ During the second quarter of 1997, the Company recorded approximately $197,300,000 of pre-tax charges to earnings of which $153,500,000 related to continuing operations and $43,800,000 to discontinued operations. For continuing operations, the charges resulted from a re-evaluation of certain business strategies including its out-of-territory long distance aggressive growth strategy, accounting policy changes at ELI in anticipation of its initial public offering and curtailment of certain employee benefit plans. For discontinued operations, the charges resulted from public utility regulatory commission orders and the curtailment of certain employee benefit plans. (13) Income Taxes: ------------- The following is a reconciliation of the provision for income taxes computed at federal statutory rates to the actual amount:
1999 1998 1997 -------- --------- -------- ($ in thousands) Consolidated tax provision at federal statutory rate $ 65,773 $ 11,558 $ 1,475 State income tax provisions (benefit), net of federal income tax 1,266 (495) 1,352 Allowance for funds used during construction (1,072) (1,322) (1,441) Nontaxable investment income (2,609) (2,932) (4,726) Amortization of investment tax credits (613) (548) (657) Flow through depreciation 5,706 4,870 3,946 Tax reserve adjustment 1,455 (4,760) 564 Company owned life insurance 2,599 561 1,290 Minority interest (8,290) (2,433) - All other, net 372 (551) 125 -------- -------- -------- $ 64,587 $ 3,948 $ 1,928 ======== ======== ========
As of December 31, 1999, 1998 and 1997, accumulated deferred income taxes amounted to $450,903,000, $432,299,000 and $408,310,000, respectively, and the unamortized deferred investment tax credits amounted to $9,305,000, $10,609,000 and $12,398,000, respectively. Income taxes paid during the year were $885,000, $5,434,000 and $17,765,000 for 1999, 1998 and 1997, respectively. F-24 The components of the net deferred income tax liability at December 31, are as follows:
1999 1998 1997 ---- ---- ---- ($ in thousands) Deferred income tax liabilities: - ------------------------------- Property, plant and equipment basis differences $ 381,278 $ 334,296 $ 338,170 Regulatory assets 69,757 73,724 76,504 Other, net 20,523 47,572 20,101 --------- --------- ---------- 471,558 455,592 434,775 --------- --------- ---------- Deferred income tax assets: - -------------------------- Regulatory liabilities 7,663 8,431 9,236 Deferred investment tax credits 3,687 4,253 4,831 --------- --------- ---------- 11,350 12,684 14,067 --------- --------- ---------- Net deferred income tax liability $ 460,208 $ 442,908 $ 420,708 ========= ========= ==========
The provision for federal and state income taxes, as well as the taxes charged or credited to shareholders' equity, includes amounts both payable currently and deferred for payment in future periods as indicated below:
1999 1998 1997 ---- ----- ---- ($ in thousands) Income taxes charged (credited) to the income statement for continuing operations: Current: Federal $ 39,735 $ (17,866) $ 11,081 State 1,394 (2,171) (353) -------- ---------- ---------- Total current 41,129 (20,037) 10,728 -------- ---------- ---------- Deferred: Federal 23,517 23,124 (10,576) Investment tax credits (613) (547) (657) State 554 1,408 2,433 -------- ---------- ---------- Total deferred 23,458 23,985 (8,800) -------- ---------- ---------- Subtotal 64,587 3,948 1,928 -------- ---------- ---------- Income taxes charged (credited) to the income statement for discontinued operations: Current: Federal 6,170 16,222 2,577 State 937 2,464 391 -------- ---------- ---------- Total current 7,107 18,686 2,968 Deferred: Federal 6,662 676 2,902 Investment tax credits (1,073) (1,079) (1,083) State 1,534 106 668 -------- ---------- ---------- Total deferred 7,123 (297) 2,487 -------- ---------- ---------- Subtotal 14,230 18,389 5,455 -------- ---------- ---------- Income tax benefit on dividends on convertible preferred securities: Current: Federal (3,344) (3,344) (3,344) State (508) (508) (508) -------- ---------- ---------- Subtotal (3,852) (3,852) (3,852) -------- ---------- ---------- Income tax benefit on cumulative effect of change in accounting principle: Current: Federal - (478) - State - - - -------- ---------- ---------- Subtotal - (478) - -------- ---------- ---------- Total Income taxes charged to the income statement (a) 74,965 18,007 3,531 -------- ---------- ----------
F-25
1999 1998 1997 ---- ---- ---- ($ in thousands) Income taxes charged (credited) to shareholders' equity: Deferred income taxes (benefits) on unrealized gains or losses on securities classified as available-for-sale $(25,906) $ 32,792 $ 6,718 Current benefit arising from stock options exercised (1,262) (35) (164) -------- -------- --------- Income taxes charged (credited) to shareholders' equity (b) (27,168) 32,757 6,554 -------- -------- --------- Total income taxes: (a) plus (b) $ 47,797 $ 50,764 $ 10,085 ======== ======== =========
The Company's alternative minimum tax credit as of December 31, 1999 is $92,114,000, which can be carried forward indefinitely to reduce future regular tax liability. This benefit is included as a debit against accrued income taxes. (14) Net Income Per Common Share: --------------------------- The reconciliation of the net income per common share calculation for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ------------------------------------------------------------- ----------------------- ($ in thousands, except for per share amounts) Per Per Per Income Shares Share Income Shares Share Income Shares Share ------ ------ ----- ------ ------ ----- ------ ------ ----- Net income per common share: Basic $144,486 260,613 $ .55 $57,060 258,879 $ .22 $10,100 260,226 $ .04 Effect of dilute options - 1,779 - - 742 - - 598 - Diluted $144,486 262,392 $ .55 $57,060 259,621 $ .22 $10,100 260,824 $ .04
All share amounts represent weighted average shares outstanding for each respective period. All per share amounts have been adjusted for subsequent stock dividends for 1997. There were no stock dividends declared in 1999. The diluted net income per common share calculation excludes the effect of potentially dilutive shares when their exercise price exceeds the average market price over the period. The Company has 4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible Preferred Securities which are convertible into common stock at a 3.76 to 1 ratio at an exercise price of $13.30 per share and 7,756,406 potentially dilutive stock options at a range of $10.54 to $14.24 per share. These items were adjusted for subsequent stock dividends and were not included in the diluted net income per common share calculation for any of the above periods as their effect was antidilutive. (15) Comprehensive Income (Loss): --------------------------- The Company's other comprehensive income (loss) for the years ended December 31, 1999 and 1998 is as follows:
Year Ended December 31, 1999 ---------------------------- Before-Tax Tax Expense/ Net-of-Tax Amount (Benefit) Amount ------------ ------------ ------------ ($ in thousands) Net unrealized gains on securities: Net unrealized holding gains arising during period $ 56,746 $ 21,722 $ 35,024 Less: Reclassification adjustment for net gains realized in net income 124,421 47,628 76,793 ------------ ------------ ------------ Other comprehensive loss $ (67,675) $ (25,906) $ (41,769) ============ ============ ============
F-26
Year Ended December 31, 1998 ---------------------------- Before-Tax Tax Expense/ Net-of-Tax Amount Benefit Amount ------------ ------------ ----------- ($ in thousands) Net unrealized gains on securities: Net unrealized holding gains arising during period $ 56,497 $ 21,627 $ 34,870 Add: Reclassification adjustment for net losses realized in net income 29,167 11,165 18,002 ---------- ------------ ------------ Other comprehensive income $ 85,664 $ 32,792 $ 52,872 ========== ============ ============
(16) Segment Information: ------------------- The Company is segmented into communications and ELI. The communications segment provides both regulated and competitive communications services to residential, business and wholesale customers. ELI is a facilities based integrated communications provider providing a broad range of communications services throughout the United States. EBITDA for each segment consists of segment operating income plus depreciation, all excluding special items. EBITDA is a measure commonly used to analyze companies on the basis of operating performance. It is not a measure of financial performance under generally accepted accounting principles and should not be considered as an alternative to net income as a measure of performance nor as an alternative to cash flow as a measure of liquidity and may not be comparable to similarly titled measures of other companies. Special items for 1999 include the following: gains on the sales of investments, asset impairment charges, accelerated depreciation related to the change in useful life of an operating system, costs associated with an executive retirement agreement, restructuring charges, pre-acquisition integration costs and separation costs. Special items for 1998 include separation costs and the HTCC investment write-off. Special items for 1997 include the 1997 charges to earnings.
Year Ended December 31, -------------------------------- 1999 1998 1997 ------------------------------------- ($ in thousands) Communications: - -------------- Revenues excluding special items $ 949,268 $ 867,446 $ 840,329* Inter-segment revenues (46,031) (32,407) (23,573) Revenues as reported 903,237 835,039 802,589 Depreciation 226,141 181,656 175,363 Operating income (loss) 103,727 157,567 (2,580) EBITDA 380,465 340,642 315,506 Capital expenditures, net 227,176 201,453 263,011 Total segment assets 2,422,572 2,438,978 2,313,535 * Excludes $14,167,000 of the 1997 charges to earnings. ELI: - --- Revenues $ 187,008 $ 100,880 $ 61,084 Inter-segment revenues (2,817) (3,061) (3,341) Revenues as reported 184,191 97,819 57,743 Depreciation 36,289 17,002 11,167 Operating loss (95,659) (75,923) (48,201) EBITDA (57,698) (58,921) (26,269) Capital expenditures, net 245,695* 200,000 124,549 Total segment assets 775,234 532,309 359,962
* Includes $60,000,000 in non-cash capital lease additions. F-27 The following table is a reconciliation of certain segment items to the total consolidated amount. Year Ended December 31, ------------------------------ 1999 1998 1997 ------------------------------------ ($ in thousands) EBITDA - ------ Total segment EBITDA $ 322,767 $ 281,721 $ 289,237 Investment and other income 22,513 37,197 41,396 Non operating gain on sale of subsidiary stock - - 78,734 Special items 168,819 (33,324) (153,488) Discontinued operations 148,190 158,399 112,310 ----------- ---------- ----------- Consolidated EBITDA $ 662,289 $ 443,993 $ 368,189 =========== ========== =========== Capital expenditures - -------------------- Total segment capital expenditures $ 472,871 $ 401,453 $ 387,560 General capital expenditures 6,741 25,123 33,334 Discontinued operations capital 135,804 95,456 103,595 expenditures ---------- --------- ---------- Consolidated reported capital expenditures $ 615,416 $ 522,032 $ 524,489 ========== ========= ========== Assets - ------ Total segment assets $ 3,197,806 $ 2,971,287 $ 2,673,497 General assets 917,525 807,597 760,149 Discontinued operations assets 1,656,414 1,514,048 1,439,206 ---------- --------- ---------- Consolidated reported assets $ 5,771,745 $ 5,292,932 $ 4,872,852 ========== ========= ========== (17) Quarterly Financial Data (unaudited): ------------------------------------ Net Income Per Common Share ----------------- Revenues Net Income Basic Dilutive -------- ---------- ----- -------- 1999 ($ in thousands) ---- First quarter $ 264,750 $ 54,625 $.21 $.21 Second quarter 273,946 7,753 .03 .03 Third quarter 271,517 11,908 .05 .05 Fourth quarter 277,215 70,200 .27 .26 Net Income Per Common Share ----------------- Revenues Net Income Basic Dilutive -------- ---------- ------ -------- 1998 ($ in thousands) ---- First quarter $ 224,540 $ 26,779 $.10 $.10 Second quarter 224,511 14,462 .06 .06 Third quarter 236,324 14,461 .06 .06 Fourth quarter 247,483 1,358 .01 .01 First quarter 1999 results include an after tax gain of approximately $42,900,000 on the sale of Centennial Cellular stock (see Note 5). Fourth quarter 1999 results include an after tax gain of approximately $41,700,000 on the sale of Century stock and an after tax gain of approximately $51,800,000 on the sale of the Company's interest in a cable joint venture (see Note 5), offset by after tax asset impairment charges of approximately $22,300,000 (see Note 1(g)), after tax costs of an executive retirement agreement of $4,100,000, after tax restructuring charges of approximately $3,600,000 (see Note 11), after tax impact of accelerated depreciation of approximately $3,000,000 related to the change in useful life of an operating system and after tax pre-acquisition integration costs of approximately $2,400,000 (see Note 3). F-28 First quarter 1998 results include an after tax cumulative effect of change in accounting principle, net of related minority interest of approximately $2,334,000 (see Note 1(k)). Fourth quarter 1998 results include an after tax write-off of the HTCC investment of approximately $19,700,000 (see Note 5). The quarterly net income per common share amounts are rounded to the nearest cent. Annual net income per common share may vary depending on the effect of such rounding. (18) Supplemental Cash Flow Information: ---------------------------------- The following is a schedule of net cash provided by operating activities for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---- ---- ---- ($ in thousands) Income (Loss) from continuing operations $ 117,127 $ 20,532 $ (3,923) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 262,430 198,658 186,530 Non cash charges to earnings 36,136 - 122,735 Investment gains (221,088) - - Non cash HTCC investment write-off - 31,905 - Cumulative effect of change in accounting principle - 3,394 - Gain on sale of subsidiary stock - - (78,734) Allowance for equity funds used during construction (2,547) (2,700) (4,566) Deferred income tax and investment tax credit 30,581 23,687 (6,373) Change in operating accounts receivable (7,783) (40,770) (41,745) Change in accounts payable and other 91,088 (112,809) (27,982) Change in accrued taxes and interest 30,624 17,996 (4,458) Change in other assets 10,941 16,205 (1,628) --------- -------- --------- Net cash provided by continuing operating activities $ 347,509 $ 156,098 $ 139,856 ========= ======== =========
In conjunction with the acquisitions described in Note 3 the Company assumed debt of $13,800,000 and $8,400,000 in 1998 and 1997, respectively, at weighted average interest rates of 5.6% and 6.2%, respectively. (19) Retirement Plans: ----------------- Pension Plan ------------ The Company and its subsidiaries have a noncontributory pension plan covering all employees who have met certain service and age requirements. The benefits are based on years of service and final average pay or career average pay. Contributions are made in amounts sufficient to fund the plan's net periodic pension cost while considering tax deductibility. Plan assets are invested in a diversified portfolio of equity and fixed-income securities. The following tables set forth the plan's benefit obligations and fair values of plan assets as of December 31, 1999 and 1998. 1999 1998 ----- ----- Change in benefit obligation ($ in thousands) ---------------------------- Benefit obligation at beginning of year $ 252,914 $ 208,520 Service cost 13,234 10,747 Interest cost 17,200 15,703 Amendments (1,877) (1,487) Actuarial (gain)/loss (33,039) 27,941 Acquisitions - 8,344 Benefits paid (20,830) (16,854) --------- -------- Benefit obligation at end of year $ 227,602 $ 252,914 ========= ======== F-29 1999 1998 ---- ---- Change in plan assets ($ in thousands) - --------------------- Fair value of plan assets at beginning of year $ 232,536 $ 201,834 Actual return on plan assets 21,760 24,749 Acquisitions - 10,875 Employer contribution 5,420 11,932 Benefits paid (20,830) (16,854) -------- -------- Fair value of plan assets at end of year $ 238,886 $ 232,536 ======== ======== (Accrued)/Prepaid benefit cost - ----------------------------- Funded status $ 11,284 $ (20,378) Unrecognized net liability 146 189 Unrecognized prior service cost 1,673 3,682 Unrecognized net actuarial (gain)/loss (13,911) 21,807 -------- --------- (Accrued)/Prepaid benefit cost $ (808) $ 5,300 ======== ========= Components of net periodic benefit cost - --------------------------------------- Service cost $ 13,234 $ 10,747 Interest cost on projected benefit obligation 17,200 15,703 Return on plan assets (19,081) (17,241) Net amortization and deferral 175 400 -------- --------- Net periodic benefit cost $ 11,528 $ 9,609 ======== ========= Assumptions used in the computation of pension costs/ year-end benefit obligations were as follows: 1999 1998 ---- ---- Discount rate 7.0%/8.0% 7.5%/7.0% Expected long-term rate of return on plan assets 8.25%/N/A 8.25%/N/A Rate of increase in compensation levels 4.0%/4.0% 4.0%/4.0% In November 1998, the Company acquired Rhinelander Telecommunications, Inc., including its pension benefit plans. The acquisition increased the pension benefit obligation by $3,974,000 and the fair value of plan assets by $4,884,000 as of December 31, 1998. In June 1998, the Company acquired The Gas Company (TGC), including its non-collectively bargained pension benefit plan. The acquisition increased the pension benefit obligation by $4,370,000 and the fair value of plan assets by $5,991,000 as of December 31, 1998. F-30 Postretirement Benefits Other Than Pensions ------------------------------------------- The Company provides certain medical, dental and life insurance benefits for retired employees and their beneficiaries and covered dependents. The following table sets forth the plan's benefit obligations and the postretirement benefit liability recognized on the Company's balance sheets at December 31, 1999 and 1998: 1999 1998 ---- ---- Change in benefit obligation ($ in thousands) - ---------------------------- Benefit obligation at beginning of year $ 51,983 $ 49,110 Service cost 781 980 Interest cost 3,431 3,523 Plan participants' contributions 629 596 Amendments - (4,734) Actuarial (gain)/loss (8,590) 4,503 Acquisitions - 651 Benefits paid (2,706) (2,646) -------- -------- Benefit obligation at end of year $ 45,528 $ 51,983 ======== ======== Change in plan assets - --------------------- Fair value of plan assets at beginning of year $ 18,710 $ 6,661 Actual return on plan assets 1,200 677 Benefits paid (948) - Employer contribution 1,498 11,372 -------- -------- Fair value of plan assets at end of year $ 20,460 $ 18,710 ======== ======== Accrued benefit cost - --------------------- Funded status $ (25,068) $(33,273) Unrecognized transition obligation 359 386 Unrecognized prior service cost - - Unrecognized (gain) (14,953) (7,562) ------- ---------- Accrued benefit cost $ (39,662) $(40,449) ======= ========== Components of net periodic postretirement benefit cost - ------------------------------------------------------- Service cost $ 781 $ 980 Interest cost on projected benefit obligation 3,431 3,523 Return on plan assets (1,544) (549) Net amortization and deferral (828) (947) Curtailment gain - (2,003) ------- ---------- Net periodic postretirement benefit cost $ 1,840 $ 1,004 ======= ========== For purposes of measuring year end benefit obligations, the Company used the same discount rates as were used for the pension plan and a 7% annual rate of increase in the per-capita cost of covered medical benefits, gradually decreasing to 5% in the year 2040 and remaining at that level thereafter. The effect of a 1% increase in the assumed medical cost trend rates for each future year on the aggregate of the service and interest cost components of the total postretirement benefit cost would be $378,000 and the effect on the accumulated postretirement benefit obligation for health benefits would be $3,845,000. The effect of a 1% decrease in the assumed medical cost trend rates for each future year on the aggregate of the service and interest cost components of the total postretirement benefit cost would be $(338,000) and the effect on the accumulated postretirement benefit obligation for health benefits would be $(3,486,000). In August 1999, the Company's Board of Directors approved a plan of divestiture for the public services properties. As such, any pension and/or postretirement gain or loss associated with the divestiture of these properties will be recognized when realized. F-31 401(k) Savings Plans -------------------- The Company sponsors employee savings plans under section 401(k) of the Internal Revenue Code. The plans cover substantially all full-time employees. Under the plans, the Company provides matching contributions in Company stock based on qualified employee contributions. Matching contributions were $5,850,000, $5,795,000 and $4,883,000 for 1999, 1998 and 1997, respectively. (20) Commitments and Contingencies: ----------------------------- The Company has budgeted capital expenditures in 2000 of approximately $599,800,000 (including $38,000,000 of non-cash capital lease additions) for continuing operations and $169,900,000 for discontinued operations and certain commitments have been entered into in connection therewith. In December 1999, the Company entered into an agreement with Nortel to outsource elements of DMS central office engineering and commissioning of the Company's network. The Company's commitment under this three year agreement is approximately $69,000,000 for 2000, $37,000,000 for 2001 and $35,000,000 for 2002. The 2000 capital cost of this contract is included in the 2000 budgeted capital expenditures. The Company conducts certain of its operations in leased premises and also leases certain equipment and other assets pursuant to operating leases. Future minimum rental commitments for all long-term noncancelable operating leases for continuing operations are as follows: Year Amount ------------- ------------- ($ in thousands) 2000 $ 26,363 2001 25,610 2002 17,237 2003 12,342 2004 9,219 thereafter 13,972 ----------- Total $ 104,743 =========== Total rental expense included in the Company's results of operations for the years ended December 31, 1999, 1998 and 1997 was $30,855,000, $27,964,000 and $19,076,000, respectively. The Company subleases, on a month to month basis, certain office space in its corporate office to a charitable foundation formed by its Chairman. In 1995, ELI entered into a $110 million construction agency agreement and an operating lease agreement in connection with the construction of certain communications networks and fiber cable links. ELI served as agent for the construction of these projects and, upon completion of each project, leased the facilities for a three year term, with one year renewals available through April 30, 2002. At December 31, 1999 and 1998, ELI was leasing assets under this agreement with an original cost of approximately $108,541,000 and $87,426,000 at December 31, 1997. ELI has the option to purchase the facilities at the end of the lease terms for the amount of the lessor's average investment in the facilities. Payments under the lease depend on current interest rates, and assuming continuation of current interest rates, payments would approximate $6.1 million annually through April 30, 2002 and, assuming exercise of the purchase option, a final payment of approximately $110 million in 2002. In the event ELI chooses not to exercise this option, ELI is obligated to arrange for the sale of the facilities to an unrelated party and is required to pay the lessor any difference between the net sales proceeds and the lessor's investment in the facilities. However, any amount required to be paid to the lessor is subject generally to a maximum of 80% (approximately $88 million) of the lessor's investment. The Company has guaranteed all obligations of ELI under this operating lease. ELI has entered into various capital and operating leases for fiber optic cable to interconnect ELI's local networks with long-haul fiber optic routes. The terms of the various agreements covering these routes range from 20 to 25 years, with varying optional renewal periods. For certain contracts, rental payments are based on a percentage of ELI's leased traffic, and are exclusive, subject to certain minimums. For other contracts, certain minimum payments are required. ELI has also entered into certain operating and capital leases in order to develop ELI's local networks, including an operating lease to develop a local network in Phoenix and a capital lease in San Francisco. The operating lease in Phoenix provides for rental payments based on a percentage of the network's operating income for a period of 15 years. The capital lease in San F-32 Francisco is a 30-year indefeasible and exclusive right to use agreement for optical fibers in the San Francisco Bay Area. The Phoenix operating lease network is currently operational, and the San Francisco capital lease network is expected to become operational in 2000. Minimum payments on operating leases are included in the table above. For payments on capital leases, see Note 7. The Company is also a party to contracts with several unrelated long distance carriers. The contracts provide fees based on leased traffic subject to minimum monthly fees aggregating as follows: Year Amount ------------- ------------- ($ in thousands) 2000 $ 36,840 2001 31,490 2002 6,120 2003 5,960 2004 4,200 thereafter 12,600 ----------- Total $ 97,210 =========== The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including the Company, have entered into a purchase power agreement with Hydro-Quebec. The agreement contains "step-up" provisions that state that if any VJO member defaults on its purchase obligation under the contract to purchase power from Hydro-Quebec the other VJO participants will assume responsibility for the defaulting party's share on a pro-rata basis. As of December 31, 1999 and 1998, the Company's obligation under the agreement is approximately 10% of the total contract. The two largest participants in the VJO represent approximately 46% and 37% of the total contract, respectively. During 1998, these two major participants have each experienced regulatory disallowances that have resulted in credit rating downgrades and stock price declines. Both of these participants are in the process of appealing the regulatory disallowances; however, both companies have stated that an unfavorable ruling could jeopardize their ability to continue as going concerns. If either or both of these companies default on their obligations under the Hydro-Quebec agreement, the remaining members of the VJO, including the Company, may be required to pay for a substantially larger share of the VJO's total power purchase obligation for the remainder of the agreement. Such a result could have a materially adverse effect on the financial results of the Company. The purchaser of the Company's Vermont Electric Division has agreed at closing to assume the Company's power purchase obligations under the Hydro-Quebec agreement, and the Company has agreed to indemnify that purchaser against losses resulting from the "step-up" provision in that agreement. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters, after considering insurance coverages, will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. F-33
EX-3.(I) 2 RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF CITIZENS UTILITIES COMPANY CITIZENS UTILITIES COMPANY, a corporation organized and existing under the laws of the State of Delaware (the "Company"), hereby certifies as follows: 1. The name of the corporation is CITIZENS UTILITIES COMPANY The date of filing its original Certificate of Incorporation with the Secretary of State was November 12, 1935. 2. The provisions of the Amended and Restated Certificate of Incorporation of the Company as heretofore amended, are hereby amended and restated and integrated into the single instrument which is hereinafter set forth, and which is entitled Amended and Restated Certificate of Incorporation of Citizens Utilities Company without any further amendments and without any further discrepancy between the provisions of the Amended and Restated Certificate of Incorporation as heretofore amended and the provisions of the said single instrument hereinafter set forth. 3. The amendments and the restatement of the Amended and Restated Certificate of Incorporation herein certified have been duly adopted by the stockholders and the Board of Directors, respectively, of the Company in accordance with the provisions of Section 242 and of Section 245 of the General Corporation Law of the State of Delaware. 4. The capital of the Company will not be reduced under or by reason of any amendment in this Amended and Restated Certificate of Incorporation here- inafter set forth. 5. The text of the Amended and Restated Certificate of Incorporation shall upon the effective date of this Amended and Restated Certificate of Incorporation read as follows: AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF CITIZENS UTILITIES COMPANY FIRST: The name of this corporation is CITIZENS UTILITIES COMPANY. SECOND: Its principal office in the State of Delaware is to be located at 1013 Centre Road, in the City of Wilmington, County of New Castle, and its resident agent is The Prentice-Hall Corporation System, Inc. THIRD: The nature of the business and the objects and purposes to be transacted, promoted, and carried on are to do any or all of the things herein mentioned as fully and to the same extent as natural persons might or could do and in any part of the world, viz.: (a) To purchase or otherwise acquire, own, operate and dispose of all or any part of the business and properties of persons, partnerships, associations, and other corporations engaged in any business, including that of operating public utilities, and to make payment therefor by the issuance of securities of this corporation or in any other manner permitted by law, and in connection therewith to assume any or all of the bonds, mortgages, franchises, leases, contracts, indebtedness, liabilities, and obligations of such corporations, and to do any things necessary or expedient in connection therewith or with the carrying out of any plan of reorganization of predecessor company or any modification therefor. (b) To generate, produce, buy, or in any manner acquire, and to sell, dispose of, and distribute electricity for light, heat, power, and other purposes and to carry on the business of furnishing, supplying, manufacturing, and vending light heat, power, gas, water, steam heat, ice, refrigeration, and any and all businesses incident thereto, and to build, construct, develop, improve, acquire, hold, own, lease, maintain, and operate plants, facilities, and works for the manufacture, generation, production, accumulation, transmission, and distribution of electric energy, gas and steam, for light power, heat and other purposes, and to acquire, construct, maintain, and operate systems of water works, gas works, steam heating plants, for the supply of water, gas, and steam heat, and to exercise rights of condemnation and eminent domain in connection with the doing of its business objects and purposes as herein set forth so far as may be permissible by law, to acquire, maintain, operate, and exercise all the rights of ownership of any telephone, telegraph, and/or other communication system or systems. (c) To build, construct, develop, improve, acquire, hold, own, lease, maintain and operate, by electricity or other power, street railways and interurban railways for the transportation of passengers, mail, express, merchandise, or other freight in any part of the world. (d) To produce, mine, buy, sell, store, market, deal in, and prospect for coal and minerals of all kinds and the products and by-products thereof. - 2 - (e) To organize, incorporate, reorganize, finance, and to aid and assist financially or otherwise, companies, corporations, joint stock companies, syndicates, partnerships, and associations of all kinds, and to underwrite, subscribe for, and endorse the bonds, stocks, securities, debentures, notes, or undertakings of any such company, corporation, joint stock company, syndicate partnership or association, and to make any guarantee in connection therewith or otherwise for the payment of money or for the performance of any obligation or undertaking, and to do any and all things necessary or convenient to carry any of such purposes into effect. (f) To carry on the business of engineering and contracting in all of its branches; to appraise, value, design, build, construct, enlarge, develop, improve, extend, and repair works, plants, systems, lines, stations, buildings, structures, mines, shafts, tunnels, wells, canals, viaducts, highways, facilities, apparatus, machinery, equipment, appliances and appurtenances, of any and every nature and kind whatsoever. (g) To purchase and acquire securities, assets, and property of every kind and description at judicial, judiciary, trustee's, pledge's, mortgagee's or liquidating or public or private sales, either pursuant to a plan of reorganization or otherwise, and to carry on a general salvage, liquidation, and realization business; and also to do a general commission and brokerage business. (h) To hold in trust, issue on commission, make advances upon or sell, lease, license, transfer, organize, reorganize, incorporate, or dispose of any of the undertakings or resulting investments aforesaid, or the stock or securities thereof; to act as agent or depositary for any of the above or like purposes or any purpose herein mentioned; and to act as fiscal agent of any other person, firm or corporation. (i) To obtain the grant of, purchase, lease, or otherwise acquire any concessions, rights, options, patents, privileges, lands, rights of way, sites, properties, undertakings or businesses, or any right, option or contract in relation thereto, and to perform, carry out, and fulfill the terms and conditions thereof and to carry the same into effect, and to develop, maintain, lease, sell, transfer, dispose of, and otherwise deal with the same. (j) From time to time to apply for, obtain the grant of, purchase or acquire by assignment, transfer or otherwise, and to exercise, carry out and enjoy any license, power, authority, franchise, ordinance, order, right or privilege, which any government or authority, supreme, municipal or local, or any corporation or other public body shall enact, make, or grant. (k) To issue shares of the capital, stock, bonds, debentures, debenture stock, notes, and other obligations of this corporation for cash, for labor done, for property, real or personal, or leases thereof, or for any combination of any of the foregoing, or for services rendered or in exchange for the stock debentures, debenture stock, bonds, securities, or obligations of any person, firm, association, corporation, or other organization. - 3 - (l) To purchase, acquire, and lease, and to sell, lease, and dispose of water, water rights, water records, power privileges, and appropriations for power, light, heat, mining, milling, irrigation, agricultural, domestic or any other use or purpose. (m) To acquire by purchase, lease, own, hold, sell, mortgage, and encumber both improved and unimproved real estate wherever situate; to survey, subdivide, plat, colonize, and improve the same for the purposes of sale or otherwise; and to construct and erect thereon factories, works, plants, shops, stores, mills, hotels, houses, buildings, and other structures, and to own, use, maintain, manage, and operate the same or any thereof. (n) To own and control and acquire, by lease, purchase, construction, or otherwise, steamships, boats, barges, hydroplanes, and vessels of all kinds or interests therein and to operate the same either on Alaska Waters and on the Waters of Puget Sound and on all navigable rivers and waters connected therewith and elsewhere, or both, for the transportation of passengers and freight of all kinds, with power to purchase, build, construct, repair, lease, sell, convey, and operate vessels of all kinds, and all machinery, appliances and apparatus incident, necessary or convenient thereto, or in any way connected therewith; with power also to do a towing business, and also to purchase, own, lease, construct, control, and operate and sell docks, wharves, landings floats, warehouses, dry docks and dock machinery, appliances and apparatus of all kinds; and with the power also to do a general shipbuilding, stevedore, dockage, warehouse, and commission business; to conduct a general cold storage and refrigeration business. (o) To subscribe for, or cause to be subscribed for, buy, own, hold, purchase, receive, or acquire, and/or to sell, negotiate, guarantee, assign, deal in, exchange, transfer, mortgage, pledge and/or otherwise dispose of shares of the capital stock, scrip, bonds, coupons, mortgages, debentures, debenture stock, securities, notes, acceptances, drafts, and/or evidences of indebtedness issued and/or created by any government or by any political subdivision thereof or by any other corporations, joint stock companies, or associations, whether public, private, or municipal, or any corporate body, and while the owner thereof, to possess and to exercise in respect thereof all the rights, powers, and privileges of ownership, including the right to vote thereon; to guarantee the payment of dividends on any shares of the capital stock of any of the corporations, joint stock companies, or associations in which this corporation has or may at any time have an interest, and to become surety in respect of, endorse, or otherwise guarantee the payment of the principal of or interest on any scrip, bonds, coupons, mortgages, debentures, debenture stock, securities, notes, drafts, bills of exchange , or evidences of indebtedness, issued or created by any such corporations, joint stock companies, or associations; to assume and agree to pay all or part of the indebtedness, evidenced by bonds or otherwise, of any corporation, and to assume and agree to perform any covenants, conditions, or agreements contained in any mortgage or trust indenture, and to assume any other obligation, or liability of any corporation; to become surety for or guarantee the carrying out and performance of any and all contracts, leases, and obligations of every kind of any corporations, joint stock companies, or associations, and in particular of any corporation, joint stock company, or association any of whose shares, scrip, bonds, coupons, mortgages, debentures, debenture stock, securities, notes, drafts, bills of exchange, or evidences of indebtedness, are at any time held by or for this corporation, and to do any acts or things designed to protect, preserve, improve or enhance the value of any such shares, scrip, bonds, coupons, mortgages, debentures, debenture stock, securities, notes, drafts, bills of exchange, or evidences of indebtedness, provided, however, that this Subdivision (o) shall not be construed to authorize this corporation to engage in the business of banking. - 4 - (p) To manufacture, buy, sell, and generally deal in, goods, wares, merchandise, property, and commodities of any and every class and description, and all articles used or useful in connection therewith; to engage in any business whether manufacturing or otherwise which this corporation may deem advantageous or useful in connection with any or all of the foregoing, and to purchase, acquire, manufacture, market, or prepare for market, sell or otherwise dispose of any article, commodity, or thing which this corporation may use in connection with its business. (q) To manage, operate, conduct and supervise the business, properties, and affairs, in whole or in part, of any companies, corporations, joint stock companies, syndicates, partnerships, and associations of all kinds whether it owns any or all of the securities and/or obligations of such companies, corporations, joint stock companies, syndicates, partnerships, and associations or not. (r) To secure, purchase, acquire, apply for, register, own, hold, sell, or dispose of any and all copyrights, trademarks and other trade rights. (s) To organize, or cause to be organized, under the laws of the State of Delaware, or of any other state, territory, or country, or the District of Columbia, a corporation or corporations for the purpose of accomplishing any or all of the objects for which this corporation is organized, and to dissolve, wind up, liquidate, merge or consolidate any such corporation, or corporations, or to cause the same to be dissolved, wound up, liquidated, merged, or consolidated. (t) To purchase, apply for, obtain, or otherwise acquire any and all letters patent, licenses, patent rights, patented processes, and similar rights granted by the United States or any other government or country, or any interest therein, or any inventions which may seem capable of being used for or in connection with any of the objects or purposes of this corporation, and to use, exercise, develop, sell, dispose of, lease, grant licenses in respect to, or other interests in the same, and otherwise turn the same to account, and to carry on any business, manufacturing or otherwise, which may be deemed to directly or indirectly aid, effectuate, or develop, the objects or any of them of this corporation. (u) To lend money, to borrow money for any of the purposes of this corporation, and to issue bonds, debentures, debenture stock, notes, and other obligations, and to secure the same by pledge or mortgage of the whole or any part of the property, of this corporation, either real or personal, or to issue bonds, debentures, debenture stock, notes, or other obligations without any such security. (v) To enter into, make, perform, and carry out contracts of every kind for any lawful purpose, without limit as to amount, with any person, firm, association, or corporation. - 5 - (w) In connection with its business, to draw, make, accept, endorse, discount, guarantee, execute, and issue promissory notes, bills of exchange, drafts, warrants and all kinds of obligations and certificates and negotiable or transferable instruments. (x) To purchase, hold, sell, and transfer shares of its own capital stock, bonds, notes, and other obligations of this corporation from time to time to such extent and in such manner and upon such terms as its Board of Directors shall determine; provided that any purchase of any of the shares of the capital stock of the corporation shall not be made when such purchase would cause any impairment of the capital of the corporation; and provided further that shares of its own capital stock belonging to this corporation shall not be voted upon directly or indirectly. (y) To have one or more offices, to carry on any or all of its operations and business and without restriction or limit as to amount, to purchase, lease, or otherwise acquire, hold, and own, and to mortgage, sell, convey, lease or otherwise dispose of, real and personal property of every class and description in any of the states or territories of the United States and in the District of Columbia, and in any and all foreign countries, subject to the laws of such state, district, territory, or country. (z) To do any and all things herein set forth, and in addition such other acts and things as are necessary or convenient to the attainment of the purposes of this corporation, or any of them, to the same extent as natural persons lawfully might or could do in any part of the world. The foregoing clauses shall be construed both as objects and powers and it is hereby expressly provided that the foregoing enumeration of specific power shall not be held to limit or restrict in any manner the powers of this corporation, and are in furtherance of, and in addition to, and not in limitation of the general powers conferred by the laws of the State of Delaware. It is the intention that the purposes, objects and powers specified in this Article Third and all subdivisions thereof shall, except as otherwise expressly provided, in nowise be limited or restricted by reference to or inference from the terms of any other clause or paragraph of this Article, and that each of the purposes, objects, and powers specified in this Article Third shall be regarded as independent purposes, objects, and powers. FOURTH: (a) The total number of shares of stock which this corporation shall have authority to issue is six hundred and fifty million (650,000,000) shares of which fifty million (50,000,000) shares shall be shares of Preferred Stock with a par value of one cent ($.0l) each, amounting in aggregate to five hundred thousand dollars ($500,000), six hundred million (600,000,000) shares shall be shares of Common Stock, par value of twenty-five ($.25) each, amounting in the aggregate to one hundred and fifty million dollars ($150,000,000). (b) The Preferred Stock may be issued from time to time in one or more series, and in such amounts as may be determined by the Board of Directors. The designations, powers, preferences and relative, participating optional, conversion and other rights, and the qualifications, limitations and restrictions thereof, of the Preferred Stock of each series, which shall not be fixed by the Certificate of Incorporation, shall be such as may be fixed or altered by resolution or resolutions by the Board of Directors (authority so to do being hereby expressly granted to, and vested in, the Board of Directors) to the full extent now or hereafter permitted by the laws of Delaware. - 6 - (c ) Each holder of Common Stock shall at every meeting of the stockholders be entitled to one vote in person or by written proxy signed by him for each full share of Common Stock owned by him and shall be entitled to vote upon all such matters as may come before the stockholders including without limitation the election of directors, which shall be decided by majority vote of the Common Stock present or represented by proxy and entitled to vote at the meeting. The stockholders of this corporation shall have no preemptive right to subscribe to any issue of shares of stock of this corporation now or hereafter made. (d) Each full share of the former Common Stock Series B with the par value of twenty-five cents ($.25) each ("Common Stock Series B") which shall be outstanding immediately prior to the time when this Article FOURTH shall become effective, shall, upon such effectiveness, automatically and without any further action on the part of the holder thereof, be changed and reclassified into one full share of Common Stock. Each certificate representing a share or shares of Common Stock Series B (including those certificates representing a share or shares of the former Common Stock Series A) shall thereafter represent a like number of shares of Common Stock of this corporation into which the shares of Common Stock Series B have been changed and reclassified and shall for all purposes be deemed evidence of the ownership of a like number of shares of Common Stock of this corporation into which the shares of Common Stock Series B have been changed and reclassified. The holders of such certificates shall not be required immediately to surrender the same in exchange for certificates of Common Stock, but, as such certificates representing shares of Common Stock Series B are surrendered for transfer, this corporation shall cause to be issued certificates representing shares of Common Stock, and, at any time upon surrender by any holders of certificates representing Common Stock Series B, this corporation shall cause to be issued thereof certificates for a like number of shares of Common Stock of this corporation." FIFTH: The minimum amount of capital with which it will commence business is One Thousand Dollars ($1,000.00). SIXTH: The name and place of residence of each of the incorporators are as follows: NAME RESIDENCE ---- --------- L. H. HERMAN Wilmington, Delaware WALTER LENZ Wilmington, Delaware W. T. HOBSON Wilmington, Delaware SEVENTH: This corporation is to have perpetual existence. - 7 - EIGHTH: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. NINTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized: To make, alter, and repeal the by-laws subject to the power of the stockholders to change or repeal such bylaws; provided, however, that prior to the second Tuesday in March, 1937, no by-laws shall be adopted or amended by the directors so as to authorize or provide (a) for the holding of any meeting of stockholders for the election of directors at any place other than Minneapolis, Minnesota or at any time prior to the holding of the first annual meeting of stockholders for election of directors on the second Tuesday in March, 1937; or (b) for the holding of meetings of directors, prior to such first meeting of stockholders for the election of directors, at any place other than as provided in the original by-laws; To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to alter or abolish any such reserve; To fix, determine, and vary from time to time the amount to be main- tained as surplus and the amount or amounts to be set apart for working capital. All of the powers of this corporation, insofar as the same lawfully may be vested by this Certificate in the Board of Directors, are hereby con- ferred upon the Board of Directors of this corporation. Directors need not be elected by ballot, unless voting by ballot shall be requested by the holders of ten percent (10%) or more of the shares of stock represented at the meeting of stockholders at which the directors are to be elected. TENTH: This corporation may in its by-laws make any other provisions or requirements for the management or conduct of the business of this corporation provided the same be not inconsistent with the provisions of this Certificate or contrary to the laws of the State of Delaware, and subject to the limitations upon amendment of by-laws contained in this Certificate of Incorporation. ELEVENTH: This corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by law and all rights conferred on officers, directors, and stockholders herein are granted subject to this reservation. TWELFTH: A. director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation - 8 - Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this Article to authorize corporation action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. B. No modification or repeal of the provisions of this Article shall adversely affect any right or protection of any director of the corporation existing at the date of such modification or repeal or create any liability or adversely affect any such right or protection for any acts or omissions of such director occurring prior to such modification or repeal. IN WITNESS WHEREOF, said CITIZENS UTILITIES COMPANY has caused this Certificate to be signed by Edward O. Kipperman, its Vice President, and attested by Charles J. Weiss, its Secretary, on this 2nd day of July, 1998. CITIZENS UTILITIES COMPANY By:____________________________ Edward O. Kipperman Vice President ATTEST: By:_________________________ Charles J. Weiss Secretary - 9 - EX-10.19 3 CITIZENS EXECUTIVE DEFERRED SAVINGS PLAN THE CITIZENS EXECUTIVE DEFERRED SAVINGS PLAN INDEX Section Page No. ------- -------- SECTION 1: Purpose 1 SECTION 2: Definitions 1 SECTION 3: Administration 4 SECTION 4: Deferrals 5 SECTION 5: Company Matching Credits 6 SECTION 6: Growth of Accounts 7 SECTION 7: Distribution 8 SECTION 8: Hardship Withdrawals 9 SECTION 9: Discretionary Payment 10 SECTION 10: Change in Control 11 SECTION 11: Beneficiary Designation 12 SECTION 12: General Provisions 12 SECTION 13: Withholding 13 SECTION 14: Amendment, Suspension, or Termination 14 Section 1. Purpose 1.1 The purpose of The Citizens Executive Deferred Savings Plan (the "Plan") is to (a) provide incentives and rewards to employees who occupy certain management and highly compensated positions; (b) assure that the Company's compensation programs for senior management are in alignment with the strategic direction of the Company; and (c) assist the Company in attracting, retaining, and motivating employees of high caliber and experience. Section 2. Definitions 2.1 "Account" or "Accounts" shall mean each of a Participant's Deferral Account, and Company Matching Account or any such Accounts or all of such Accounts, as the context requires. 2.2 "Account Balance" shall mean (a) the sum of (1) the amounts credited to a Participant's Deferral Account, (2) the amounts credited to a Participant's Company Matching Account, and (3) earnings and losses credited to a Participant's Accounts, minus (b) distributions from a Participant's Accounts, including without limitation, Hardship Withdrawals from a Participant's Deferral Account, and forfeitures. 2.3 "Administrative Committee" shall mean the committee appointed by the Plan Committee to supervise the day to day operation of the Plan. 2.4 "Beneficiary" shall mean the person or persons designated by a Participant to receive the Participant's Account Balance upon the death of the Participant or a Participant's deemed beneficiary pursuant to Section 11 hereof. 2.5 "Board" shall mean the Board of Directors of the Company. 1 2.6 "Change in Control" shall mean the occurrence of any of the following: (a) A "change in control" as such term is used in Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as in effect at the date hereof (the "Act"); or (b) If there has occurred a change in control as the term "control" is defined in Rule 12b-2 promulgated under the Act; or (c) When any "person" (as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Act) becomes a beneficial owner, directly or indirectly, of securities of the Company representing 20% or more of the Company's then outstanding securities having the right to vote on the election of directors; or (d) If the shareholders of the Company approve a plan of complete liquidation of the Company; or (e) A change in the ownership of a substantial portion of the assets of the Company (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended). 2.7 "Company" shall mean Citizens Utilities Company, its successors and such of its subsidiary companies as shall be designated by the Board to participate in the Plan. 2.8 "Company Matching Account" shall mean the separate account maintained for a Participant on the books of the Company reflecting all Company Matching Credits adjusted for earnings and losses thereon. 2 2.9 "Company Matching Credit" shall have the meaning set forth in Section 5.1. 2.10 "Compensation" shall mean a Participant's base salary for a Plan Year without reduction for Deferrals, including before-tax contributions made by a Participant to the Company's 401(k) Plan and contributions to any plan maintained by the Company pursuant to Section 125 of the Internal Revenue Code of 1986, as amended (the "Code"). 2.11 "Deferral" shall mean the amount credited to a Participant's Deferral Account for a Plan Year to reflect Compensation otherwise payable to a Participant during such Plan Year which such Participant has elected to defer pursuant to Section 5. 2.12 "Deferral Account" shall mean the separate account maintained for a Participant on the books of the Company to reflect Deferrals (adjusted for earnings and losses thereon). 2.13 "Disability" shall mean a Participant's inability to engage in the customary activities required by his employment by reason of any medically determinable physical or mental impairment as certified by a physician acceptable to the Plan Committee. 2.14 "Effective Date" shall mean January 1, 1996. 2.15 "Eligible Employee" shall mean any individual employed by the Company with a base compensation of $100,000 or more who is actively employed by the Company on December 31 of the year preceding the Plan Year of Deferral. 2.16 "401(k) Plan" shall mean The CUC 401(k) Employee Benefit Plan. 2.17 "Participant" shall mean an Eligible Employee who elects to make Deferrals for the Plan Year. 3 2.18 "Plan" shall mean The Citizens Executive Deferred Savings Plan. 2.19 "Plan Committee" shall mean the Compensation Committee of the Board. 2.20 "Plan Year" shall mean the period commencing on the Effective Date and ending on December 31, 1996 and thereafter, the calendar year. 2.21 "Retirement" shall mean termination of employment after attaining eligibility for a retirement benefit under the terms of the Citizens Pension Plan. 2.22 "Termination for Cause" or "Terminated for Cause" shall mean any of the following: (a) The Participant shall have willfully failed to perform any of his material obligations as an employee of the Company and shall have failed to cure such failure within ten (10) days after receiving written notice thereof from the Company; or (b) The Participant shall have committed an act of fraud, theft or dishonesty which, in the reasonable opinion of the Company, is likely to result in financial harm to the Company; or (c) The Participant shall be convicted of (or pleaded nolo contendere to) any felony or misdemeanor involving moral turpitude, which misdemeanor might, in the reasonable opinion of the Company, cause embarrassment to the Company. Section 3. Administration 3.1 The Plan Committee shall retain overall supervisory authority and responsibility for the Plan, and shall appoint the Administrative Committee. The Plan shall be administered by the Administrative Committee. The Administrative Committee shall have full power and authority to 4 construe and interpret the Plan, establish and amend administrative regulations to further the purposes of the Plan, and take any other action necessary to administer the Plan. The Plan Committee's and the Administrative Committee's decisions, actions, and interpretations regarding the Plan shall be final and binding upon all Participants and Beneficiaries. 3.2 The Administrative Committee shall consist of not less than three (3) members. The Administrative Committee shall act by vote or written consent of a majority of its members. Members of the Administrative Committee who are either eligible to become Participants or who are Participants may vote on or participate in any matter affecting the administration of the Plan, provided however, that no member of the Administrative Committee may vote on or participate in a request for a Hardship Withdrawal to such member or any other matter concerning the benefits of such member. 3.3 The Administrative Committee shall: (a) notify employees who are eligible to become a Participant for a Plan Year; (b) formulate and recommend to the Plan Committee such changes in the Plan as may facilitate the administration of the Plan; (c) value Accounts, and maintain Accounts and records of Deferrals, Company Matching Credits and earnings and losses thereon, payment of Account Balances, and Beneficiary designations; (d) prepare communications to Participants and Beneficiaries; (e) prepare reports and data required by the Company; (f) determine Hardship Withdrawals; (g) obtain necessary consents and approvals; (h) obtain any data requested by the Plan Committee; and (i) take any other actions requested by the Plan Committee or as are otherwise necessary or appropriate, as determined by the Administrative Committee, for effective implementation and administration of the Plan. Section 4. Deferrals 4.1 Each employee who is eligible to become a Participant for a Plan Year may become a Participant for such Plan Year (or, during the first year of employment, the portion thereof after electing to participate) by electing, prior to the commencement of the Plan Year or for the first year of employment, within 30 days after commencement of employment on such 5 form as shall be provided to the Participant by the Administrative Committee, to make Deferrals for such Plan Year. A Participant's Deferral for a Plan Year shall not exceed 50% of the Participant's Compensation for such Plan Year; provided however that such 50% limit shall be reduced by the before-tax contributions, if any, made by the Participant for such Plan Year to the 401(k) Plan for such year. A Participant's Deferral for a Plan Year (or a portion thereof) shall not be less than $1,000. 4.2 Each election of Deferral shall be effective only in the Plan Year to which such election of Deferral applies. Elections to make Deferrals for a Plan Year and the amount of such Deferrals for such Plan Year shall be irrevocable. 4.3 A Participant's Deferrals shall be credited to a Participant's Deferral Account in accordance with procedures determined by the Administrative Committee. Section 5. Company Matching Credits 5.1 Effective for each Plan Year, the Company shall accrue a Company Matching Credit on behalf of each Participant who elects to make Deferrals for such Plan Year. For purposes of the Plan "Company Matching Credit" shall mean the amount credited to a Participant's Company Matching Account for a Plan Year based on a rate determined by the Board of Directors at its discretion. The Company Matching Credit may be represented by a hypothetical amount in shares of Citizens Utilities Company Series B stock or such other property as the Board may determine at its discretion. Notwithstanding the foregoing provisions of this Section 5.1, the Company Matching Credit for a Plan Year shall be reduced (but not below zero) by any Company Matching Contributions (as defined under the 401(k) Plan) made for the Participant for such Plan Year under the 401(k) Plan in respect of before-tax contributions. 5.2 Company Matching Credits, if any, for a Plan Year shall be accrued in each Participant's Company Matching Account on or about the time that the Company Matching Contribution (as defined under the 401(k) Plan) for such Plan Year is made to the 401(k) Plan. 6 Upon attaining the age of 55 years, a Participant may elect to transfer amounts from his/her "Company Matching Account" to any of the investment categories then available and/or elect to have participating Company Matching Credits invested in the investment categories elected for their elective Deferred Account. 5.3 Subject to Section 5.4 below, a Participant shall be vested in Company Matching Credits and the earnings and losses accrued in his/her Company Matching Account upon the earliest of the following events: (a) retirement, or (b) completion of five years of service. A Participant is always fully vested in salary deferrals and earnings and losses on salary deferrals. Notwithstanding the foregoing, (a) in the event of a Change in Control, a participant shall be deemed to be 100% vested in his/her Company Matching Account, and (b) a Participant whose employment by the Company ceases on account of death or Disability shall be 100% vested in his/her Company Matching Account. For purposes of this Section 5.3, the term Years of Service shall have the same meaning and shall be calculated in the same manner as set forth under the 401(k) Plan. 5.4 Notwithstanding anything set forth in Section 5.3 above, in the event that a Participant's employment with the Company is Terminated for Cause, then such Participant shall be deemed to have forfeited any and all non-vested Company Matching Credits and earnings, gains and losses thereon theretofore accrued in his/her Company Matching Account. Section 6. Growth of Accounts 6.1 Subject to Section 6.3 below and Section 5.1, a Participant's Deferral and Company Matching Accounts shall be increased by the amount of income and gains and reduced by the amount of losses which would be realized if the amounts credited to each such account were invested in one or more investment mutual funds made available by the Plan Committee under the Plan or in shares of Citizens Utilities Company Series B stock, as elected by the Participant or for the company matching accounts, as determined by the Board of Directors. 7 Expenses incurred in connection with any such investment mutual funds shall be deducted from a Participant's Accounts. Investment elections shall be made in multiples of five percent (5%) of the amount of the Participant's Deferral. Any investment election shall be made on a form prescribed by the Administrative Committee. Notwithstanding anything to the contrary set forth herein, in no event shall the Company, the Plan Committee or the Administrative Committee be responsible for and shall not be held liable for the investment performance of any investment made available hereunder. 6.2 Subject to Section 6.3, a Participant shall be permitted to change his/her deemed investment election with regard to existing and future balances in his/her Deferral Account one (1) time during each calendar quarter. Any such change in investment election shall be on such form as prescribed by the Administrative Committee and in accordance with such rules and procedures prescribed by the Administrative Committee. Upon attaining the age of 55 years, a participant may elect to transfer amounts from his Company Matching Account to any of the other investment categories then available and/or redirect any Company Matching Credits to any of the investment categories then available. 6.3 Notwithstanding anything to the contrary set forth herein, the Company shall not be required to invest all or any portion of a Participant's Deferral Account or Company Matching Account, in any of the investment funds set forth in Section 6.1, but may invest such Accounts in any manner it may determine, or not invest such Accounts. Section 7. Distribution 7.1 Except as set forth in Sections 8, 9 and 10, a Participant shall irrevocably elect in writing, and file with the Administrative Committee, at the same time as such Participant makes any election to defer Compensation, the period of deferral with respect to such election. A Participant may elect to defer until termination of employment or for a fixed period not exceeding 10 years, subject to the minimum required period of deferral, which is two full calendar years following the year of deferral. Notwithstanding the foregoing, the two-year minimum deferral 8 period shall not apply to payments made as a result of death, Disability, Retirement, or pre-Retirement termination. 7.2 Except as set forth in Sections 8, 9 and 10, a Participant shall irrevocably elect in writing, and file with the Administrative Committee, at the same time as any election to defer, a method of payment of vested amounts deferred under this Plan from the following methods: (a) Payment of vested amounts credited to the Participant's Account in a specified number of annual installments, the first installment to be paid in January of the year following the year in which the Participant terminates employment due to his retirement, disability or death. (b) Payment of vested amounts credited to the Participant's Account in a single lump sum in the month and year specified by the Participant, or if not specified by the Participant in January of the year next following the year of the Participant's termination for Retirement, Disability, or death. (c) Payment in a lump sum as soon as administratively feasible upon termination prior to age 55 with less than five (5) years of service, after the date of termination. Section 8. Hardship Withdrawals 8.1 The Administrative Committee may, in its sole discretion, permit a Participant to withdraw all or a portion of the Deferrals credited to his/her Deferral Account without regard to earnings thereon if such Participant demonstrates a Hardship (as defined in Section 8.2 below) to the satisfaction of the Administrative Committee. Hardship Withdrawals from a Participant's Company Matching Account shall not be permitted. In determining whether to grant a Participant's request for a Hardship Withdrawal, the Administrative Committee may consider the resources currently available to a Participant and any resources that may in the future become available to the Participant. 9 8.2 For purposes of the Plan, the term "Hardship" means a circumstance resulting from an immediate and heavy financial need of the Participant and arising from an emergency, and shall mean, (a) extraordinary medical expenses, (b) the purchase of a primary residence, (c) college education expenses for a member of the Participant's immediate family, or (d) any other event beyond the Participant's control, as determined in each such event, by the Administrative Committee in its discretion. 8.3 A withdrawal on account of Hardship shall only be granted if the Participant demonstrates to the Administrative Committee's satisfaction, by submitting written documentation, incorporating such statements and evidence that the Administrative Committee deems to be relevant, that the Participant's circumstances satisfy the definition of Hardship set forth in Section 8.2 and that the Hardship withdrawal is necessary to satisfy the Participant's financial need. 8.4 Hardship Withdrawals shall be limited to the amount, determined by the Administrative Committee, in its sole discretion, necessary to relieve the Participant's Hardship. Hardship Withdrawals shall be paid as soon as practicable after the Administrative Committee's approval of the Participant's request. A Participant's Deferral Account shall be reduced by the amount of any Hardship Withdrawals distributed to the Participant. 8.5 Hardship withdrawals shall be allocated by class year spread across Vested Account Balances. Section 9. Discretionary Payment 9.1 Notwithstanding anything to the contrary set forth herein, the Plan Committee may, in its sole and absolute discretion, direct an immediate payment to any or all the Participants or their beneficiary(ies) of all of his/her vested Account Balances in cash, if the Plan Committee determines that such action is in the best interest of either the Company, the Participant(s) or their Beneficiary(ies). 10 9.2 In the event that the Plan Committee shall so direct an immediate payment, in accordance with Section 9.1, then: (a) The vested Account Balances to be paid shall be determined by the Plan Committee so as to reflect fairly and equitably appropriate earnings since the last preceding valuation and so as to reflect fairly and equitably such other facts and circumstances as the Plan Committee deems appropriate; (b) Compensation which was deferred or was to be deferred with respect to the Plan Year in which such payment occurs shall be paid when otherwise payable (such amounts that would otherwise have been payable prior to the date of such payment or distribution shall be paid as soon as practicable thereafter); (c) In the event that vested Account Balances are not paid or made available to a Participant in accordance with Section 9.1 when otherwise due, then such Participant may file a claim for such payment and, if such Participant is successful, then the Company shall reimburse such Participant for reasonable attorneys' fees actually paid by such Participant in enforcing such Participant's rights to such payment; and (d) In the event that vested Account Balances are not paid or made available to Participants in accordance with Section 9.1 when otherwise due, then with respect to such unpaid amounts, interest will be credited each month on the last day of the month from the date it was otherwise due until the date it is actually paid at a rate equal to the prime rate in effect at the PNC Bank, Pittsburgh, Pennsylvania, on the last business day of each month. 11 Section 10. Change in Control 10.1 Notwithstanding anything to the contrary set forth herein, (a) a Participant's Account Balance under the Plan and (b) all Deferrals and Company Matching Credits which have been accrued but not yet credited to a Participant's Accounts, shall be paid to each Participant in a lump sum on the occurrence of a Change in Control or as soon thereafter as practicable, but in no event later than five (5) days after the occurrence of the Change in Control, unless, in the opinion of the Plan Committee, it is not in the best interests of the Company, the Participants and their Beneficiaries to cause such payment to be made and to invoke the foregoing provisions of this Section 10.1. In the event of any such distribution, the amounts of each Participant's Account Balance shall be determined by the Plan Committee (which, for this purpose, shall be comprised of members of the Board prior to the Change in Control) so as to reflect fairly and equitably appropriate interest and dividends since the last preceding valuation and so as to reflect fairly and equitably such other facts and circumstances as the Plan Committee deems appropriate. Section 11. Beneficiary Designation 11.1 Each Participant shall file with the Administrative Committee a written designation of a Beneficiary on such form as may be prescribed by the Administrative Committee. A Participant may, from time to time, amend or revoke the designation of Beneficiary. 11.2 If a Participant fails to designate a Beneficiary or if a Participant's designation of Beneficiary fails for any reason, then the Beneficiary or Beneficiaries designated by the Participant, or deemed to have been designated by the Participant under the 401(k) Plan shall be deemed to be the Participant's Beneficiary. If a Participant does not participate in the 401(k) Plan, or if the Participant participates in the 401(k) Plan and has not designated or been deemed to have designated a Beneficiary thereunder, then the Beneficiary or Beneficiaries of such Participant under the Company's defined benefit plan (the Retirement Plan) shall be deemed to be such Participant's Beneficiary. If a Participant does not participate in the Company's Retirement Plan, or if a Participant participates in the Retirement Plan and has not designated or been deemed 12 to have designated a Beneficiary thereunder, then the Beneficiary or Beneficiaries of such Participant under the Company's Group Life Insurance Plan shall be deemed to be such Participant's Beneficiary. If a Participant does not participate in the Company's Group Life Insurance Plan, or participates in such Plan, but has not designated or been deemed to have designated a Beneficiary thereunder, and such Participant dies without designating a Beneficiary, then the Administrative Committee shall distribute such Participant's Account Balance to the Participant's estate. If a Beneficiary does not survive the Participant, then the Administrative Committee shall cause such Participant's Account Balance to be distributed to the Participant's estate. If the Beneficiary of a deceased Participant survives the Participant, and dies before such Participant's Account Balance is distributed, then the Plan Committee shall cause such Participant's Account Balance to be distributed to the Beneficiary's estate. Section 12. General Provisions 12.1 The rights of a Participant to the payment of deferred compensation as provided in the Plan shall not be assigned, transferred, pledged, or encumbered or be subject in any manner to alienation or anticipation. No Participant may borrow against his/her Account Balance. Accounts shall not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, whether voluntary or involuntary, including but not limited to any liability which is for alimony or other payments for the support of a spouse or former spouse, or for any other relative of any Participant. Any such attempted assignment or transfer shall be void. 12.2 The Plan is intended to constitute an unfunded deferred compensation arrangement for a select group of management and highly compensated employees. Nothing contained in the Plan, and no action taken pursuant to the Plan, shall create or be construed to create a trust of any kind. The Company's obligations hereunder shall be an unfunded and unsecured promise to pay money in the future for tax purposes and for purposes of Title I of ERISA. A Participant's right to receive his/her Account Balance shall be no greater than the right of an unsecured general creditor of the Company. Account Balances shall be paid from the general funds of the Company, 13 and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such Account Balances. 12.3 Nothing contained in the Plan shall give any Participant the right to continue in the employment of the Company, or affect the right of the Company to discharge a Participant. 12.4 The Plan shall be construed and governed in accordance with the laws of the State of Connecticut. Section 13. Withholding 13.1 The Company shall deduct from all amounts paid under this Plan any taxes required to be withheld by any federal, state, or local government tax statutes. The Participants and their Beneficiaries, distributees, and personal representatives will be responsible for the payment of any and all federal, foreign, state, local, or other income or other taxes imposed on amounts paid under this Plan. Section 14. Amendment, Suspension, or Termination 14.1 The Plan Committee reserves the right to amend, suspend, or terminate the Plan at any time and for any reason; provided, however, that any amendment, suspension, or termination shall not adversely affect the rights of the Participants or Beneficiaries to receive Deferrals, vested Company Matching Credits, and earnings thereon credited to their accounts prior to such action. In the event the Plan is terminated, Account Balances shall be distributed to Participants and Beneficiaries, in a lump sum, as soon as practicable thereafter. 14 Executed as of the 1st day of January, 1996. Citizens Utilities Company By: /s/ James D. Ranton --------------------- Vice President, Human Resources Attest: /s/ ------------------------ Secretary 15 EX-10.20 4 CITIZENS INCENTIVE PLAN CITIZENS INCENTIVE PLAN I. ESTABLISHMENT AND PURPOSE OF PLAN. Citizens Utilities Company hereby restates its Incentive Deferred Compensation Plan. The restated Plan is effective as of March 21, 2000 and shall be known as the "Citizens Incentive Plan." The purpose of the Plan is to provide selected Employees with a reward for, and incentive to continue, superior performance. This Plan is composed of two components: (i) a short-term incentive component in which Awards are paid in cash following the end of each fiscal year; and (ii) an unfunded, non-qualified deferred compensation component for Top-Hat Participants (as defined in the Plan) in which payment of Awards may be deferred until any subsequent calendar year but not beyond termination of employment. Any Awards made prior the effective date of this restated Plan shall be governed by the terms of the Citizens Utilities Company Incentive Deferred Compensation Plan, as amended and in effect prior to its restatement herein (the "Prior Plan"), except as otherwise expressly provided in this restated Plan. II. ELIGIBILITY TO PARTICIPATE. All Exempt Employees of the Company and its Affiliates shall be eligible to participate in the Plan and to receive an Award if selected by the Compensation Committee of the Board of Directors (the "Committee"). Receipt by a Participant of an Award with respect to one Plan Year shall not entitle the Participant to receive an Award with respect to any subsequent Plan Year of the Company. III. DETERMINATION OF AWARDS. (a) Determining the Amount to be Contributed to Plan. As soon as adminis- tratively feasible, but not later than 120 days, following the close of each fiscal year of the Company, the Board of Directors shall determine the amount, if any, to be made available for contribution to the Plan with respect to the fiscal year just ended and shall inform the Committee of its decision. The amount contributed to the Plan and paid or allocated to Participants' Accounts shall be reflected as a liability on the books of the Company as required by generally accepted accounting principles ("GAAP") or other appropriate account- ing rules or conventions, but shall not be held in trust or otherwise segregated from the Company's general assets. (b) Determining the Amount to be Awarded to Plan Participants. After being informed by the Board of Directors of the amount to be contributed to the Plan with respect to the year just ended, the Company will select and the Committee will review and approve Employees or groups of employees who will be entitled to Awards. The Committee in its discretion may make Awards for any Plan Year which, in the aggregate, does not exceed the amount made available by the Board of Directors for contribution with respect to a fiscal year. Partici- pants shall be informed of the fact and amount of his or her Award following committee action. IV. MAINTENANCE OF ACCOUNTS; INTEREST CREDITED. All Awards allocated to a Participant which are to be deferred shall be credited to an Account maintained under the Plan for each Participant. Amounts credited to this Account shall include the value of any Awards not paid out under the terms of the Prior Plan, as well as any Awards made under the terms of this Plan. Each Participant's un- distributed Account Balance, other than that portion deemed invested in phantom shares of Company stock under the terms of the Prior Plan or in any other elective investment that may, from time to time be permitted under terms of this Plan (the Participant's "uninvested Account Balance"), shall be credited with interest as of the last day of each Plan Year. The Board of Directors, excluding any member with an Account Balance under this Plan, shall establish the interest rate to be credited to such Accounts as soon as administratively feasible following the close of such Plan Year based upon recommendations of the Committee. The interest to be credited to each Account shall equal the product of (a) the average of the month end uninvested Account Balance for each month of that calendar year and (b) the interest percentage rate established by the Board of Directors. V. VESTING; FORFEITURE FOR CAUSE. Each Participant shall be fully vested in his or her Account Balance and shall be fully vested in each Award subsequently approved by the Committee. Notwithstanding the foregoing, any Participant may be removed from the Plan by the Committee at any time "for cause", as determined by the Committee in its sole discretion, whether or not the Participant has received any benefits under the Plan, and whether or not the Participant's employment has been terminated. "Cause" shall include, without limitation, willful misconduct of the Employee as determined in the sole discretion of the Committee. Upon removal from the Plan, the Participant shall forfeit any remaining Account Balance, and neither the Participant nor his or her bene- ficiaries shall be entitled to receive any payments from the Plan from and after the date of the removal. The Committee's determination with respect to a forfeiture shall be set forth in a written notice given to the Participant and to the Company and shall be final and binding on both; any forfeiture shall take place immediately upon receipt of such notice by the Company and Participant. VI. ELECTION WITH RESPECT TO DISTRIBUTION OR DEFERRAL OF AWARDS. (a) Election to Defer by Top-Hat Participants. An active "Top-Hat" Participant (as hereinafter defined) may elect, by an irrevocable written election filed with the Committee prior to September 1 of a Plan Year, with respect to any Award that may be made in the subsequent calendar for such Plan Year: (i) to withdraw any percentage, up to and including 100%, of any Award which may be made to the Participant in the subsequent calendar year; or 2 (ii) to defer distribution of any portion or all of such Award to a subsequent year (up until termination of service). Each election shall be made annually and shall be effective only with re- spect to the Award to be made in the subsequent Plan Year for the Year in which the election is filed. Notwithstanding deferral by a Participant of the receipt of an Award, the Company shall withhold FICA taxes and any other payroll taxes that may be applicable with respect to the year in which the Award is made. (b) Top-Hat Participant Defined. A "Top-Hat" Participant includes both (i) an Officer of the Company (or its Affiliates) or (ii) a Participant whose annual base salary is expected to be above an amount sufficient for this separate portion of the Plan to qualify as a non-qualified deferred compensation plan for select management or highly compensated Employees. Subject to the issuance of Department of Labor regulations or similar authoritative guidance, such amount shall be $100,000, as adjusted for cost-of-living adjustments for periods after 1996. (c) Effect of Election to Defer Receipt of Award until Termination of Service. A request by a Participant that receipt of some portion or all of an Award be deferred until the Participant's termination of employment with the Company and its Affiliates shall create a non-qualified deferred compensation plan for Top-Hat Participants which shall be deemed to be a separate program from the remainder of this Plan. VII. ELECTION AS TO INVESTMENT OF UNINVESTED ACCOUNT BALANCE. (a) If the Committee, in its discretion, shall make available either actual or phantom investment choices, a Top-Hat Participant may elect before September 1 of the then current Plan Year, to invest a portion or all of his Account Balance in one or more of the investment options then offered by the Committee in such percentages as the Committee may offer from time to time. Participant investment direction over Accounts shall be subject to such rules and regulations as to the timing and frequency of investment changes, limitations, allocations of expenses and other aspects of Plan administration as the Committee may from time to time establish in writing. No investment is permitted in actual shares of Company common stock under this Plan. (b) Any Participant whose Account, under the terms of the Prior Plan, was credited with phantom shares of Company stock, may elect in a writing filed with the Committee, to have the value of any such phantom shares deemed to be sold, and the net cash value of the proceeds of such deemed sale credited to the Participant's Account. If, under the terms of the Prior Plan, a Participant was not an Officer at the time he requested to have a portion of an Award deemed invested in phantom shares of Company Stock, and did not specify a date for the deemed sale prior to the date of the Award, then the phantom stock shall be deemed sold and the proceeds thereof transferred to such Participant's Account on July 3 of the year following the Participant's appointment as an Officer. 3 VIII. DISTRIBUTION OF ACCOUNT BALANCES. (a) Distribution of Incentive Awards. (i) any award allocated under the terms of this Plan to the Account of a Participant who is not a Top-Hat Participant, and (ii) any portion of an Award that a Top-Hat Participant has elected to have withdrawn pursuant to paragraph (a)(ii) of Article VI, shall be distributed as soon as administratively feasible, after the Participant is notified by the Committee of the fact and amount of the Award for the Plan Year just ended. (b) Distribution of Deferred Amounts. Any other Award shall be distributed in accordance with the following provisions: (i) any Award (or any portion thereof) which has been deferred, in accordance with the provisions of paragraph (a)(ii) of Article VI, to a subsequent calendar year shall be paid in full in a single sum, provided, however, that any portion of such Award representing the deemed sale of phantom stock shall not be paid to any Officer until six months and one day following the commencement of the calendar year; (ii) any Award (or any portion thereof) which has been deferred until termination of service shall be paid in full in a single sum within thirty (30) days of the date on which the Participant terminates service with the Company and its Affiliates provided, however, that any portion of such Award representing the deemed sale of phantom stock shall not be paid to any Officer until six months and one day following the Officer's termination of service; and (iii) any portion of a Participant's Account Balance that is scheduled to be distributed pursuant to the Participant's irrevocable election of up to a five (5) year payout pursuant to the terms of the Prior Plan shall be paid in accordance with the terms of such irrevocable election. In addition, to the amounts specified in paragraph (b)(ii) above, upon a Participant's termination by reason of his or her retirement (on or after his Early or Normal Retirement Date, as defined in the Company's Pension Plan), death, or Permanent Disability, the Participant (or, if applicable, hi beneficiary (ies) or legal representative) shall be entitled to 100% 4 of any Award allocated to the Employee for the Plan Year in which his or her termination occurs, together with credited interest provided for in Article IV. (c) Distribution due to Unforeseeable Emergency. Upon written application of the Participant to the Committee, the Committee may, in its sole judgment, pay a portion or all of a Participant's Account Balance to the Participant sooner than upon his or her termination of service, provided that (i) the Committee determines that the Participant has an unforeseeable emergency that is caused by an event beyond the control of the Participant which would result in severe financial hardship to the Participant absent the early distribution, and (ii) the Chief Executive Officer or Chief Operating Officer of the Company approves the distribu- tion in writing. Any distribution hereunder shall be limited to the amount necessary to meet the unforeseeable emergency and may be made in a single sum or in installments (with interest on the unpaid balance being cal- culated in accordance with Article IV.) (d) Deferral of Payment of Awards Due to the Imposition of Code Section 162(m). If the Committee determines that the payment of any portion or all of an Award or the Participant's Account Balance would result in the Company not being able to take a tax deduction under Section 162(m) of the Code, it may elect instead to defer payment of such Award or Account Balance until the next succeeding year (or years) in which the Participant's compensation either does not exceed the limit set forth in Code Section 162(m) or is not subject to Code Section 162(m). IX. DESIGNATION OF BENEFICIARIES; DEATH BENEFITS. (a) A Participant may designate a beneficiary or beneficiaries to receive the Participant's remaining Account Balance, if any, in the event of his or her death, and may from time to time change any such beneficiary designation. All beneficiary designations and changes therein shall be in writing and shall be effective only when delivered to the Committee during the lifetime of the Participant. In the event that no effective beneficiary designation has been made, any Account Balance of the Participant remaining undistributed at his or her death shall be paid to the Participant's spouse, if any, and if none to the Participant's estate. (b) A Participant's death benefits under this Plan shall be equal to the sum of the value of the Participant's Account Balance remaining undistributed at his death, together with the 100% of the value of any Award allocated to the Employee for the Plan Year in which his or her death occurs, together with credited interest provided for in Article IV. X. ADMINISTRATION OF PLAN. The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee") as that Committee may be constituted from time to time. The Committee shall have the absolute power and discretion to administer the Plan, including, but not limited to the power to (a) approve Plan Participants, (b) determine the amount, vesting requirement 5 and other features and conditions of Awards, (c) interpret the Plan, and (d) make all other decisions relating to the operation of the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. No member of the Committee shall be liable for any action taken, or decision made, in good faith in connection with the exercise of the Committee's duties under the Plan. The Committee shall adopt such rules as it may determine appropriate or necessary to regulate its affairs and administer the Plan. XI. AMENDMENT AND TERMINATION. The Plan may be amended or terminated by the Board of Directors of the Company at any time. If the Plan is terminated, final payment shall be made of the then existing Account Balances, provided, however, that if the Committee determines that the payment of any portion or all of an Account Balance would result in the Company not being able to take a tax deduction under Section 162(m) of the Code, it may elect to defer payment in accordance with Article VIII(d). Termination of the Plan shall not accelerate the payout or transfer of phantom shares of Company stock from the Account Balance of any Officer. Any amendment or termination shall not divest a Participant of his or her vested Account Balance. XII. MISCELLANEOUS. (a) Rights of Participants as Creditors of the Company. Participants shall have the rights of unsecured general creditors with respect to amounts due under the Plan. The Company shall not be required to establish any trust fund or separate account with respect to any amounts due under the Plan. (b) Withholding. The obligation of the Company to make payments under the Plan shall be subject to applicable federal, state and local tax with- holding requirements. (c) Nonassignability. A Participant may not assign, pledge, encumber, or transfer the right to receive payments provided for under the Plan other than by will or the laws of descent and distribution. (d) No Employment Contract. The Plan shall not create an employment agreement and shall not entitle any Employee who has participated in the Plan to remain in the employ of the Company or to obtain damages if employment is terminated. (e) Governing Law. The Plan shall be governed by the laws of the State of Connecticut. (f) Statement of Account Balances. After the end of each Plan Year each deferring Participant will be furnished a statement of the amount of his or her Account Balance as of the end of that Year, and of all credits to, distributions from, and charges to the account during that Year. 6 (g) Binding Effect. The terms of the Plan shall be binding upon any suc- cessor to the Company's business, whether by merger or sale of sub- stantially all of the assets or otherwise. (h) Notices. All notices under the Plan shall be in writing and shall be deemed given when delivered personally or mailed by registered mail, return receipt requested, to a Participant at the Participant's last address set forth in the Company's records, or to the Company at the address of its principal office. XIII. DEFINITIONS. The following terms (whether used in the singular or plural) shall have the following meanings indicated when used in the Plan: (a) "Affiliated Company" or "Affiliate" means any entity controlled by the Company, controlling the Company or under common control with the Company. (b) "Award" means the actual dollar amount of the annual cash incentive determined by the Committee to be payable to a Participant under the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Code" means the Internal Revenue Code of 1986, as amended from time to time or any successor statute(s) thereto. (e) "Committee" means the Compensation Committee of the Board, which shall be the administrator of this Plan. (f) "Company" means Citizens Utilities Company. (g) "Employee" means any common law employee of the Company or its Affiliates. (h) "Exempt" means any Employee who is exempt from overtime pay require- ments of state and federal law. (i) "Officer" means an officer of the Company as defined in Rule 16a-1 of the Securities Exchange Commission ("SEC"). (j) "Participant" means any Employee who has received an Award under the Plan. (k) "Permanent Disability" means any mental or physical incapacity of a Participant which, in the sole judgement of the Committee, has ren- dered the Participant incapable of performing the duties of his regular occupation with the Company and its Affiliates for a period of at least six months, and which can be expected to result in death or to last indefinitely. 7 (l) "Plan" means the Citizens Incentive Plan. (m) "Plan Year" means each calendar year. (n) "Prior Plan" means the Citizens Utilities Company Incentive Deferred Compensation Plan, as amended and in effect prior to its restatement in this Plan. Dated: March 21, 2000 CITIZENS UTILITIES COMPANY 8 EX-10.22 5 CHASE CREDIT AGREEMENT EXECUTION COPY ================================================================================ $3,000,000,000 COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Dated as of October 29, 1999 Among CITIZENS UTILITIES COMPANY as Borrower and THE LENDERS NAMED HEREIN as Lenders and THE CHASE MANHATTAN BANK as Administrative Agent ================================================================================ CHASE SECURITIES INC. Lead Arranger and Book Manager CITIBANK, N.A. and BANK OF AMERICA, N.A., as Co-syndication Agents FIRST UNION NATIONAL BANK, as Documentation Agent TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS Section 1.01. Defined Terms .................................................1 Section 1.02. Terms Generally ..............................................12 ARTICLE II THE CREDITS Section 2.01. Commitments ..................................................12 Section 2.02. Loans ........................................................13 Section 2.03. Competitive Bid Procedure ....................................14 Section 2.04. Standby Borrowing Procedure ..................................17 Section 2.05. Conversions...................................................17 Section 2.06. Fees..........................................................18 Section 2.07. Repayment of Loans............................................18 Section 2.08. Interest on Loans ............................................19 Section 2.09. Default Interest .............................................20 Section 2.10. Alternate Rate of Interest....................................20 Section 2.11. Termination and Reduction of Commitments .....................20 Section 2.12. Prepayment....................................................21 Section 2.13. Reserve Requirements; Change in Circumstances.................22 Section 2.14. Change in Legality............................................24 Section 2.15. Indemnity ....................................................24 Section 2.16. Pro Rata Treatment............................................25 Section 2.17. Sharing of Setoffs............................................25 Section 2.18. Payments .....................................................26 Section 2.19. Taxes ........................................................26 ARTICLE III REPRESENTATIONS AND WARRANTIES Section 3.01. Organization; Powers; Governmental Approvals .................28 Section 3.02. Financial Statements .........................................29 Section 3.03. No Material Adverse Change ...................................29 Section 3.04. Title to Properties; Possession Under Leases .................29 Section 3.05. Ownership of Subsidiaries ....................................30 Section 3.06. Litigation; Compliance with Laws..............................30 Section 3.07. Agreements....................................................30 Section 3.08. Federal Reserve Regulations...................................31 Section 3.09. Investment Company Act; Public Utility Holding Company Act ...31 Section 3.10. Use of Proceeds ..............................................31 i Section 3.11. Tax Returns...................................................31 Section 3.12. No Material Misstatements.....................................31 Section 3.13. Employee Benefit Plans .......................................31 Section 3.14. Insurance ....................................................32 Section 3.15. Year 2000 Matters.............................................32 ARTICLE IV CONDITIONS OF LENDING Section 4.01. Each Borrowing ...............................................32 Section 4.02. Effective Date ...............................................33 ARTICLE V AFFIRMATIVE COVENANTS Section 5.01. Existence; Businesses and Properties .........................34 Section 5.02. Financial Statements, Reports, etc ...........................35 Section 5.03. Litigation and Other Notices .................................36 Section 5.04. Maintaining Records ..........................................36 Section 5.05. Use of Proceeds ..............................................37 ARTICLE VI NEGATIVE COVENANTS Section 6.01. Liens ........................................................37 Section 6.02. Ownership of the Principal Subsidiaries ......................37 Section 6.03. Asset Sales ..................................................37 Section 6.04. Mergers ......................................................38 Section 6.05. Restrictions on Dividends ....................................38 Section 6.06. Transactions with Affiliates .................................38 Section 6.07. Minimum Consolidated Net Worth ...............................38 ARTICLE VII EVENTS OF DEFAULT ARTICLE VIII THE ADMINISTRATIVE AGENT ARTICLE IX MISCELLANEOUS Section 9.01. Notices ......................................................44 Section 9.02. Survival of Agreement ........................................44 Section 9.03. Binding Effect ...............................................44 Section 9.04. Successors and Assigns .......................................44 Section 9.05. Expenses; Indemnity ..........................................47 ii Section 9.06. Right of Setoff...............................................48 Section 9.07. Applicable Law ...............................................48 Section 9.08. Waivers; Amendment ...........................................48 Section 9.09. Interest Rate Limitation .....................................49 Section 9.10. Entire Agreement .............................................49 Section 9.11. Waiver of Jury Trial .........................................49 Section 9.12. Severability .................................................49 Section 9.13. Counterparts .................................................49 Section 9.14. Headings .....................................................49 Section 9.15. Jurisdiction; Consent to Service of Process ..................50 Exhibit A-1 Form of Competitive Bid Request Exhibit A-2 Form of Notice of Competitive Bid Request Exhibit A-3 Form of Competitive Bid Exhibit A-4 Form of Competitive Bid Accept/Reject Letter Exhibit A-5 Form of Standby Borrowing Request Exhibit A-6 Form of Conversion Request Exhibit B Form of Administrative Questionnaire Exhibit C Form of Assignment and Acceptance Exhibit D Form of Opinion of Counsel to Borrower Exhibit E-1 Form of Standby Note Exhibit E-2 Form of Competitive Note Schedule 2.01 Lenders' Commitments and Addresses iii COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, dated as of October 29, 1999, among CITIZENS UTILITIES COMPANY, a Delaware corporation (the "Borrower"), the Lenders listed in Schedule 2.01 (the "Lenders") and THE CHASE MANHATTAN BANK, a New York banking corporation, as administrative agent for the Lenders (in such capacity, the "Administrative Agent"). The Borrower has requested the Lenders to extend credit to the Borrower in order to enable it to borrow on a standby revolving credit basis on and after the date hereof and at any time and from time to time prior to the Revolving Period Maturity Date (as hereinafter defined) a principal amount not in excess of $3,000,000,000 at any time outstanding, all or a portion of which may be converted to one-year term loans on the Revolving Period Maturity Date. The Borrower has also requested the Lenders to provide a procedure pursuant to which the Borrower may invite the Lenders to bid on an uncommitted basis on short-term borrowings by the Borrower. The proceeds of such borrowings are to be used to backstop commercial paper issued to finance the Acquisitions (as hereinafter defined) and for other general corporate purposes, including other acquisitions. The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions herein set forth. Accordingly, the Borrower, the Lenders and the Administrative Agent agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Acquisitions" shall mean the acquisition by the Borrower of telephone access lines from GTE Corp. and certain of its affiliates and US West Communications, Inc. pursuant to (i) nine separate Agreements for Purchase and Sale of Telephone Exchanges, each dated as of June 16, 1999, between the Borrower and US West Communications, Inc., (ii) an Asset Purchase Agreement, dated as of May 27, 1999, between GTE California Incorporated and the Borrower, (iii) an Asset Purchase Agreement, dated as of May 27, 1999, between GTE West Coast Incorporated and the Borrower and (iv) an Asset Purchase Agreement, dated as of May 27, 1999, between Contel of Minnesota, Inc. and the Borrower. "Administrative Fees" shall have the meaning assigned to such term in Section 2.06(b). 2 "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form of Exhibit B hereto. "Affiliate" shall mean, when used with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability of the Administrative Agent to obtain sufficient quotations, the Alternate Base Rate shall be determined without regard to clause (ii) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Rate" shall mean 0.000% with respect to any ABR Loan, and shall mean, with respect to any Eurodollar Standby Loan or Facility Fee, as the case may be, at all times during which any "Applicable Rating Level" set forth below is in effect, the rate per annum set forth below under the appropriate caption next to such Applicable Rating Level: ================================================================================ Applicable Applicable S&P Rate for Applicable Rating Rating/Moody's Eurodollar Rate for Utilization Level Rating Standby Loans Facility Fee Margin ================================================================================ AA-or higher/Aa3 I or higher 0.200% 0.050% 0.100% - -------------------------------------------------------------------------------- II A+/A1 0.240% 0.060% 0.100% - -------------------------------------------------------------------------------- III A/A2 0.240% 0.060% 0.100% - -------------------------------------------------------------------------------- IV A-/A3 0.330% 0.070% 0.125% - -------------------------------------------------------------------------------- V BBB+/Baa1 0.400% 0.100% 0.125% - -------------------------------------------------------------------------------- VI BBB/Baa2 0.625% 0.125% 0.125% - -------------------------------------------------------------------------------- VII BBB-/Baa3 0.725% 0.150% 0.250% - -------------------------------------------------------------------------------- lower than BBB-/lower than VIII Baa3 0.800% 0.200% 0.250% - -------------------------------------------------------------------------------- provided, that the Applicable Rate for Eurodollar Standby Loans and ABR Loans shall be increased by the rate per annum set forth above under the caption "Utilization Margin" that corresponds to the Applicable Rating Level used to determine such Applicable Rates at all times following the effectiveness of the Term Election or at any time during a Utilization Period. For purposes of the foregoing, the Applicable Rating Level shall be determined in accordance with the then applicable S&P Rating and the then applicable Moody's Rating. In the 3 event that the S&P Rating and the Moody's Rating do not correspond to the same Applicable Rating Level, then the higher of the two ratings shall determine the Applicable Rating Level; provided, however, that if there is a difference of two or more levels between the Applicable Rating Level corresponding to the S&P Rating and the Applicable Rating Level corresponding to the Moody's Rating, then the Applicable Rating Level that is one level above the Applicable Rating Level corresponding to the lower of the S&P Rating and the Moody's Rating shall apply. In the event that no S&P Rating or no Moody's Rating shall be in effect (other than by reason of the circumstances referred to in the last sentence of this definition), then the Applicable Rating Level shall be Applicable Rating Level VIII. The Applicable Rating Level shall be redetermined on the date of announcement of a change in the S&P Rating or the Moody's Rating. A change in the Applicable Rate resulting from a change in the Applicable Rating Level shall become effective on such date. If the rating system of S&P or Moody's shall change, or if either such Person shall cease to be in the business of rating corporate debt obligations, the Borrower and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such Person and, pending the effectiveness of any such amendment, the Applicable Rate shall be determined by reference to the rating most recently in effect prior to such change or cessation. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) or Converted on a single date and as to which a single Interest Period is in effect. All Loans of the same Type, having the same Interest Period and made or Converted on the same day shall be deemed a single Borrowing hereunder until repaid or next Converted. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Lease Obligations" of any Person shall mean the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. 4 A "Change in Control" shall be deemed to have occurred if (a) any Person or group (within the meaning of Rule 13d-5 of the Securities and Exchange Commission as in effect on the date hereof) shall own directly or indirectly, beneficially or of record, shares representing more than 49% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; or (b) a majority of the seats (other than vacant seats) on the board of directors of the Borrower shall at any time have been occupied by Persons who were neither (i) nominated by the management of the Borrower, nor (ii) appointed by directors so nominated; or (c) any Person or group shall otherwise directly or indirectly Control the Borrower. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender hereunder as set forth in Schedule 2.01 hereto, as such Lender's Commitment may be permanently terminated or reduced from time to time pursuant to Section 2.11 or Section 2.13(f). Unless earlier terminated pursuant to the terms of this Agreement, the Commitments shall automatically and permanently terminate on the Revolving Period Maturity Date. "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by the Borrower pursuant to Section 2.03(d) in the form of Exhibit A-4. "Competitive Bid Rate" shall mean, as to any Competitive Bid made by a Lender pursuant to Section 2.03(b), (i) in the case of a Eurodollar Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03 in the form of Exhibit A-1. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted by the Borrower under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a Loan from a Lender to the Borrower pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be a Eurodollar Competitive Loan or a Fixed Rate Loan. "Consolidated Net Worth" shall mean, as at any date of determination, the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries, including mandatorily redeemable convertible preferred securities and minority equity interests in other persons, as determined on a consolidated basis in conformity with GAAP consistently applied. 5 "Consolidated Tangible Assets" of any Person shall mean total assets of such Person and its consolidated Subsidiaries, determined on a consolidated basis, less goodwill, patents, trademarks and other assets classified as intangible assets in accordance with GAAP. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and "Controlling" and "Controlled" shall have meanings correlative thereto. "Conversion", "Convert" or "Converted" shall mean the conversion of any Standby Loan of one Type into a Standby Loan of another Type, or the selection of a new, or the renewal of the same, Interest Period for any such Standby Loan, as the case may be, pursuant to Section 2.05. "Conversion Request" shall mean a request made pursuant to Section 2.05 in the form of Exhibit A-6. "Default" shall mean any event or condition which upon notice, lapse of time, or both would constitute an Event of Default. "Dollars" or "$" shall mean lawful money of the United States of America. "Effective Date" shall mean the date on which the conditions specified in Section 4.02 are satisfied (or waived in accordance with Section 9.08). "Environmental Laws" shall mean all national, federal, state, provincial, municipal or local laws, statutes, ordinances, orders, judgments, decrees, injunctions, writs, policies and guidelines (having the force of law), directives, approvals, notices, rules and regulations and other applicable laws relating to environmental or occupational health and safety matters, including those relating to the Release or threatened Release of Specified Substances and to the generation, use, storage or transportation of Specified Substances, each as in effect as of the date of determination. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time, and the regulations promulgated and the rulings issued thereunder. "ERISA Affiliate" shall mean each trade or business (whether or not incorporated) which together with the Borrower or a Subsidiary of the Borrower would be deemed to be a "single employer" within the meaning of Section 4001(b)(1) of ERISA. "ERISA Termination Event" shall mean (i) a "Reportable Event" described in Section 4043 of ERISA (other than a "Reportable Event" not subject to the provision for 30-day notice to the PBGC under such regulations), or (ii) the withdrawal of the Borrower or any of its ERISA Affiliates from a Plan during a plan year in which it was a "substantial employer" as defined in Section 4001(a)(2) of ERISA, or (iii) the filing of a notice of intent to terminate a Plan or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the 6 institution of proceeding to terminate a Plan by the PBGC or (v) any other event or condition which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan. "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar Loans. "Eurodollar Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurodollar Loan" shall mean any Eurodollar Competitive Loan or Eurodollar Standby Loan. "Eurodollar Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VII. "Existing Facility" shall mean the Credit Agreement, dated as of December 16, 1993, as amended, among the Borrower, the lenders named therein, Bank of America, N.A., as co-agent thereunder, and The Chase Manhattan Bank, as agent for said lenders. "Facility Fee" shall have the meaning assigned to such term in Section 2.06(a). "Federal Funds Effective Rate" shall mean, for any day, 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 on the next succeeding 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 the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the letter agreement, dated July 29, 1999, as amended or supplemented from time to time, among the Borrower, The Chase Manhattan Bank and Chase Securities Inc. relating to the credit facility contemplated hereby. "Fees" shall mean the Facility Fee and the Administrative Fees. "Financial Officer" of any corporation shall mean the President, Chief Financial Officer, Chief Executive Officer or Treasurer of such corporation. "First Mortgage Bond Indentures" shall mean (i) the First Mortgage and Collateral Trust Indenture, dated as of March 1, 1947, from the Borrower to The Marine Midland Trust Company of New York, as Trustee, and (ii) the Mortgage and Deed of Trust Indenture, dated as of June 1, 1962, from the Borrower to Manufacturers Hanover Trust Company, as Trustee, as the same have been and may from time to time be amended or supplemented and in effect. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. 7 "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "GAAP" shall mean generally accepted accounting principles, applied on a consistent basis. "Governmental Approval" shall mean any authorization, consent, order, approval, license, franchise, lease, ruling, tariff, rate, permit, certificate, exemption of, or filing or registration with, any Governmental Authority required in connection with the Borrower's execution, delivery or performance of this Agreement. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Hostile Acquisition" shall mean any Target Acquisition (as defined below) involving a tender offer or proxy contest that has not been recommended or approved by the board of directors (or similar governing body) of the Person that is the subject of such Target Acquisition prior to the first public announcement or disclosure relating to such Target Acquisition. As used in this definition, the term "Target Acquisition" shall mean any transaction, or any series of related transactions, by which the Borrower and/or any of its Subsidiaries directly or indirectly (i) acquires any ongoing business or all or substantially all of the assets of any Person or division thereof, whether through purchase of assets, merger or otherwise, (ii) acquires (in one transaction or as the most recent transaction in a series of transactions) control of at least a majority in ordinary voting power of the securities of a Person which have ordinary voting power for the election of directors or (iii) otherwise acquires control of a more that 50% ownership interest in any such Person. "Indebtedness" of any Person shall mean, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property or assets purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capital Lease Obligations of such Person, (h) all obligations of such Person in respect of interest rate protection agreements, foreign currency exchange agreements or other interest or exchange rate hedging arrangements, (i) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances and (j) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, directly or indirectly (i) to purchase or pay (or advance or supply funds for the purchase 8 or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness, (ii) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness; provided, however, that the term Indebtedness shall not include endorsements for collection or deposit, in either case in the ordinary course of business. "Interest Payment Date" shall mean, with respect to any Loan, the last day of the Interest Period applicable thereto and, in the case of a Eurodollar Loan with an Interest Period of more than three months' duration or a Fixed Rate Loan, each day that would have been an Interest Payment Date for such Loan had successive Interest Periods of three months' duration or 90 days duration, as the case may be, been applicable to such Loan and, in addition, the date of any Conversion of such Loan to a Loan of a different Type. "Interest Period" shall mean (a) as to any Eurodollar Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter (or such longer period as may be agreed to by all of the Lenders), as the Borrower may elect, (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing and ending on the date 90 days thereafter or, if earlier, on the Termination Date or the date of prepayment of such Borrowing and (c) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offer to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than the day after the date of such Borrowing or later than 364 days (or, subject to the Borrower obtaining all necessary Governmental Approvals, such longer period as may be agreed to by all of the Lenders) after the date of such Borrowing; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of Eurodollar Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the rate at which dollar deposits approximately equal in principal amount to (i) in the case of a Standby Borrowing, the Administrative Agent's portion of such Eurodollar Borrowing and (ii) in the case of a Competitive Borrowing, a principal amount that would have been The Chase Manhattan Bank's portion of such Competitive Borrowing had such Competitive Borrowing been a Standby Borrowing, and, in the case of each of clause (i) and clause (ii) above, for a maturity comparable to such Interest Period, are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period. 9 "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, encumbrance, charge, or security interest in or on such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease, or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call, or similar right of a third party with respect to such securities. "Loan" shall mean a Competitive Loan or a Standby Loan, whether made as a Eurodollar Loan, an ABR Loan, or a Fixed Rate Loan, as permitted hereby. "Margin" shall mean, as to any Eurodollar Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Regulations" shall mean Regulations T, U and X of the Board. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, operations, condition, financial or otherwise, or results of operations of the Borrower and the Subsidiaries taken as a whole. "Moody's" shall mean Moody's Investors Service, Inc., or any successor thereto. "Moody's Rating" shall mean, on any date of determination, (i) the debt rating most recently announced by Moody's with respect to the long-term, senior, unsecured, non-credit enhanced Indebtedness of the Borrower or (ii) if (A) the Indebtedness of the Borrower under this Agreement shall be credit-enhanced by any Person other than the Borrower and (B) both Moody's and S&P shall have assigned a debt rating to such Indebtedness, then such debt rating assigned by Moody's. "Net Cash Proceeds" shall mean, with respect to the sale of any Utilities Assets, the aggregate amount of cash received by the Borrower or any Subsidiary thereof in connection with such sale after deducting therefrom (i) reasonable and customary transaction costs that are, at the time of receipt of such cash, actually paid or reserved for payment (A) to a Person that is not an Affiliate of the Borrower or (B) to the Borrower or an Affiliate of the Borrower to reimburse the Borrower or such Affiliate of the Borrower for payments made by the Borrower or such Affiliate of the Borrower to another Person that is not the Borrower or an Affiliate of the Borrower in respect of such transaction costs described above and (ii) the amount of taxes paid or reasonably expected to be payable in connection with, or as a result of, such transaction. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "Person" shall mean any natural person, corporation, business trust, joint venture, association, company, limited liability company, partnership, or government, or any agency or political subdivision thereof. 10 "Plan" shall mean any pension plan (including a multiemployer plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code which is maintained for or to which contributions are made for employees of the Borrower or any ERISA Affiliate. "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. "Principal Subsidiaries" shall mean any Subsidiary of the Borrower, other than Electric Lightwave, Inc., whose Consolidated Tangible Assets comprise in excess of 20% of the Consolidated Tangible Assets of the Borrower and its consolidated Subsidiaries as of the date hereof or at any time hereafter. "Register" shall have the meaning given such term in Section 9.04(d). "Regulation D" shall mean Regulation D of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation T" shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Release" shall mean any spilling, emitting, discharging, depositing, escaping, leaching, dumping or other releasing, including the movement of any Specified Substance through the air, soil, surface water, groundwater or property, and when used as a verb has a like meaning. "Required Lenders" shall mean, at any time, Lenders having Commitments representing at least 66-2/3% of the Total Commitment or, for purposes of acceleration pursuant to clause (ii) of Article VII or if the Total Commitment has terminated, Lenders holding Loans representing at least 66-2/3% of the aggregate principal amount of the Loans outstanding. "Revolving Period Maturity Date" shall mean October 27, 2000. "S&P" shall mean Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., or any successor thereto. "S&P Rating" shall mean, on any date of determination, (i) the debt rating most recently announced by S&P with respect to the long-term, senior, unsecured, non-credit enhanced Indebtedness of the Borrower or (ii) if (A) the Indebtedness of the Borrower under this 11 Agreement shall be credit-enhanced by any Person other than the Borrower and (B) both S&P and Moody's shall have assigned a debt rating to such Indebtedness, then such debt rating assigned by S&P. "Specified Substance" shall mean (i) any chemical, material or substance defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", "restricted hazardous waste" or "toxic substances" or words of similar import under any applicable Environmental Laws; (ii) any (A) oil, natural gas, petroleum or petroleum derived substance, any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal fluid, any flammable substances or explosives, any radioactive materials, any hazardous wastes or substances, any toxic wastes or substances or (B) other materials or pollutants that, in the case of both (A) and (B), (1) pose a hazard to the property of the Borrower or any of its Subsidiaries or any part thereof or to persons on or about such property or to any other property that may be affected by the Release of such materials or pollutants from such property or any part thereof or to persons on or about such other property or (2) cause such property or such other property to be in violation of any Environmental Law; (iii) asbestos, urea formaldehyde foam insulation, toluene, polychlorinated biphenyls and any electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million; and (iv) any sound, vibration, heat, radiation or other form of energy and any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any Governmental Authority. "Standby Borrowing" shall mean a Borrowing consisting of simultaneous Standby Loans from each of the Lenders. "Standby Borrowing Request" shall mean a request made pursuant to Section 2.04 in the form of Exhibit A-5. "Standby Loans" shall mean the revolving loans made by the Lenders to the Borrower pursuant to Section 2.04. Each Standby Loan shall be a Eurodollar Standby Loan or an ABR Loan. All Standby Loans by a Lender of the same Type, having the same Interest Period and made or Converted on the same day shall be deemed to be a single Standby Loan by such Lender until repaid or next Converted. "Subsidiary" shall mean, with respect to any Person (herein referred to as the "parent"), any corporation, partnership, association, or other business entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled, or held by the parent, or (b) which is, at the time any determination is made, otherwise Controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Unless otherwise indicated, all references in this Agreement to "Subsidiaries" shall be construed as references to Subsidiaries of the Borrower. "Term Election" shall have the meaning assigned to such term in Section 2.07(b). 12 "Term Maturity Date" shall have the meaning assigned to such term in Section 2.07(b). "Termination Date" shall mean the earlier to occur of (i) the Revolving Period Maturity Date or, if the Borrower makes the election described in Section 2.07(b), the Term Maturity Date and (ii) the date of termination or reduction in whole of the Commitments pursuant to Section 2.11 or Article VII. "Total Commitment" shall mean at any time the aggregate amount of the Lenders' Commitments, as in effect at such time. "Transferee" shall mean any transferee or assignee of all or any portion of a Lender's interests, rights and obligations hereunder, including any participation holder. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO Rate, the Alternate Base Rate and the Fixed Rate. "Utilities Assets" shall mean any assets of the Borrower or any Subsidiary thereof (including, without limitation, stock in any such Subsidiary) that are employed in the generation or production, transmission or distribution (as applicable) of electricity, natural gas, synthetic gas or water, or that are used to provide wastewater services. "Utilization Period" shall mean any day or days during which the Loans outstanding hereunder are equal to or greater than 33% of the Total Commitment for such day or days. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement, unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that, for purposes of determining compliance with any covenant set forth in Article VI, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in preparing the Borrower's audited financial statements referred to in Section 3.02. ARTICLE II THE CREDITS SECTION 2.01. Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, 13 to make Standby Loans to the Borrower, at any time and from time to time on and after the Effective Date and until the earlier to occur of the Revolving Period Maturity Date and the termination of the Commitment of such Lender, in an aggregate principal amount at any time outstanding not to exceed such Lender's Commitment minus the amount by which the Competitive Loans outstanding at such time shall be deemed to have used such Commitment pursuant to Section 2.16, subject however, to the conditions that (a) at no time shall (i) the sum of (x) the outstanding aggregate principal amount of all Standby Loans made by all Lenders plus (y) the outstanding aggregate principal amount of all Competitive Loans made by all Lenders exceed (ii) the Total Commitment, and (b) at all times the outstanding aggregate principal amount of all Standby Loans made by each Lender shall equal the product of (i) the percentage which its Commitment represents of the Total Commitment times (ii) the outstanding aggregate principal amount of all Standby Loans made pursuant to Section 2.04. Each Lender's Commitment is set forth opposite its respective name in Schedule 2.01. Such Commitments may be terminated or reduced from time to time pursuant to Section 2.11 and Section 2.13(f). Within the foregoing limits, the Borrower may borrow, pay, or prepay and reborrow hereunder, on and after the Effective Date and prior to the Revolving Period Maturity Date, subject to the terms, conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Standby Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their Commitments; provided, however, that the failure of any Lender to make any Standby Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Standby Loans or Competitive Loans comprising any Borrowing shall be in an aggregate principal amount which is an integral multiple of $1,000,000 and not less than $10,000,000 (or, in the case of Standby Loans, an aggregate principal amount equal to the remaining balance of the available Commitments). (b) Each Competitive Borrowing shall be comprised entirely of Eurodollar Competitive Loans or Fixed Rate Loans, and each Standby Borrowing shall be comprised entirely of Eurodollar Standby Loans or ABR Loans, as the Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Borrower shall not be entitled to request any Borrowing which, if made, would result in an aggregate of more than ten separate Standby Loans of any Lender being outstanding hereunder at any one time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. (c) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 1:00 P.M., New York City time, and the Administrative Agent shall by 3:00 P.M., New York City time, credit the amounts so received to the general deposit 14 account of the Borrower with the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Competitive Loans shall be made by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant to Section 2.03 in the amounts so accepted and Standby Loans shall be made by the Lenders pro rata in accordance with Section 2.16. Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Borrowing (or, in the case of an ABR Borrowing, prior to the time of such ABR Borrowing) that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent and the Administrative Agent has made available to the Borrower such portion, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount, together with interest thereon for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, the Federal Funds Effective Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Notwithstanding any other provision of this Agreement, the Interest Period requested by the Borrower with respect to any Borrowing shall not (unless otherwise agreed to by all of the Lenders) end after the earlier to occur of (i) the Termination Date and (ii) the latest date permitted by any Governmental Approval then in effect for the Borrower to have outstanding Borrowings. SECTION 2.03. Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time during the period from and including the Effective Date to but excluding the earlier to occur of the Revolving Period Maturity Date and the termination of the Commitments of all Lenders, the Borrower may request Competitive Bids and may, but shall not have any obligation to, accept Competitive Bids and borrow Competitive Loans; provided, that at no time shall the sum of (x) the outstanding aggregate principal amount of all Standby Loans made by all Lenders plus (y) the outstanding aggregate principal amount of all Competitive Loans made by all Lenders exceed the Total Commitment. In order to request Competitive Bids, the Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Competitive Bid Request in the form of Exhibit A-1 hereto, to be received by the Administrative Agent (i) in the case of a Eurodollar Competitive Borrowing, not later than 10:00 A.M., New York City time, four Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 A.M., New York City time, one Business Day before a proposed Competitive Borrowing. No ABR Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit A-1 may be rejected in the Administrative Agent's sole discretion, and the Administrative Agent shall promptly notify the Borrower of such rejection by 15 telecopier. Such request shall in each case refer to this Agreement and specify (x) whether the Borrowing then being requested is to be a Eurodollar Borrowing or a Fixed Rate Borrowing, (y) the date of such Borrowing (which shall be a Business Day) and the aggregate principal amount thereof which shall be in a minimum principal amount of $10,000,000 and in an integral multiple of $1,000,000, and (z) the Interest Period(s) with respect thereto (which may not end after the Revolving Period Maturity Date unless otherwise agreed to by all of the Lenders). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Administrative Agent shall invite by telecopier (in the form set forth in Exhibit A-2 hereto) the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Loans pursuant to the Competitive Bid Request. (b) Each Lender may, in its sole discretion, make one or more Competitive Bids to the Borrower responsive to a Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Administrative Agent via telecopier, in the form of Exhibit A-3 hereto, (i) in the case of a Eurodollar Competitive Borrowing, not later than 9:30 A.M., New York City time, three Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 A.M., New York City time, on the day of a proposed Competitive Borrowing. Multiple bids will be accepted by the Administrative Agent. Competitive Bids that do not conform substantially to the format of Exhibit A-3 may be rejected by the Administrative Agent after conferring with, and upon the instruction of, the Borrower, and the Administrative Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the range of principal amounts (each of which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000 and, in the case of the larger such amount, may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make to the Borrower, (y) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Loan or Loans and (z) the Interest Period and the last day thereof. If any Lender shall elect not to make a Competitive Bid, such Lender shall so notify the Administrative Agent via telecopier (A) in the case of Eurodollar Competitive Loans, not later than 9:30 A.M., New York City time, three Business Days before a proposed Competitive Borrowing, and (B) in the case of Fixed Rate Loans, not later than 9:30 A.M., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Loan as part of such Competitive Borrowing. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable. If the Administrative Agent shall not have received from any Lender notification of its election to make a Competitive Bid on or before the times set forth in the second sentence of this paragraph, such Lender shall be deemed to have elected not to make a Competitive Bid. (c) The Administrative Agent shall promptly notify (but in any event no later than 10:00 A.M., New York City time, on the day any Competitive Bid is received by the Administrative Agent) the Borrower by telecopier of all the Competitive Bids made, the Competitive Bid Rate and the principal amount (or range thereof) of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Administrative Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.03. 16 (d) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject all or any portion (within the range of principal amounts specified therein) of any Competitive Bid referred to in paragraph (c) above. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopier in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above, (x) in the case of a Eurodollar Competitive Borrowing, not later than 11:00 A.M., New York City time, three Business Days before a proposed Competitive Borrowing and (y) in the case of a Fixed Rate Borrowing, not later than 11:00 A.M., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that (i) the failure by the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (c) above, (ii) the Borrower shall not accept a bid made at a particular Competitive Bid Rate if the Borrower has decided to reject a bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request, (iv) if the Borrower shall accept a bid or bids made at the same Competitive Bid Rate but the amount of such bid or bids shall cause the total amount of bids to be accepted by the Borrower to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount no greater than the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids at a lower Competitive Bid Rate accepted with respect to such Competitive Bid Request, which acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the lowest amount of each such bid at such Competitive Bid Rate, and (v) except pursuant to clause (iv) above, no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given by the Borrower pursuant to this paragraph (d) shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopier sent by the Administrative Agent, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Borrower not later than 9:15 A.M., New York City time, on the day on which the other Lenders are required to submit their bids to the Administrative Agent pursuant to paragraph (b) above. (g) All notices required by this Section 2.03 shall be given in accordance with Section 9.01. 17 SECTION 2.04. Standby Borrowing Procedure. In order to request a Standby Borrowing (other than a Conversion), the Borrower shall hand deliver or telecopy to the Administrative Agent a notice in the form of Exhibit A-5 (a) in the case of a Eurodollar Standby Borrowing, not later than 11:00 A.M., New York City time, three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 11:00 A.M., New York City time, on the day of a proposed Borrowing. No Fixed Rate Loan shall be requested or made pursuant to a Standby Borrowing Request. Such notice shall be irrevocable (unless otherwise expressly provided herein) and shall in each case specify (i) whether the Borrowing then being requested is to be a Eurodollar Standby Borrowing or an ABR Borrowing; (ii) the date of such Standby Borrowing (which shall be a Business Day) and the amount thereof; and (iii) if such Borrowing is to be a Eurodollar Standby Borrowing, the Interest Period with respect thereto. If no election as to the Type of Standby Borrowing is specified in any such notice, then the requested Standby Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurodollar Standby Borrowing is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall promptly advise (but in any event no later than 12:00 noon on such date) the Lenders of any notice given pursuant to this Section 2.04 and of each Lender's portion of the requested Borrowing. SECTION 2.05. Conversions. The Borrower may from time to time Convert any Standby Loan (or portion thereof) of any Type to one or more Standby Loans of the same or any other Type by delivering (by hand delivery or telecopier) a request for such Conversion in the form of Exhibit A-6 to the Administrative Agent no later than (i) 11:00 A.M., New York City time, on the third Business Day prior to the date of any proposed Conversion into a Eurodollar Standby Loan and (ii) 11:00 A.M., New York City time, on the day of any proposed Conversion into an ABR Loan. The Administrative Agent shall give each Lender prompt notice of each Conversion Request. Each Conversion Request shall be irrevocable (unless otherwise expressly provided herein) and binding on the Borrower and shall specify the requested (A) date of such Conversion, (B) Type of, and Interest Period, if any, applicable to, the Standby Loans (or portions thereof) proposed to be Converted, (C) Type of Standby Loans to which such Standby Loans (or portions thereof) are proposed to be Converted, (D) initial Interest Period, if any, to be applicable to the Standby Loans resulting from such Conversion and (E) aggregate amount of Standby Loans (or portions thereof) proposed to be Converted. No Eurodollar Standby Loans may be Converted on a date other than the last day of the Interest Period applicable thereto, unless the Borrower reimburses each Lender pursuant to Section 2.15 for all losses or expenses incurred by such Lender in connection with such Conversion. If the Borrower shall fail to give a timely Conversion Request pursuant to this subsection in respect of any Standby Loans, such Standby Loans shall, on the last day of the then existing Interest Period therefor, automatically Convert into, or remain as, as the case may be, ABR Loans, unless such Standby Loans are repaid at the end of such Interest Period. If the Borrower shall fail, in any Conversion Request that has been timely given, to select the duration of any Interest Period for Standby Loans to be Converted into Eurodollar Standby Loans, such Standby Loans shall, on the last day of the then existing Interest Period therefor, automatically Convert into Eurodollar Standby Loans with an Interest Period of one months' duration. If, on the date of any proposed Conversion, the Borrower shall have failed to fulfill any condition set forth in Section 4.01, all Standby Loans 18 then outstanding shall, on such date, automatically Convert into, or remain as, as the case may be, ABR Loans. SECTION 2.06. Fees. (a) The Borrower agrees to pay to each Lender, through the Administrative Agent, on each March 31, June 30, September 30 and December 31, on the date on which the Commitment of such Lender shall be terminated as provided herein and on the Termination Date, a facility fee (a "Facility Fee") at a rate per annum equal to the Applicable Rate from time to time in effect on (i) the amount of the Commitment of such Lender, whether used or unused, during the preceding quarter (or shorter period commencing on the date hereof or ending on the Revolving Period Maturity Date or any other date on which the Commitment of such Lender shall be terminated) and (ii) in the event that the Commitments have terminated and/or the Borrower has made the Term Election, the aggregate amount of the Standby Loans owed by the Borrower to such Lender during the preceding quarter (or shorter period ending on the later of the Term Maturity Date and the date on which such Standby Loans are paid in full). All Facility Fees shall be computed on the basis of the actual number of days elapsed in a year of 365 or 366 days, as the case may be. The Facility Fee due to each Lender shall commence to accrue on the date hereof and shall cease to accrue on the later of the Termination Date and the date of payment in full of the Loans, accrued interest thereon and all other amounts payable hereunder. (b) The Borrower agrees to pay the Administrative Agent, for its own account, the fees (the "Administrative Fees") at the times and in the amounts agreed upon in the Fee Letter. (c) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.07. Repayment of Loans. (a) The outstanding principal balance of each Loan shall be payable, in the case of each Competitive Loan, on the earlier to occur of the last day of the Interest Period applicable to such Loan and the Termination Date, and, in the case of each Standby Loan, on the Termination Date, unless otherwise agreed to by all of the Lenders. Each Competitive Loan and each Standby Loan shall bear interest from the date thereof on the outstanding principal balance thereof as set forth in Section 2.08. Each Lender shall, and is hereby authorized by the Borrower to record in such Lender's internal records an appropriate notation evidencing the date and amount of each Competitive Loan or Standby Loan, as applicable, of such Lender, each payment or prepayment of principal of any Competitive Loan or Standby Loan, as applicable, and such other relevant information as such Lender records in its internal records with respect to loans of a type similar to such Loans; provided, however, that the failure of any Lender to make such a notation or any error therein shall not in any manner affect the obligation of the Borrower to repay the Competitive Loans or Standby Loans, as applicable, made by such Lender in accordance with the terms hereof. (b) The Borrower may elect, by providing written notice of such election to the Administrative Agent (who shall promptly advise the Lenders of such notice) at least five but no more than 30 days prior to the Revolving Period Maturity Date, to have all or a portion of the Standby Loans outstanding on the Revolving Period Maturity Date mature not later than the first 19 anniversary of the Revolving Period Maturity Date (such election being the "Term Election"). Such notice shall be irrevocable and binding on the Borrower and shall specify (i) the date (the "Term Maturity Date") on which the Borrower desires such Standby Loans to mature (which date shall be no later than the first anniversary of the Revolving Period Maturity Date) and (ii) the Standby Loans and the amount thereof that shall mature on the Term Maturity Date. The Term Election shall be effective on the Revolving Period Maturity Date if and only if on such date no Default or Event of Default shall have occurred and be continuing or would occur as a result of the Term Election. Upon the effectiveness of the Term Election, the Borrower shall no longer have the right to borrow any unfunded portion of the Commitments or reborrow all or any part of the Loans that have been repaid or prepaid. The Term Election may be made only once. (c) Any Lender may request that any Loans made by it be evidenced by one or more promissory notes. Promptly upon receipt of such request, the Borrower shall prepare, execute and deliver to such Lender one or more promissory notes payable to the order of such Lender (or, if requested by such Lender, to such Lender and its assignees) substantially in the form of Exhibit E-1 or E-2, as appropriate. Thereafter, the Loans evidenced by such promissory notes and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein. SECTION 2.08. Interest on Loans. (a) Subject to the provisions of Section 2.09, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to (i) in the case of each Eurodollar Standby Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, and (ii) in the case of each Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Margin offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each Eurodollar Borrowing shall be payable on each applicable Interest Payment Date. The LIBO Rate for each Interest Period shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. The Administrative Agent shall promptly (but in any event no later than 10:30 A.M., New York City time, two Business Days prior to the commencement of such Interest Period) (A) advise the Borrower and each Lender, as appropriate, of such determination and (B) upon the request of the Borrower, provide the Borrower with the calculations and relevant factors supporting such determination. (b) Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 days when determined with reference to the Prime Rate and over a year of 360 days in all other cases) at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate. Interest on each ABR Borrowing shall be payable on each applicable Interest Payment Date. The Alternate Base Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. The Administrative Agent shall promptly (but in any event no later than 11:30 A.M., New York City time, on the day of each ABR Borrowing) (A) advise the Borrower and each Lender of such determination and (B) upon the request of the Borrower, provide the Borrower with the calculations and relevant factors supporting such determination. 20 (c) Subject to the provisions of Section 2.09, each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. Interest on each Fixed Rate Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. SECTION 2.09. Default Interest. If the Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration, or otherwise, the Borrower shall on demand from time to time from the Administrative Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus 2%. SECTION 2.10. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Borrowing the Administrative Agent shall have determined that dollar deposits in the principal amounts of the Eurodollar Loans comprising such Borrowing are not generally available in the London interbank market, or that the rates at which such dollar deposits are being offered will not adequately and fairly reflect the cost to any Lender of making or maintaining its Eurodollar Loan during such Interest Period, or that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give written notice of such determination to the Borrower and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any such request by the Borrower for a Eurodollar Competitive Borrowing pursuant to Section 2.03 shall be of no force and effect and shall be denied by the Administrative Agent, (ii) any such request by the Borrower for a Eurodollar Standby Borrowing pursuant to Section 2.04 shall be deemed to be a request for an ABR Borrowing (unless the Borrower shall have withdrawn its request for such Eurodollar Standby Borrowing not later than 10:00 A.M., New York City time, on the day of the proposed Borrowing) and (iii) any request by the Borrower for a Conversion to Eurodollar Standby Loans pursuant to Section 2.05 shall be deemed to be a request for a Conversion to ABR Loans (unless the Borrower shall have withdrawn its request for such Conversion not later than 10:00 A.M., New York City time, on the day of the proposed Conversion). Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.11. Termination and Reduction of Commitments. (a) Upon at least three Business Days' prior irrevocable written notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; provided, however, that (i) each partial reduction of the Total Commitment shall be in an integral multiple of $1,000,000 and in a minimum principal amount of $10,000,000 and (ii) no such termination or reduction shall be made which would reduce the Total Commitment to an amount less than the aggregate outstanding principal amount of the Competitive Loans. 21 (b) The Total Commitment shall be permanently reduced in an amount equal to the amount of any prepayment required to be made pursuant to Section 2.12(c), regardless of whether any Loans are outstanding or actually prepaid, such reduction to be effective on the scheduled date for such prepayment. (c) Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrower shall pay to the Administrative Agent for the account of the Lenders, on the date of each termination or reduction, the Facility Fees on the amount of the Commitments so terminated or reduced accrued through the date of such termination or reduction. Subject to Section 2.06(a)(ii), no additional Facility Fees on the amount of the Commitments so terminated or reduced will accrue. (d) Unless earlier terminated pursuant to the terms of this Agreement, the Commitment of each Lender shall automatically and permanently terminate on the Revolving Period Maturity Date. (e) Any termination or reduction of the Commitments pursuant to this Section 2.11 shall be appropriately recorded by the Administrative Agent in the Register in accordance with Section 9.04(d). In addition, all notices with respect to any such termination or reduction shall be maintained by the Administrative Agent with the Register. SECTION 2.12. Prepayment. (a) The Borrower shall have the right at any time and from time to time to prepay any Standby Borrowing or Eurodollar Competitive Borrowing, in whole or in part, upon giving written notice (or telephone notice promptly confirmed by written notice) to the Administrative Agent: (i) before 11:00 A.M., New York City time, three Business Days prior to prepayment, in the case of Eurodollar Loans, and (ii) before 11:00 A.M., New York City time, on the day of prepayment, in the case of ABR Loans; provided, however, that each partial prepayment shall be in an amount which is an integral multiple of $1,000,000 and not less than $5,000,000. The Borrower shall not have the right to prepay any Fixed Rate Competitive Borrowing. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.11 (other than subsection (b) thereof) or Section 2.13(f), the Borrower shall pay or prepay so much of the Standby Borrowings as shall be necessary in order that the aggregate principal amount of the Competitive Loans and Standby Loans outstanding will not exceed the Total Commitment after giving effect to such termination or reduction. In the event that the Borrower makes the Term Election, the Borrower shall pay or prepay on the Revolving Period Maturity Date so much of the Standby Borrowings as shall be necessary in order that the aggregate principal amount of the Standby Loans outstanding will not exceed the amount of the Standby Loans subject to the Term Election. (c) The Borrower shall, from time to time, prepay Standby Borrowings in an amount equal to the Net Cash Proceeds received by the Borrower or any Subsidiary thereof from the sale of any Utilities Assets, such prepayment to be made on the tenth Business Day following the day on which the Borrower or such Subsidiary receives such Net Cash Proceeds; provided, that the aggregate amount of such prepayments made pursuant to this subsection (c) shall not exceed 22 $2,000,000,000 minus the aggregate amount of reductions in the Total Commitment made pursuant to Section 2.11(a); provided, further, that any prepayment of a Eurodollar Loan made pursuant to this subsection (c) shall not be required to be made until the end of the Interest Period applicable to such Eurodollar Loan. (d) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrower to prepay such Borrowing (or portion thereof) by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.13. Reserve Requirements; Change in Circumstances. (a) It is understood that the cost to each Lender of making or maintaining any of the Eurodollar Loans may fluctuate as a result of the applicability of reserve requirements imposed by the Board at the ratios provided for in Regulation D on the date hereof. The Borrower agrees to pay to each of the Lenders from time to time such amounts as shall be necessary to compensate such Lender for the portion of the cost of making or maintaining Eurodollar Loans (other than Eurodollar Competitive Loans) resulting from any such reserve requirements provided for in Regulation D as in effect on the date hereof, it being understood that the rates of interest applicable to Eurodollar Loans have been determined on the assumption that no such reserve requirements exist or will exist and that such rates do not reflect costs imposed on the Lenders in connection with such reserve requirements. (b) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation (including, without limitation, Regulation D) or in the interpretation or administration thereof by any governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan or Fixed Rate Loan made by such Lender or any Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender and franchise taxes imposed on it by the jurisdiction in which such Lender has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify, or deem applicable any reserve, special deposit, or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender, or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or any Eurodollar Loan or Fixed Rate Loan made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest, or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. Notwithstanding the foregoing, no Lender shall be entitled to request compensation under this paragraph with respect to any Competitive Loan if it shall have had actual knowledge of the change giving rise to such request at the time of submission of the Competitive Bid pursuant to which such Competitive Loan shall have been made. 23 (c) If any Lender shall have determined that the adoption after the date hereof of any law, rule, regulation, or guideline regarding capital adequacy, or any change in any existing law, rule, regulation, or guideline regarding capital adequacy or in the interpretation or administration of any of the foregoing by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company 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, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (d) certificate of a Lender setting forth such amount or amounts as shall be necessary to compensate such Lender as specified in paragraph (a), (b), or (c) above, as the case may be, and all of the relevant factors and the calculations supporting such amount or amounts, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered by it within 10 days after the receipt of the same. (e) Notwithstanding the provisions of subsections (a), (b) or (c), above, to the contrary, no Lender shall be entitled to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital to the extent that such compensation relates to any period of time prior to the date upon which such Lender first notified the Borrower of the occurrence of the event entitling such Lender to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Borrower required by any governmental authority, central bank or comparable agency). (f) If any Lender shall have delivered a notice or certificate pursuant to paragraph (d) above, the Borrower shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, to require such Lender to (i) terminate its Commitment or (ii) transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.04) all or a portion of its interest, rights and obligations under this Agreement to another financial institution which shall assume such obligations; provided that (A) no such termination or assignment shall conflict with any law, rule, or regulation or order of any Governmental Authority and (B) the Borrower or the assignee, as the case may be, shall pay to the affected Lender in immediately available funds on the date of such termination or assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder (other than any amounts owed to such Lender pursuant to Section 2.15(c) in connection with such principal payment). 24 SECTION 2.14. Change in Legality. (a) Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Borrower and to the Administrative Agent, such Lender may: (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon such Lender shall not submit a Competitive Bid in response to a request for Eurodollar Competitive Loans and any request by the Borrower for a Eurodollar Standby Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan (or for a Conversion thereto pursuant to Section 2.05) unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be Converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically Converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the Converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the Conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.14, a notice to the Borrower by any Lender shall be effective as to each Eurodollar Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrower. Section 2.15. Indemnity. The Borrower shall indemnify each Lender against any loss or expense which such Lender may sustain or incur as a consequence of (a) any failure by the Borrower to fulfill on the date of any Borrowing hereunder the applicable conditions set forth in Article IV, (b) any failure by the Borrower to borrow or to Convert any Loan hereunder after irrevocable notice of such Borrowing or Conversion has been given pursuant to Section 2.03, 2.04 or 2.05, (c) any payment, prepayment or Conversion of a Eurodollar Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period applicable thereto, (d) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise), or (e) the occurrence of any Event of Default, including, in each such case, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss or reasonable expense shall include an amount equal to the excess, if any, as reasonably demonstrated by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid, Converted, or not borrowed (assumed to be the LIBO Rate or, in the case of a Fixed Rate Loan, the fixed rate of interest 25 applicable thereto) for the period from the date of such payment, prepayment, or failure to borrow to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow, the Interest Period for such Loan which would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably demonstrated by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid, or not borrowed for such period or Interest Period, as the case may be. A certificate of any Lender setting forth the factors and calculations supporting any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower no later than 30 days following the incurrence of any loss or expense for which such Lender is seeking indemnification under this Section 2.15 and shall be conclusive absent manifest error. SECTION 2.16. Pro Rata Treatment. Except as required or otherwise permitted under Sections 2.13(f) and 2.14, each Standby Borrowing, each payment or prepayment of principal of any Standby Borrowing, each payment of interest on the Standby Loans, each payment of the Facility Fees, each reduction of the Commitments and each Conversion of any Borrowing with a Standby Borrowing of any Type, shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Standby Loans). Each payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. For purposes of determining the available Commitments of the Lenders at any time, each outstanding Competitive Borrowing shall be deemed to have utilized the Commitments of the Lenders (including those Lenders which shall not have made Loans as part of such Competitive Borrowing) pro rata in accordance with such respective Commitments. Each Lender agrees that, in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.17. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff, or counterclaim against the Borrower, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency, or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Standby Loan or Standby Loans as a result of which the unpaid principal portion of the Standby Loans of such Lender shall be proportionately less than the unpaid principal portion of the Standby Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Standby Loans of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans and participations in the Standby Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans then outstanding as the principal amount of its Standby Loans prior to such exercise of banker's lien, setoff, or counterclaim or 26 other event was to the principal amount of all Standby Loans outstanding prior to such exercise of banker's lien, setoff, or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrower expressly consents to the foregoing arrangements and agrees that, to the maximum extent permitted by law, any Lender holding a participation in a Standby Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff, or counterclaim with respect to any and all moneys owing by the Borrower to such Lender by reason thereof as fully as if such Lender had made a Standby Loan directly to the Borrower in the amount of such participation. SECTION 2.18. Payments. (a) The Borrower shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder not later than 12:00 noon, New York City time, on the date when due in dollars to the Administrative Agent at its offices at 270 Park Avenue, New York, New York 10017, in immediately available funds. All payments by the Borrower shall be made without deduction for any counterclaim, defense, recoupment or setoff. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. Taxes. (a) Any and all payments by the Borrower hereunder shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges, or withholdings, and all liabilities with respect thereto, excluding taxes imposed on the Administrative Agent's or any Lender's (or any Transferee's) net income and franchise taxes imposed on the Administrative Agent or any Lender (or Transferee) by the United States or any jurisdiction under the laws of which it is organized or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lenders (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other Governmental Authority in accordance with applicable law. Each Lender represents and warrants that no Taxes will be incurred on the date hereof in connection with the execution and delivery of this Agreement. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges, or similar levies which arise from any payment made hereunder or from the execution, delivery, or registration of, or otherwise with 27 respect to, this Agreement (hereinafter referred to as "Other Taxes"). Each Lender represents and warrants that no Other Taxes will be incurred on the date hereof in connection with the execution and delivery of this Agreement. (c) The Borrower will indemnify each Lender (or Transferee) and the Administrative Agent for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.19) paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. Payment of such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor. If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to receive a refund in respect of Taxes of Other Taxes, it shall promptly notify the Borrower of the availability of such refund and shall, within 30 days after receipt of a request by the Borrower, apply for such refund at the Borrower's expense. If any Lender (or Transferee) or the Administrative Agent receives a refund in respect of any Taxes or Other Taxes for which such Lender (or Transferee) or the Administrative Agent has received payment from the Borrower hereunder, it shall promptly notify the Borrower of such refund and shall, within 30 days after receipt of a request by the Borrower (or promptly upon receipt, if the Borrower has requested application for such refund pursuant hereto), repay such refund to the Borrower, net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and only with interest received, if any, from the relevant taxing authority or Governmental Authority; provided that the Borrower, upon the request of such Lender (or Transferee) or the Administrative Agent, agrees to return such refund (plus penalties, interest, or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund. (d) Within 30 days after the date of any payment of Taxes or Other Taxes withheld by the Borrower in respect of any payment to any Lender (or Transferee) or the Administrative Agent, the Borrower will furnish to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.19 shall survive the payment in full of the principal of and interest on all Loans made hereunder. (f) Each Lender represents and warrants that either (i) it is organized under the laws of a jurisdiction within the United States or (ii) it has delivered to the Borrower and the Administrative Agent duly completed copies of such form or forms prescribed by the Internal Revenue Service indicating that such Lender is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Code. Each Transferee agrees that, on or prior to the date upon which it shall become a party hereto or obtain a participation herein, and upon the reasonable request from time to time of the Borrower or the Administrative Agent, it will deliver to the Borrower and the Administrative Agent either (A) a statement that it is organized under the laws of a jurisdiction within the United States or (B) duly 28 completed copies of such form or forms as may from time to time be prescribed by the United States Internal Revenue Service, indicating that such Transferee is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Code. Each Lender that has delivered, and each Transferee that hereafter delivers, to the Borrower and the Administrative Agent the form or forms referred to in the two preceding sentences further undertakes to deliver to the Borrower and the Administrative Agent, so far as it may legally do so, further copies of such form or forms, or successor applicable form or forms, as the case may be, as and when any previous form filed by it hereunder shall expire or shall become incomplete or inaccurate in any respect. Each Lender and Transferee represents and warrants that each such form supplied by it to the Administrative Agent and the Borrower pursuant to this subsection (f), and not superseded by another form supplied by it, is or will be, as the case may be, complete and accurate. (g) The Borrower shall not be required to pay any additional amounts to any Lender (or Transferee) in respect of United States withholding tax pursuant to paragraph (a) above if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender (or Transferee) to comply with the provisions of paragraph (f) above, unless such failure results from (i) a change in applicable law, regulation, or official interpretation thereof, or (ii) an amendment, modification, or revocation of any applicable tax treaty or a change in official position regarding the application or interpretation thereof, in each case after the Effective Date (and, in the case of a Transferee, after the date of assignment or transfer); provided, however, that the Borrower shall be required to pay those amounts to any Lender (or Transferee) which it was required to pay hereunder prior to the failure of such Lender (or Transferee) to comply with the provisions of paragraph (f). (h) Any Lender (or Transferee) claiming any additional amounts payable pursuant to this Section 2.19 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue and would not, in the sole determination of such Lender, be otherwise disadvantageous to such Lender (or Transferee). ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to each of the Lenders that: SECTION 3.01. Organization; Powers; Governmental Approvals. (a) The Borrower and each Principal Subsidiary (i) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, (ii) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and (iii) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not have a material adverse effect on the condition, financial or 29 otherwise, results of operations, business, assets, operations, or prospects of the Borrower and its Subsidiaries taken as a whole. The Borrower's execution, delivery and performance of this Agreement are within its corporate powers, have been duly authorized by all necessary action and do not violate or create a default under law, its constituent documents, or any contractual provision binding upon it. This Agreement constitutes the legal, valid and binding obligation of the Borrower enforceable against it in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium and other laws affecting the rights of creditors generally and general principles of equity). (b) All Governmental Approvals have been duly obtained, are in full force and effect without having been amended or modified in any manner that may impair the ability of the Borrower to perform its obligations under this Agreement, and are not the subject of any pending or overtly threatened appeal, stay or other challenge. No Interest Period requested with respect to any Borrowing extends beyond the latest date permitted for Borrowings by any Governmental Approval then in effect. SECTION 3.02. Financial Statements. The Borrower has furnished to the Lenders, for itself and its Subsidiaries, its most recent filings with the Securities and Exchange Commission on Forms 10-K and 10-Q. Such Forms 10-K and 10-Q do not contain any untrue statement of a material fact or omit to state a material fact necessary to make any statement therein, in light of the circumstances under which it was made, not misleading. Each of the financial statements in such Forms 10-K and 10-Q has been, and each of the financial statements to be furnished pursuant to Section 5.02 will be, prepared in accordance with GAAP applied consistently with prior periods, except as therein noted, and fairly presents or will fairly present in all material respects the consolidated financial position of the Borrower and its Subsidiaries as of the date thereof and the results of the operations of the Borrower and its Subsidiaries for the period then ended. SECTION 3.03. No Material Adverse Change. Since the date of the Borrower's most recent financial statements contained in its Annual Report on Form 10-K for the fiscal year ended December 31, 1998, furnished to the Lenders pursuant to Section 3.02, there has been no material adverse change in, and there has occurred no event or condition which is likely to result in a material adverse change in, the condition, financial or otherwise, results of operations, business, assets or operations of the Borrower and the Subsidiaries taken as a whole. SECTION 3.04. Title to Properties; Possession Under Leases. (a) To the best of the Borrower's knowledge, each of the Borrower and the Principal Subsidiaries has good and marketable title to, or valid leasehold interests in, or other rights to use or occupy, all its material properties and assets, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. All such material properties and assets are free and clear of Liens, other than Liens expressly permitted by Section 6.01. (b) Each of the Borrower and the Principal Subsidiaries has complied with all obligations under all material leases to which it is a party and all such leases are in full force and effect, except where such failure to comply or maintain such leases in full force and effect would not have a Material Adverse Effect. Each of the Borrower and the Subsidiaries enjoys peaceful and 30 undisturbed possession under all such material leases except where such failure would not have a Material Adverse Effect. SECTION 3.05. Ownership of Subsidiaries. The Borrower owns, free and clear of any Lien (other than Liens expressly permitted by Section 6.01), all of the issued and outstanding shares of common stock of each of the Principal Subsidiaries. SECTION 3.06. Litigation; Compliance with Laws. (a) There is no action, suit, or proceeding, or any governmental investigation or any arbitration, in each case pending or, to the knowledge of the Borrower, threatened against the Borrower or any of the Subsidiaries or any material property of any thereof before any court or arbitrator or any governmental or administrative body, agency, or official which (i) challenges the validity of this Agreement or (ii) except as disclosed in the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 or the Borrower's Quarterly Reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, may have a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries is in violation of any law, rule, or regulation, or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default could reasonably be anticipated to result in a Material Adverse Effect. (c) Except as set forth in or contemplated by the financial statements or other reports referred to in Section 3.02 hereof and which have been delivered to the Lenders on or prior to the date hereof, (i) the Borrower and each of its Subsidiaries have complied with all Environmental Laws, except to the extent that failure to so comply is not reasonably likely to have a Material Adverse Effect, (ii) neither the Borrower nor any of its Subsidiaries has failed to obtain, maintain or comply with any permit, license or other approval under any Environmental Law, except where such failure is not reasonably likely to have a Material Adverse Effect, (iii) neither the Borrower nor any of its Subsidiaries 7has received notice of any failure to comply with any Environmental Law or become subject to any liability under any Environmental Law, except where such failure or liability is not reasonably likely to have a Material Adverse Effect, (iv) no facilities of the Borrower or any of its Subsidiaries are used to manage any Specified Substance in violation of any law, except to the extent that such violations, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect, and (v) the Borrower is aware of no events, conditions or circumstances involving any Release of a Specified Substance that is reasonably likely to have a Material Adverse Effect. SECTION 3.07. Agreements. (a) Neither the Borrower nor any of the Subsidiaries is a party to any agreement or instrument or subject to any corporate restriction that has resulted, or could reasonably be anticipated to result, in a Material Adverse Effect. (b) Neither the Borrower nor any of the Subsidiaries is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default could reasonably be anticipated to result in a Material Adverse Effect. 31 SECTION 3.08. Federal Reserve Regulations. No part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally, or ultimately, for any purpose which entails a violation of, or which is inconsistent with, the provisions of the Margin Regulations. SECTION 3.09. Investment Company Act; Public Utility Holding Company Act. Neither the Borrower nor any of the Subsidiaries is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.10. Use of Proceeds. The Borrower will use the proceeds of the Loan only for the purposes specified in Section 5.05. SECTION 3.11. Tax Returns. Each of the Borrower and the Subsidiaries has filed or caused to be filed all Federal, state and local tax returns required to have been filed by it and has paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by it, except taxes that are being contested in good faith by appropriate proceedings and for which the Borrower shall have set aside on its books adequate reserves. SECTION 3.12. No Material Misstatements. No statement, information, report, financial statement, exhibit or schedule furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the syndication or negotiation of this Agreement or included herein or delivered pursuant hereto contained, contains, or will contain any material misstatement of fact or intentionally omitted, omits, or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are, or will be made, not misleading. SECTION 3.13. Employee Benefit Plans. (a) Each Plan is in compliance with ERISA, except for such noncompliance that has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (b) No Plan has an accumulated or waived funding deficiency within the meaning of Section 412 or Section 418B of the Code, except for any such deficiency that has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (c) No proceedings have been instituted to terminate any Plan, except for such proceedings where the termination of a Plan has not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. (d) Neither the Borrower nor any Subsidiary or ERISA Affiliate has incurred any liability to or on account of a Plan under ERISA (other than obligations to make contributions in accordance with such Plan), and no condition exists which presents a material risk to the Borrower or any Subsidiary of incurring such a liability, except for such liabilities that have not resulted, and could not reasonably be anticipated to result, in a Material Adverse Effect. 32 SECTION 3.14. Insurance. Each of the Borrower and the Principal Subsidiaries maintains insurance with financially sound and reputable insurers, or self-insurance, with respect to its properties and business against loss or damage of the kind customarily insured against by reputable companies in the same or similar business and of such types and in such amounts (with such deductible amounts) as is customary for such companies under similar circumstances. SECTION 3.15. Year 2000 Matters. The Borrower has (i) initiated a review and assessment of all mission critical areas within its and each of its Subsidiaries' business and operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by the Borrower or any of its Subsidiaries (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and the Borrower's Quarterly Reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in accordance with that timetable. The Borrower has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millenium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to the Borrower after making reasonable inquiries of such suppliers and vendors. The Borrower makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Each Borrowing. The obligation of each Lender to make a Loan on the occasion of any Borrowing, including any Conversion pursuant to Section 2.05, is subject to the satisfaction of the following conditions: (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03, 2.04 or 2.05, as applicable; (b) The representations and warranties set forth in Article III hereof (except, in the case of a Conversion, the representations set forth in Sections 3.03 and 3.06(a)) shall be true and correct in all material respects on and as of the date of such Borrowing with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date; and (c) The Borrower shall be in compliance with all of the terms and provisions set forth herein on its part to be observed or performed, and at the time of, and immediately after such Borrowing, no Event of Default or Default shall have occurred and be continuing. 33 Each Borrowing shall be deemed to constitute a representation and warranty by the Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.08): (a) The Borrower shall have entered into all definitive contracts with respect to the Acquisitions, no default or failure in the satisfaction of a condition shall have occurred and be continuing under such contracts that could reasonably be expected to threaten or materially delay the consummation of the Acquisitions, and the Borrower shall not have agreed to any modification of such contracts without the consent of the Administrative Agent if the effect of such modification would be to materially increase the aggregate purchase price of the assets subject of the Acquisitions or materially decrease the aggregate value of such assets. (b) The Administrative Agent shall have received a favorable written opinion of the general counsel of the Borrower, dated the Effective Date and addressed to the Lenders, to the effect set forth in Exhibit D hereto, and the Borrower hereby instructs such counsel to deliver such opinion to the Administrative Agent; (c) All legal matters incident to this Agreement and the borrowings hereunder shall be satisfactory to the Administrative Agent and the Lenders; (d) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation, including all amendments thereto, of the Borrower, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of the Borrower as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of the Borrower dated the Effective Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of the Borrower as in effect on the Effective Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Agreement and the borrowings hereunder, and that such resolutions have not been modified, rescinded, or amended and are in full force and effect, (C) that the certificate or articles of incorporation of the Borrower have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Borrower; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; (iv) an irrevocable notice from the Borrower requesting termination of the "Total Commitment" under the Existing Facility effective automatically on the Effective Date and (v) such other documents as the Administrative Agent or the Lenders may reasonably request; 34 (e) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by a Financial Officer of the Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01 and paragraph (a) of this Section; (f) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Effective Date; (g) All "Commitments" (as defined in the Existing Facility) under the Existing Facility shall have been terminated in accordance with the terms thereof and all "Loans" (as defined in the Existing Facility) outstanding thereunder shall have been repaid or prepaid together with accrued interest thereon and all other amounts payable to the "Lenders" (as defined in the Existing Facility) under the Existing Facility; and (h) The Administrative Agent shall have received satisfactory evidence that the commercial paper of the Borrower is rated at least A2 by S&P and P2 by Moody's. ARTICLE V AFFIRMATIVE COVENANTS The Borrower covenants and agrees with the Administrative Agent and each Lender that, so long as this Agreement shall remain in effect or the principal of or interest on any Loan (or any portion thereof), or any other expenses or amounts payable hereunder, shall be unpaid, the Borrower will: SECTION 5.01. Existence; Businesses and Properties. (a) Preserve and maintain, cause each of the Principal Subsidiaries to preserve and maintain, and cause each other Subsidiary to preserve and maintain (where the failure by any such other Subsidiary to so preserve and maintain would likely result in a Material Adverse Effect), its corporate existence, rights and franchises, provided, however, that the corporate existence of any Principal Subsidiary may be terminated if such termination is not disadvantageous to the Administrative Agent or any Lender; (b) continue to own all of the outstanding shares of common stock of each Principal Subsidiary; (c) comply, and cause each of the Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, including, without limitation, all Environmental Laws; (d) pay, and cause each of the Subsidiaries to pay, before any such amounts become delinquent, (i) all taxes, assessments and governmental charges imposed upon it or upon its property, and (ii) all claims (including without limitation, claims for labor, materials, supplies, or services) which might, if unpaid, become a Lien upon its property, unless, in each case, the 35 validity or amount thereof is being disputed in good faith, and the Borrower has maintained adequate reserves with respect thereto; (e) keep, and cause each of the Subsidiaries to keep, proper books of record and account, containing complete and accurate entries of all financial and business transactions of the Borrower and such Subsidiary; (f) continue to carry on, and cause each Principal Subsidiary to continue to carry on, substantially the same type of business as the Borrower or such Principal Subsidiary conducted as of the date hereof and business reasonably related thereto, except for changes in such business that result from the sale of Utilities Assets and the consummation of the Acquisitions; and (g) maintain or cause to be maintained insurance with financially sound and reputable insurers, or self-insurance, with respect to its properties and business and the properties and business of the Subsidiaries against loss or damage of the kinds customarily insured against by reputable companies in the same or similar businesses, such insurance to be of such types and in such amounts (with such deductible amounts) as is customary for such companies under similar circumstances; provided, however, that the foregoing shall not limit the right of the Borrower or any of its Subsidiaries to engage in any transaction not otherwise prohibited by Section 6.02, 6.03 or 6.04. SECTION 5.02. Financial Statements, Reports, etc. In the case of the Borrower, furnish to the Administrative Agent and each Lender: (a) as soon as available and in any event within 110 days after the end of each fiscal year, consolidated balance sheets and the related statements of income and cash flows of the Borrower and its Subsidiaries (the Borrower and its Subsidiaries being collectively referred to as the "Companies") as of the close of such fiscal year (which requirement shall be deemed satisfied by the delivery of the Borrower's Annual Report on Form 10-K (or any successor form) for such year), all audited by KPMG Peat Marwick or other independent public accountants of recognized national standing and accompanied by an opinion of such accountants to the effect that such consolidated financial statements fairly present in all material respects the financial condition and results of operations of the Companies on a consolidated basis in accordance with GAAP consistently applied; (b) within 65 days after the end of each of the first three fiscal quarters of each fiscal year, consolidated balance sheets and related statements of income and cash flows of the Companies as of the close of such fiscal quarter and the then elapsed portion of the fiscal year (which requirement shall be deemed satisfied by the delivery of the Borrower's Quarterly Report on Form 10-Q (or any successor form) for such quarter), each certified by a Financial Officer as fairly presenting the financial condition and results of operations of the Companies on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; 36 (c) promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Borrower's public shareholders, and copies of all registration statements (other than those on Form S-8) and Form 8-K's (to the extent that such Form 8-K's disclose actual or potential adverse developments with respect to the Borrower or any of its Subsidiaries that constitute, or could reasonably be anticipated to constitute, a Material Adverse Effect) filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange; (d) prompt notice of any reduction in the credit rating given to the Borrower by S&P or Moody's; (e) promptly after (i) the occurrence thereof, notice of any ERISA Termination Event or "prohibited transaction", as such term is defined in Section 4975 of the Code, with respect to any Plan that results, or could reasonably be anticipated to result, in a Material Adverse Effect, which notice shall specify the nature thereof and the Borrower's proposed response thereto, and (ii) actual knowledge thereof, copies of any notice of PBGC's intention to terminate or to have a trustee appointed to administer any Plan; and (f) promptly, from time to time, such other information, regarding its operations, business affairs and financial condition, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. Section 5.03. Litigation and Other Notices. Furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) proposed to be taken with respect thereto; (b) the filing or commencement of, or any threat or notice of intention of any Person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any Governmental Authority, against the Borrower or any of the Subsidiaries which is reasonably likely to be adversely determined and which, if adversely determined, could reasonably be anticipated to result in a Material Adverse Effect; (c) any development with respect to the Borrower or any Subsidiary that has resulted in, or could reasonably be anticipated to result in, a Material Adverse Effect; and (d) its receipt of any Net Cash Proceeds from the sale of any Utilities Assets. SECTION 5.04. Maintaining Records. Maintain all financial records in accordance with GAAP and, upon reasonable notice, permit any Lender to visit and inspect the financial records of the Borrower at reasonable times and as often as requested and to make extracts from and copies of such financial records, and permit any representatives designated by any Lender to discuss the affairs, finances and condition of the Borrower with the appropriate officers thereof and, with the Borrower's consent (which shall not be unreasonably withheld), the independent accountants therefor; provided, however, that if the Borrower shall so require, a single 37 representative shall be appointed by Lenders holding at least 50% of the aggregate outstanding principal balance of the Loans to exercise the rights granted under this Section 5.04. SECTION 5.05. Use of Proceeds. Use the proceeds of the Loans only for the purposes set forth in the preamble of this Agreement; provided, however, that no such proceeds shall be used directly or indirectly in connection with any Hostile Acquisition. ARTICLE VI NEGATIVE COVENANTS The Borrower covenants and agrees with each Lender and the Administrative Agent that, so long as this Agreement shall remain in effect or the principal of or interest on any Loan (or any portion thereof), or any other expenses or amounts payable hereunder, shall be unpaid, it will not: SECTION 6.01. Liens. Create, incur, assume, or suffer to exist, or permit any of the Principal Subsidiaries to create, incur, assume, or suffer to exist, any Lien on any of its property now owned or hereafter acquired to secure any Indebtedness of the Borrower or any such Principal Subsidiary, other than (a) Liens incurred or deposits made in the ordinary course of business to secure surety and appeal bonds, leases, return-of-money bonds and other similar obligations (exclusive of obligations of the payment of borrowed money); (b) Liens created under or in connection with the First Mortgage Bond Indentures or any other indentures governing the issuance of mortgage bonds by the Borrower; (c) pledges or deposits to secure the utility obligations of the Borrower incurred in the ordinary course of business; (d) Liens upon or in property now owned or hereafter acquired to secure Indebtedness incurred solely for the purpose of financing the acquisition, construction or improvement of any property, provided that such Indebtedness shall not exceed the fair market value of the property being acquired, constructed or improved; (e) Liens on the assets of any Principal Subsidiary to secure the repayment of project financing for such Principal Subsidiary; (f) Liens on the assets of any Person merged or consolidated with or into (in accordance with Section 6.04) the Borrower or any Principal Subsidiary that were in effect at the time of such merger or consolidation; and (g) Liens securing Indebtedness of the Borrower or of any Principal Subsidiary to the U.S. Rural Electrification Administration (or any successor agency) or to the U.S. Rural Telephone Bank (or any successor agency); provided, however, that the Borrower or any Principal Subsidiary may create, incur, assume or suffer to exist other Liens (in addition to Liens excepted by the foregoing clauses (a) through (g)) on its assets so long as the assets subject to such Liens do not represent in the aggregate more than 30% of the Borrower's Consolidated Tangible Assets. SECTION 6.02. Ownership of the Principal Subsidiaries. Sell, assign, pledge, or otherwise transfer or dispose of any shares of common stock, voting stock, or stock convertible into voting or common stock of any Principal Subsidiary except to another Subsidiary. SECTION 6.03. Asset Sales. Permit any Principal Subsidiary to sell, assign, or otherwise dispose of assets (whether in one transaction or a series of transactions), if after giving effect to such transaction, such Principal Subsidiary will have disposed of, in the aggregate, assets representing more than 25% of such Principal Subsidiary's aggregate Consolidated 38 Tangible Assets as of the date upon which such Principal Subsidiary first became a Principal Subsidiary; provided that (i) any Principal Subsidiary may transfer assets representing up to 100% of such Principal Subsidiary's Consolidated Tangible Assets to any other Subsidiary or to the Borrower, and (ii) any Subsidiary may dispose of its Utilities Assets. SECTION 6.04. Mergers. Merge or consolidate with, or sell, assign, lease, or otherwise dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired), except for Utilities Assets, to any Person, or permit any Principal Subsidiary to do so, except that any Subsidiary may merge into or, subject to Section 6.03, transfer assets to the Borrower or any other Subsidiary and the Borrower may merge with any Person; provided that, immediately thereafter and after giving effect thereto, no event shall occur or be continuing which constitutes an Event of Default or a Default and, in the case of any such merger to which the Borrower is a party, either the Borrower is the surviving corporation or the surviving entity (if not the Borrower) has a consolidated net worth (as determined in accordance with GAAP) immediately subsequent to such merger at least equal to the Consolidated Net Worth of the Borrower immediately prior to such merger and expressly assumes the obligations of the Borrower hereunder; provided, however, that, notwithstanding the foregoing, the Borrower and any of the Principal Subsidiaries may sell assets in the ordinary course of its business and may sell or otherwise dispose of worn out or obsolete equipment on a basis consistent with good business practices. SECTION 6.05. Restrictions on Dividends. Enter into or permit any Principal Subsidiary to enter into, any contract or agreement (other than with a governmental regulatory authority having jurisdiction over the Borrower or such Principal Subsidiary) restricting the ability of such Principal Subsidiary to pay dividends or make distributions to the Borrower in any manner that would impair the ability of the Borrower to meet its present and future obligations hereunder. The Secretary of the Borrower or another officer of the Borrower satisfactory to the Administrative Agent shall, prior to entry into any contract or agreement that could restrict the ability of any Principal Subsidiary to pay dividends or make distributions to the Borrower, deliver to the Lenders a certificate certifying (a) to the absence of any Event of Default or Default after giving effect to the entry by such Principal Subsidiary into such contract or agreement, and (b) that such contract or agreement will not impair the ability of the Borrower to meet its present and future obligations hereunder. SECTION 6.06. Transactions with Affiliates. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that as long as no Default or Event of Default shall have occurred and be continuing, the Borrower or any Subsidiary may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties or as otherwise may be required by any Federal or state Governmental Authority. SECTION 6.07. Minimum Consolidated Net Worth. Permit its Consolidated Net Worth at any time to be less than $1,500,000,000. 39 ARTICLE VII EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with this Agreement or the Borrowings hereunder, or any representation, warranty, statement, or information contained in any written report, certificate, financial statement, or other instrument furnished in connection with or pursuant to this Agreement, shall prove to have been false or misleading in any material respect when so made, deemed made, or furnished; (b) default shall be made in the payment of any principal of any Loan (or any portion thereof) when and as the same shall become due and payable, whether at the due date thereof or at a date fixed or for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan (or any portion thereof) or any Fee or any other amount (other than an amount referred to in (b) above) due hereunder, when and as the same shall become due and payable, and such default shall continue unremedied for a period of five Business Days; (d) default shall be made in the due observance or performance of any covenant, condition, or agreement contained in Section 5.01(f) or Section 5.05 or in Article VI; (e) default shall be made in the due observance or performance of any covenant, condition, or agreement contained herein (other than those specified in (b), (c), or (d) above) or in the Fee Letter and such default shall continue unremedied for a period of 30 days after the earlier to occur of (i) the Borrower obtaining knowledge thereof and (ii) the date that written notice thereof shall have been given to the Borrower by the Administrative Agent or any Lender; (f) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Borrower or any Principal Subsidiary, or of a substantial part of the property or assets of the Borrower or a Principal Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership, or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator, or similar official for the Borrower or any Principal Subsidiary or for a substantial part of the property or assets of the Borrower or a Principal Subsidiary, or (iii) the winding-up or liquidation of the Borrower or any Principal Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (g) the Borrower or any Principal Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership, or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (f) above, (iii) apply 40 for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator, or similar official for the Borrower or any Principal Subsidiary or for a substantial part of the property or assets of the Borrower or any Principal Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability, or fail generally to pay its debts as they become due, or (vii) take any action for the purpose of effecting any of the foregoing; (h) the Borrower or any Principal Subsidiary, as the case may be, fails to pay when due, or within any grace period applicable thereto by the terms thereof, any other Indebtedness of the Borrower or any Principal Subsidiary aggregating $50,000,000 or more; (i) the Borrower or any Principal Subsidiary shall fail to observe or perform any covenant or agreement contained in any single agreement or instrument relating to any Indebtedness in excess of (i) $75,000,000 in the aggregate, with respect to any Indebtedness issued on a tax-exempt basis, and (ii) $50,000,000 in the aggregate, with respect to all other Indebtedness, in each case within any applicable grace period, or any other event shall occur if the effect of such failure or other event is to accelerate, or to permit the holder of such Indebtedness or any other Person to accelerate, the maturity of such Indebtedness; or any such Indebtedness shall be required to be prepaid (other than by a regularly scheduled required prepayment or the exercise by the Borrower or such Principal Subsidiary of its right to make a voluntary prepayment) in whole or in part prior to its stated maturity; (j) a judgment or order for the payment of money in excess of $50,000,000 and having a Material Adverse Effect shall be rendered against the Borrower or any of the Subsidiaries and such judgment or order shall continue unsatisfied (in the case of a money judgment) and in effect for a period of 30 days during which execution shall not be effectively stayed or deferred (whether by action of a court, by agreement, or otherwise); (k) a Plan shall fail to maintain the minimum funding standard required by Section 412(a) of the Code for any plan year or a waiver of such standard is sought or granted under Section 412(d), or a Plan is or shall have been terminated or the subject of termination proceedings under ERISA, or the Borrower or an ERISA Affiliate has incurred a liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and there shall result from any such event or events a Material Adverse Effect; and (l) there shall have occurred a Change in Control; then, and in every such event (other than an event with respect to the Borrower described in paragraph (f) or (g) above), and at any time thereafter during the continuance of such event, the Administrative Agent, at the request of the Required Lenders, shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall become forthwith due and payable, without presentment, 41 demand, protest, or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding; and in any event with respect to the Borrower described in paragraph (f) or (g) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest, or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein to the contrary notwithstanding. ARTICLE VIII THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, The Chase Manhattan Bank is hereby appointed to act as Administrative Agent on behalf of the Lenders. Each of the Lenders, and each Transferee by its agreement to be bound hereby, irrevocably authorizes the Administrative Agent to take such actions on behalf of such Lender or Transferee and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to promptly give notice on behalf of each of the Lenders to the Borrower of any Event of Default specified in this Agreement of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrower pursuant to this Agreement as received by the Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall be liable as such for any action taken or omitted by any of them, except for its or his own gross negligence or willful misconduct, or be responsible for any statement, warranty, or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower of any of the terms, conditions, covenants, or agreements contained herein. The Administrative Agent shall not be responsible to the Lenders or any Transferee for the due execution, genuineness, validity, enforceability, or effectiveness of this Agreement or any other instruments or agreements. The Administrative Agent may deem and treat each Lender party hereto as a "Lender" hereunder and for all purposes hereof until it shall have received notice, given as provided herein, of the assignment of all of such Lender's rights and obligations hereunder. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders and each Transferee. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the 42 proper Person or persons. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall have any responsibility to the Borrower on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or the Borrower of any of their respective obligations hereunder or in connection herewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor administrative agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Borrower shall have the right to appoint a successor, provided that any successor selected by the Borrower must be approved by all of the Lenders. If no successor shall have been so appointed by the Borrower and shall have accepted such appointment within 20 Business Days after the retiring Administrative Agent gives notice of its resignation, then the Required Lenders shall have the right to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 Business Days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor administrative agent which shall be a bank with an office in New York, New York, having a combined capital and surplus of at least $1,000,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and the Administrative Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent. Each Lender agrees (i) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder or, if the Commitments shall have terminated, based on its outstanding Standby Loans hereunder) of any expenses incurred for the benefit of the Lenders by the Administrative Agent, including reasonable counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, 43 which shall not have been reimbursed by the Borrower, and (ii) to indemnify and hold harmless the Administrative Agent and any of its directors, officers, employees, or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, cost, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it in its capacity as the Administrative Agent or any of them in any way relating to or arising out of this Agreement or any action taken or omitted by it or any of them under this Agreement, to the extent the same shall not have been indemnified by the Borrower; provided that no Lender shall be liable to the Administrative Agent 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 the Administrative Agent or any of its directors, officers, employees, or agents. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. None of the Lenders identified on the facing page or signature pages of this Agreement as a "co-agent" or "documentation agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Without limiting the foregoing, none of the Lenders so identified as a "co-agent" or "documentation agent" shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by the method, if any, specified in the relevant provisions of this Agreement and otherwise by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to the Borrower, to it at 3 High Ridge Park, Stamford, Connecticut 06905, Attention of Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer (Telecopy No. 203-614-4625); (b) if to the Administrative Agent, to it at One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Janet Belden (Telecopy No. 212-552-5658), with a copy to Paul V. Farrell, The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017 (Telecopy No. 212-270-4392); and 44 (c) if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy, or on the date five Business Days after dispatch by certified or registered mail, if mailed, in each case delivered, sent, or mailed (properly addressed) to such party as provided in this Section 9.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.01 SECTION 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement is outstanding and unpaid or so long as the Commitments have not been terminated. SECTION 9.03. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Administrative Agent and when the Administrative Agent shall have received copies hereof which, when taken together, bear the signatures of each Lender, and thereafter shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior consent of all the Lenders. Section 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns, of such party; and all covenants, promises and agreements by or on behalf of the Borrower, the Administrative Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it; provided, however, that (i) except in the case of an assignment to a Lender or an Affiliate of such Lender, or an assignment to a Federal Reserve Bank, the Borrower and the Administrative Agent must give their prior written consent to such assignment, which consent shall not be unreasonably withheld, provided, further, however, that the consent of the Borrower to any such assignment shall not be required at any time an Event of Default shall have occurred and be continuing, (ii) each such assignment shall be of a constant, and not a varying, percentage of all the assigning Lender's rights or obligations under this Agreement, (iii) the amount of the Commitment or Loans of the assigning Lender subject to any such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 and the amount of the 45 Commitment or Loans of such Lender remaining after such assignment shall not be less than $5,000,000 or shall be zero, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Subject to payment in full by the assignee to the assignor and upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any Fees accrued for its account hereunder and not yet paid)). Notwithstanding the foregoing, any Lender assigning its rights and obligations under this Agreement may retain any Competitive Loans made by it outstanding at such time, and in such case shall retain its rights hereunder in respect of any Loans so retained until such Loans have been repaid in full in accordance with this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, and the outstanding balances of its Standby Loans and Competitive Loans (to the extent assigned), in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties, or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency, or value of this Agreement or any other instrument or document furnished pursuant hereto or the financial condition of the Borrower or any Subsidiary or the performance or observance by the Borrower or any Subsidiary of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.02 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender, or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) 46 such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The Administrative Agent shall also record in the Register the then scheduled Termination Date and shall update the Register from time to time upon any change in a Lender's Commitment and Loans pursuant to the terms of this Agreement. The entries in the Register shall be conclusive in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, together with an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and, if required, the written consent of the Borrower and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register, (iii) give prompt notice thereof to the Lenders and (iv) send a copy of such Assignment and Acceptance to the Borrower. (f) Each Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if they were Lenders and (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrower relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications, or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans, or changing or extending the Commitments). (g) Any Lender may, in connection with any assignment or proposed assignment pursuant to this Section 9.04, disclose to the assignee or proposed assignee any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure of information designated by the Borrower as confidential, each such 47 assignee or proposed assignee shall execute an agreement whereby such assignee shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information. It is understood that confidential information relating to the Borrower would not ordinarily be provided in connection with assignments of Competitive Loans. No Lender may, in connection with any participation or proposed participation pursuant to this Section 9.04, disclose to any participant or proposed participant any confidential information relating to the Borrower without the prior written consent of the Borrower. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such assignment shall release a Lender from any of its obligations hereunder. (i) The Borrower shall not assign or delegate any of its rights or duties hereunder. SECTION 9.05. Expenses; Indemnity. (a) The Borrower agrees to pay (i) all reasonable legal fees and disbursements incurred by the Administrative Agent in connection with the preparation of this Agreement and (ii) all out-of-pocket expenses (including reasonable fees and disbursements of counsel) incurred by the Administrative Agent and any Lender in connection with any amendments, modifications or waivers of the provisions hereof or thereof or incurred by the Administrative Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement. (b) The Borrower agrees to indemnify the Administrative Agent, each Lender and each of their respective directors, officers, employees, Affiliates and agents (each such Person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against any Indemnitee arising out of, (i) the use of the proceeds of the Loans or (ii) any claim, litigation, investigation, or proceeding relating to this Agreement, the use of such proceeds or the transactions contemplated hereby, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities, or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the negligence or willful misconduct of such Indemnitee. Each Lender shall notify the Borrower promptly after it determines that it will make a claim for indemnification under this Section 9.05(b). The Borrower shall be entitled to participate in the defense of the litigation, investigation, or proceeding giving rise to such claim with counsel satisfactory to the Lender, in the exercise of its reasonable judgment; provided, however, that any such participation in such defense shall be conducted by the Borrower and at the Borrower's expense and in a manner considered by such Lender to be satisfactory and effective to protect against such claim without causing damage to the conduct of, or affecting such Lender's control of, such Lender's defense. The Borrower shall inform such Lender of its intention to participate in the defense of such claim within 15 days after receipt of notice thereof from such Lender. (c) The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any 48 of the Loans, the invalidity or unenforceability of any term or provision of this Agreement, or any investigation made by or on behalf of the Administrative Agent or any Lender. All amounts due under this Section 9.05 shall be payable on written demand therefor. SECTION 9.06. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.07. Applicable Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 9.08. Waivers; Amendment. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended, or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on, any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender, (ii) change or extend the Commitment or decrease or extend any scheduled payment date for the Facility Fees of any Lender without the prior written consent of such Lender, or (iii) amend or modify the provisions of Section 2.16, the provisions of this Section or the definition of "Required Lenders", without the prior written consent of each Lender; provided further that no such agreement shall amend, modify, or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Each Lender shall be bound by any waiver, amendment, or modification authorized by this Section, and any consent by any Lender pursuant to this Section shall bind any Transferee of its rights and obligations hereunder. 49 SECTION 9.09. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the applicable interest rate, together with all fees and charges which are treated as interest under applicable law (collectively, the "Charges"), as provided for herein or in any other document executed in connection herewith, or otherwise contracted for, charged, received, taken, or reserved by any Lender, shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received, or reserved by such Lender in accordance with applicable law, the rate of interest payable to such Lender, together with all Charges payable to such Lender, shall be limited to the Maximum Rate. SECTION 9.10. Entire Agreement. This Agreement and the Fee Letter constitute the entire contract between the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the Fee Letter. Nothing in this Agreement or the Fee Letter, expressed or implied, is intended to confer upon any party other than the parties hereto and thereto any rights, remedies, obligations, or liabilities under or by reason of this Agreement or the Fee Letter. SECTION 9.11. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER, OR IN CONNECTION WITH THIS AGREEMENT OR THE FEE LETTER. EACH PARTY HERETO (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT, OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, AND (b) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND, IF APPLICABLE, THE FEE LETTER, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11. SECTION 9.12. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal, or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal, or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal, or unenforceable provisions. SECTION 9.13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 9.03. SECTION 9.14. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. 50 SECTION 9.15. Jurisdiction; Consent to Service of Process. (a) The Borrower hereby irrevocably and unconditionally submits to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the Fee Letter, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (b) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action, or proceeding arising out of or relating to this Agreement in any New York State court or Federal court of the United States of America sitting in New York City. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. [Signature pages follow] S-1 IN WITNESS WHEREOF, the Borrower, the Administrative Agent and the Lenders have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CITIZENS UTILITIES COMPANY By: ________________________________________ Robert J. DeSantis Chief Financial Officer, Vice President and Treasurer THE CHASE MANHATTAN BANK, as Administrative Agent By: ________________________________________ Name: Title: S-2 Lenders: THE CHASE MANHATTAN BANK By: ________________________________________ Name: Title: EX-10.25 6 ASSET PURCHASE AGREEMENTS WITH GTE ================================================================================ ASSET PURCHASE AGREEMENT Between GTE CALIFORNIA INCORPORATED and CITIZENS UTILITIES COMPANY May 27, 1999 ================================================================================ TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Terms............................................................1 1.2 Interpretation..................................................10 ARTICLE 2 PURCHASE AND SALE OF ASSETS.....................................10 2.1 Purchase and Sale of Assets.....................................10 2.2 Purchased Property..............................................10 2.3 Excluded Property...............................................11 2.4 Assumption of Liabilities.......................................11 2.5 No Assignment Without Consent...................................14 ARTICLE 3 PURCHASE PRICE..................................................14 3.1 Purchase Price..................................................14 3.2 Closing Date Estimate...........................................15 3.3 Closing Date Statement..........................................15 3.4 Access Line Adjustment Amount...................................16 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS..................16 4.1 State Regulatory Approval.......................................16 4.2 Debtholder Consents.............................................17 4.3 Landlord and Other Consents.....................................17 4.4 FCC Consents....................................................17 4.5 HSR Act Review..................................................17 4.6 GTE/Bell Atlantic Merger.......................................18 ARTICLE 5 PRE-CLOSING COVENANTS...........................................18 5.1 Investigation by Buyer..........................................18 5.2 Operation of the Business in the Ordinary Course................18 5.3 Satisfaction of Conditions......................................20 5.4 Approvals.......................................................20 5.5 Audit or Review of Financial Statements.........................20 5.6 Cooperation with Respect to Like-Kind Exchange..................21 5.7 Interconnection Agreements......................................21 -i- 5.8 Leased Vehicles; Capital Leases.................................21 5.9 Delivery of Interim Information.................................21 ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING.............................22 6.1 Conditions Precedent to Obligations of Buyer....................22 6.2 Conditions Precedent to Obligations of Seller...................23 ARTICLE 7 THE CLOSING.....................................................23 7.1 The Closing.....................................................23 7.2 Seller's Obligations at Closing.................................24 7.3 Buyer's Obligations at Closing..................................24 ARTICLE 8 REPRESENTATIONS AND WARRANTIES..................................25 8.1 Representations and Warranties of Seller........................25 8.2 Representations and Warranties of Buyer.........................35 ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS...............................37 9.1 Transition Services Agreement...................................37 9.2 Optional Services Agreement.....................................37 9.3 Directory Publishing............................................37 9.4 GTE Supply Relationship.........................................38 ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES.............................38 10.1 Intellectual Property...........................................38 10.2 Effect of Due Diligence and Related Matters.....................40 10.3 Confidentiality.................................................41 10.4 Further Assurances..............................................41 10.5 Prorations......................................................41 10.6 Cost Studies/NECA Matters.......................................42 10.7 Customer Deposits...............................................42 10.8 Access to Books and Records.....................................42 10.9 Purchase Price Allocation.......................................43 10.10 Owned Real Property Transfers...................................43 10.11 Transaction Taxes...............................................44 -ii- 10.12 Bulk Sales Laws.................................................45 10.13 Prepaid Non-Regulated Maintenance Agreements....................45 10.14 Vehicle Registration............................................45 10.15 Carrier Access Billing and Accounts Receivable Transition.......45 10.16 End-User Billing and Accounts Receivable Transition.............45 ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS..................................46 11.1 Employment of Transferred Employees.............................46 11.2 Transferred Employee Benefit Matters............................48 11.3 Miscellaneous Benefits..........................................60 11.4 Employee Rights.................................................61 11.5 WARN Act Requirements...........................................61 11.6 Indemnification.................................................61 ARTICLE 12 INDEMNIFICATION.................................................62 12.1 Survival of Representations.....................................62 12.2 Indemnification.................................................63 12.3 Limitations on Liability........................................64 12.4 Defense of Claims...............................................65 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action ...............................................67 ARTICLE 13 TERMINATION.....................................................67 13.1 Termination Rights..............................................67 13.2 Goodfaith Performance...........................................67 13.3 Effect of Termination...........................................67 ARTICLE 14 MISCELLANEOUS...................................................68 14.1 Notices.........................................................68 14.2 Information Releases............................................69 14.3 Expenses........................................................70 14.4 Successors and Assigns..........................................70 14.5 Amendments......................................................70 14.6 Captions........................................................70 -iii- 14.7 Entire Agreement................................................70 14.8 Waiver..........................................................70 14.9 Third Parties...................................................71 14.10 Counterparts....................................................71 14.11 Governing Law...................................................71 14.12 Further Assurances..............................................71 14.13 Severability....................................................71 14.14 Representation by Counsel; Interpretation.......................72 -iv- INDEX OF SCHEDULES Schedule* Title 1.1-A Assigned Contracts 1.1-B Excluded Contracts 1.1-C Purchased Exchanges 1.1-D License Agreement 2.3(g) Other Excluded Property 4.4 FCC Consents / Waivers 5.2.1 Operation of the Business 5.2.2(c) Material Increase to Transferred Employee Benefits 5.2.2(d) Dispositions 6.1.1 Seller's Closing Certificate 6.2.1 Buyer's Closing Certificate 7.2(a) Bill of Sale and Assignment and Assumption Agreement 7.2(b) Legal Opinion of Seller's Counsel 7.2(g) Affidavit as to Status of Foreign Person 7.3(c) Legal Opinion of Buyer's Counsel 8.1.4 Violation of Law 8.1.7(a) Owned Real Property 8.1.7(b) Bondholders 8.1.8 Real Property Leases 8.1.9 Notices of Violations of Building / Zoning Ordinances 8.1.10 Material Adverse Changes 8.1.11(a-j) Material Contracts 8.1.13 Exceptions to Tax Return Filings 8.1.14 State and Federal Claims/Suits 8.1.15(a) Tariff Proceedings 8.1.15(b) FCC Licenses 8.1.16(a) Employee Matters - Seller Employee Benefit Plans 8.1.16(b) Employee Matters - Seller Material Liabilities under ERISA 8.1.16(c) Employee Matters - Seller ERISA Plans - Compliance 8.1.16(d) Employee Matters - Seller Multiemployer Plans 8.1.16(e) Employee Matters - Seller Union Representation 8.1.17 Telephone Plant 8.1.18 Real Property Interests List 8.1.19 Exceptions to Compliance with Existing Environmental Requirements 8.1.20 Environmental Permits 8.1.21(a-c) Financial Statements 8.1.23 Native American Authorizations 8.1.24 Loss of Major Customer 9.1 Transition Services Agreement 9.2 Optional Services Agreement 9.3.1 Directory Publishing Agreements 9.3.2 Co-Bound Directory Agreements 11.1.2 Employees and Employee Matters - Employment Agreement Obligation Exceptions 11.3.1 Employees and Employee Matters - Vacation * The Schedule numbers refer to the appropriate Section within the Agreement. ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the 27th day of May, 1999, by and between Citizens Utilities Company, a Delaware corporation ("Buyer"), and GTE California Incorporated, a California corporation ("Seller"). RECITALS WHEREAS, Seller is in the business of providing regulated local exchange telephone service in certain areas of the states of California and Arizona; and WHEREAS, Seller desires to sell, convey, assign, transfer and deliver to Buyer, and Buyer desires to purchase and accept from Seller, certain of its telephone properties and related assets used in the provision of such service, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS 1.1 Terms. For purposes of this Agreement and any amendment hereto, the following terms are defined as set out below or in the Section referenced below: "Access Line Adjustment Amount" is defined in Section 3.4. "Accounts Receivable Settlement Statement" is defined in Section 10.16(b). "Accounts Payable" means accounts payable owed by Seller arising primarily from the operation of the Business. "Active Employees" is defined in Section 11.1. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Allocation" is defined in Section 10.9. "Ancillary Documents" means the Transition Services Agreement, the Optional Services Agreement, the License Agreement, and the Bill of Sale and Assignment and Assumption Agreement. "Assigned Contracts" means Contracts to which Seller or any of its Affiliates is a party (i) which relate primarily to the operation of the Business, other than the Excluded 1 Contracts, Real Property Interests, Real Property Leases and Third Party Intellectual Property Contracts, and (ii) any other contract to which Seller is a party and is listed on Schedule 1.1-A. "Assigned Permits" means, to the extent assignable, all permits, licenses, franchises, approvals and authorizations of Seller or any of its Affiliates issued or granted by any Governmental Authority that relate primarily to the operation of the Business, other than the FCC Licenses and the Excluded Permits. "Assumed Liabilities" is defined in Section 2.4.1 "Automated Assets" is defined in Section 8.1.22(c). "Bargained Welfare Plans" is defined in Section 11.2.3(a). "BIA" is defined in Section 8.1.23. "Base Purchase Price" is defined in Section 3.1. "Bill of Sale and Assignment and Assumption Agreement" is defined in Section 7.2(a). "Bondholders" means the Persons listed on Schedule 8.1.7(b). "Business" means the business of providing in the geographic area comprising the Purchased Exchanges (i) local exchange, exchange access and intra-LATA toll telecommunications services to end users, (ii) exchange access telecommunications services to interexchange carriers and other local exchange carriers, (iii) retail sales of telephone equipment and products, and (iv) non-tariffed public communications (pay telephones), commercial telecommunications services facilities leasing and other non-regulated services and products. "Buyer Pension" is defined in Section 11.2.1(c)(iii)(b). "Buyer Pension Plan" and "Buyer Pension Plans" are defined in Section 11.2.1(b). "Buyer Savings Plan" and "Buyer Savings Plans" are defined in Section 11.2.2(b). "Buyer Welfare Plans" is defined in Section 11.2.3(a). "Buyer's Actuary" is defined in Section 11.2.1(d)(ii). "Buyer's Closing Certificate" is defined in Section 6.2.1. "Calendar-Related" is defined in Section 8.1.22(c). "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. 2 "Closing" is defined in Section 7.1. "Closing Date" is defined in Section 7.1. "Closing Date Access Line Count" is defined in Section 3.4. "Closing Date Amount" is defined in Section 3.2(b) "Closing Date Statement" is defined in Section 3.3 "Confidentiality Agreement" means the Confidentiality Agreement dated as of November 20, 1998, among Buyer, Seller and certain Affiliates of Seller. "Construction Advances" means advances collected by Seller or any Affiliate for the future performance of non-regulated construction in the Purchased Exchanges. "Contracts" means all contracts, leases, indentures, agreements, and other legally binding arrangements. "Customer Advances" means amounts arising from the operation of the Business that have been billed and collected by Seller as of the Closing Date but that are unearned because they relate to the provision of service after the Closing Date. "Customer Deposits" is defined in Section 10.7. "Date Data" is defined in Section 8.1.22(c). "December 1998 Access Line Count" is defined in Section 3.4 and shall be 45,568. "Direct Claim" is defined in Section 12.4(b). "Due Diligence Documents" means those documents contained in the fifteen (15) volumes of information delivered to Buyer in connection with its review of the Purchased Property. "Earned End-User Accounts Receivable" means accounts receivable arising primarily from the operation of the Business that have been earned by Seller's provision of service on or before the Closing Date excluding amounts billed through the carrier access billing system to interexchange carriers. "Earned End-User Accounts Receivable Amount" means the aggregate amount of all Earned Unbilled Accounts Receivable as of the Closing Date, less a discount for anticipated uncollectible Earned End-User Accounts Receivable in an amount equal to the Uncollectible Factor multiplied by Earned End-User Accounts Receivable as of the Closing Date. "Employment Agreements" is defined in Section 8.1.16(a). 3 "Environmental Requirements" means all federal, state, interstate and local government or agency Laws relating to pollution or protection of human health and safety or the environment (including, without limitation, air, surface water, ground water, land surface and subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Regulated Materials; or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of Regulated Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Plans" is defined in Section 8.1.16(a). "Estimated Access Line Adjustment Amount" is defined in Section 3.2(a). "Estimated Non-Regulated Construction Work in Process Amount" is defined in Section 3.2(a). "Estimated Regulatory Obligation Amount" is defined in Section 3.2(a). "Evaluation Material" is defined in the first paragraph of the Confidentiality Agreement. "Excluded Contracts" means (i) all billing and collection agreements, interconnection agreements, national account agreements, billing media agreements, vehicle leasing agreements, capital leases, Contracts between Seller and Affiliates of Seller, except to the extent expressly listed on Schedule 1.1-A, and (ii) such other agreements as are listed on Schedule 1.1-B. "Excluded Marks" means all trademarks, applications for trademark registration, service marks, applications for service mark registration, trade names, domain names and related registrations owned by Seller or an Affiliate of Seller, or licensed to Seller or an Affiliate of Seller by any Person, and any derivations of the foregoing. "Excluded Permits" means the permits, licenses, franchises, approvals and authorizations of Seller or any Affiliates by Governmental Authorities that relate to the Excluded Property. "Excluded Property" is defined in Section 2.3. "Executive Officer" of an entity means (i) in the case of Seller, the regional president of the region that includes the Purchased Exchanges, the general manager of infrastructure provisioning for the Purchased Exchanges and the general manager of customer operations for the Purchased Exchanges, and (ii) the case of Buyer, the executive officer(s) in charge of the transactions contemplated by this Agreement. 4 "Existing Environmental Requirements" means those applicable provisions of any Environmental Requirements that are both in effect and required to be met by Seller prior to the Closing Date. "Expiration Date" is defined in Section 12.1(a). "FCC" means the Federal Communications Commission. "FCC Consents" is defined in Section 4.4. "FCC Licenses" means all licenses, certificates, permits or other authorizations granted to Seller or any Affiliates by the FCC that are used primarily in the operation of the Business. "Financial Statements" is defined in Section 8.1.21. "Final Order" shall mean action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority of the action is pending, no such stay is in effect, and if any deadline for any such request is designated by statute or regulation, such deadline is passed; (ii) no petition for rehearing or reconsideration of the action is pending before any Governmental Authority, and the time for filing any such petition has passed; (iii) the Governmental Authority does not have the action under reconsideration or its own motion and the time for such reconsideration has passed; and (iv) no appeal to a court, or request to stay by a court, of the Governmental Authority's action is pending or in effect and, if any deadline of filing any such appeal or request is designated by statute or rule, it has passed. "FRP" is defined in Section 11.2.3(f). "Future Capital Expenditure Obligations" is defined in Section 2.4.1(h). "Future Regulatory Obligations" is defined in Section 2.4.1(g). "GAAP" means United States generally accepted accounting principles. "GATT Grandfathered Participant" is defined in Section 11.2.1(c)(ii)(c). "Governmental Authority" means any court or any federal, state or foreign governmental, legislative or regulatory body, agency, department, authority or instrumentality. "GTE West Coast Agreement" is defined in Section 6.2.6. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnifiable Losses" is defined in Section 12.3(a). "Indemnification Payment" is defined in Section 12.3(a). 5 "Indemnifying Party" is defined in Section 12.3(a). "Indemnitee" is defined in Section 12.3(a). "Intellectual Property" means all inventions (whether patentable or not and whether or not such inventions are described or claimed in any patent or patent application), designs (useful or ornamental), and works subject to copyright protection, invention disclosures, specifications, manuals, drawings, functional or system block diagrams, flow charts, circuit diagrams, design or user documentation, engineering notebooks, schematics, test programs, documented procedures, documented processes, documented flows, devices, software (in any form), or firmware, and all intellectual property rights therein or based thereon, including patents, patent applications (including continuations, continuations-in-part, divisions, reissues), reexamined patents and extensions thereof, copyrights (whether registered or unregistered), and trade secrets. "Interim Capital Expenditure Obligations" is defined in Section 2.4.1(h). "IRC" means the Internal Revenue Code of 1986, as amended. "IRS" means the Internal Revenue Service. "Law" or "Laws" means any statute, rule, regulation, ordinance, judgment, order or decree of any Governmental Authority. "Leased Real Property" means the real property leased to Seller or its Affiliates under the Real Property Leases. "License Agreement" means the license agreement attached hereto as Schedule 1.1-D pursuant to which Seller grants to Buyer certain rights and licenses under Licensed Intellectual Property. "Licensed Intellectual Property" means Intellectual Property owned by Seller or its Affiliates, and Third Party Intellectual Property licensed to Seller or its Affiliates which Seller or its Affiliates can sublicense to Buyer without the payment of compensation or other consideration to any Person, and which Intellectual Property and Third Party Intellectual Property are required for the use or maintenance (to the extent not provided by the owner or licensor of the Third Party Intellectual Property) of or are included in or with the Purchased Property in the operation of the Business as of the Closing; provided that Licensed Intellectual Property shall at all times be Excluded Property. "Lien" means any lien, charge, pledge, option, mortgage, security interest or other encumbrance. "Material Adverse Effect" means a materially adverse effect on the Business or the Purchased Property, taken as a whole, other than effects relating to or arising from (i) the execution of this Agreement, (ii) the United States economy generally or the states of California or Arizona in particular, or (iii) events or circumstances that affect the Business in the same manner and to the same extent as other businesses in the industry generally. 6 "Material and Supply Inventory" is defined in the FCC's Part 32 Uniform System of Accounts. "Material Contracts" is defined in Section 8.1.11. "Material Permits" is defined in Section 8.1.15(b). "Merger" means the proposed merger involving GTE Corporation and Bell Atlantic Corporation and their respective Subsidiaries. "Native American Authorizations" is defined in Section 8.1.23. "Non-Regulated Construction Work in Process Amount" means the total amount expended but not yet billed by Seller for non-regulated construction work not completed prior to the Closing Date, minus any Construction Advances outstanding as of the Closing Date. The Non-Regulated Construction Work in Process Amount shall be billable by Buyer to third parties after the Closing Date under open customer orders or other agreements. "Non-Union Welfare Plans" is defined in Section 11.2.3(a). "Optional Services Agreement" is defined in Section 9.2. "Owned Real Property" means the real property owned in fee by Seller or its Affiliates and used primarily in the operation of the Business, including all land, buildings, structures, appurtenances and improvements located thereon. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Assets" is defined in Section 11.2.1(d)(i). "Periodic Taxes" is defined in Section 10.5. "Permitted Encumbrances" means (i) liens for current taxes and assessments not yet delinquent, or the amount or validity of which is being contested in good faith by appropriate proceedings during which collection or enforcement against the relevant property is stayed, (ii) standard utility easements, and covenants, conditions and restrictions of record that do not individually or in the aggregate materially interfere with the operation of the present Business on, or materially detract from the value of, the Owned Real Property affected thereby, (iii) mechanics', carriers', workers', repairers' and other statutory liens, (iv) existing zoning or similar laws or ordinances that do not interfere with the operation of the Business, (v) leases otherwise disclosed herein, and (vi) any other Liens and, in the case of Owned Real Property, any title defects or exceptions, that do not materially interfere with the operations of the Purchased Property in a manner consistent with the current use by Seller or that do not materially detract from the value of, or materially impair the marketability of, the Purchased Property affected. "Person" means an individual, corporation, partnership, trust, association, limited liability company or similar entity or organization. 7 "Plans" is defined in Section 8.1.16(a). "Pole Attachment Agreement" is defined in Section 8.1.11(j). "Proration Periods" is defined in Section 10.5. "PUC" is defined in Section 4.1. "PUC Permits" is defined in Section 8.1.15(b). "Purchase Price" is defined in Section 3.3(c). "Purchased Exchanges" means the telephone exchanges listed in Schedule 1.1-C and any cross-border community served from any such exchange. "Purchased Property" is defined in Section 2.2. "Real Property Interests" means all easements, rights of way, licenses or other interests in real property of Seller or its Affiliates that are used primarily in the operation of the Business, other than Owned Real Property or Leased Real Property. "Real Property Leases" means the Leases set forth on Schedule 8.1.8. "Regulated Material" means (i) any "hazardous substance" as defined in CERCLA, (ii) any petroleum or petroleum substance, and (iii) any other pollutant, waste, contaminant, or other substance regulated under Environmental Requirements. "Regulatory Approvals" is defined in Section 4.1. "Regulatory Obligation Amount" is defined in Section 3.1. "Retained Books and Records" means, collectively, all corporate records and stock books of Seller and its Affiliates, the general ledger, all records required by Law to be retained by Seller and all books and records relating to (i) Tax Returns and Tax records, (ii) Excluded Property, (iii) attorney work product, and (iv) the Retained Liabilities. "Retained Future Regulatory Obligations" is defined in Section 2.4.1(g). "Retained Liabilities" is defined in Section 2.4.2. "SEC Financial Statements" is defined in Section 5.5. "Seller Hourly Pension Plan" is defined in Section 11.2.1(a)(ii). "Seller Pension" is defined in Section 11.2.1(c)(iii)(b). "Seller Pension Plan" and "Seller Pension Plans" are defined in Section 11.2.1(a)(ii). 8 "Seller Salaried Pension Plan" is defined in Section 11.2.1(a)(i). "Seller Savings Plans" are defined in Section 11.2.2(a). "Seller Welfare Plans" is defined in Section 11.2.3(a). "Seller's Actuary" is defined in Section 11.2.1(d)(ii). "Seller's Closing Certificate" is defined in Section 6.1.1. "Switch Software" shall mean software currently used by Seller to operate telecommunications switching equipment that is part of the Telephone Plant. "System Date" is defined in Section 8.1.22(c). "Tax Returns" means a report, return or other information statement required to be supplied to or filed with a Governmental Authority with respect to Taxes. "Tax(es)" means any foreign, federal, state, county or local income, sales, use, transfer, excise, franchise, stamp duty, custom duty, real and personal property, gross receipt, capital stock, business and occupation, disability, employment, payroll, recording, ad valorem, unemployment compensation, profits, registration, social security, estimated, add-on, minimum, or withholding tax relating to the Business or the Purchased Exchanges and any interest and penalties and additions to such taxes (civil or criminal) related thereto or to the nonpayment thereof and related notarial fees. "Telephone Plant" means (i) Owned Real Property, (ii) Real Property Interests, and (iii) the machinery, equipment, inventory, vehicles and all other assets and properties used primarily in the operation of the Business, including all plant, systems, structures, construction work in progress, telephone cable (whether in service or under construction), microwave facilities (including frequency spectrum assignment), telephone line facilities, machinery, furniture, fixtures, tools, implements, conduits, stations, substations, equipment (including central office equipment, subscriber station equipment and other equipment in general), instruments and house wiring connections. Without limiting the generality of the foregoing, Telephone Plant includes the assets used primarily in the operation of the Business that would be properly included in the fixed assets referenced in Part 32 of the FCC Rules and Regulations (47 CFR, Part 32), as such accounts are reflected in Schedule 8.1.17. "Third Party Claim" is defined in Section 12.4(a). "Third Party Intellectual Property" means Intellectual Property owned by any Person, other than Seller, without regard as to whether Seller has any rights therein or the right to assign such rights to Buyer. "Third Party Intellectual Property Contracts" is defined in Section 10.1.4. "Total Service Pension" is defined in Section 11.2.1(c)(iii)(B). 9 "Transaction Taxes" is defined in Section 10.11. "Transferred Books and Records" means all of Seller's or its Affiliates' customer or subscriber lists and records, accounts and billing records, plans, blueprints, specifications, drawings, surveys, engineering reports, personnel records of Transferred Employees (where applicable) and all other documents, computer data and records, in each case relating primarily to the operation of the Business, except for the Retained Books and Records. "Transferred Employees" is defined in Section 11.1. "Transition Services Agreement" is defined in Section 9.1. "Uncollectible Factor" is defined in Section 10.16(b). "Year 2000 Compliant" is defined in Section 8.1.22(c). 1.2 Interpretation. (a) Unless the context otherwise requires, (i) all references to Sections, Articles or Schedules are to Sections, Articles or Schedules of or to this Agreement, (ii) each accounting term not otherwise defined in this Agreement has the meaning assigned to it in accordance with GAAP, (iii) all references to the "knowledge" of Seller are deemed to refer to the actual knowledge of the Executive Officers of Seller, (iv) all references to the "knowledge" of Buyer or "knowledge" obtained by Buyer are deemed to refer to the actual knowledge of the Executive Officers of Buyer, except as otherwise provided herein, (v) the term "primarily" means primarily or exclusively, and (vi) the term "including" means including without limitation. (b) No provision of this Agreement will be interpreted in favor of or against either of the parties by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft of such provision or of this Agreement. ARTICLE 2 PURCHASE AND SALE OF ASSETS 2.1 Purchase and Sale of Assets. Upon the terms and subject to the conditions of this Agreement, Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer and Buyer hereby agrees to purchase, acquire and accept from Seller, in each case effective as of the Closing, all of Seller's and each of its Affiliates' right, title and interest in and to the Purchased Property. 2.2 Purchased Property. The term "Purchased Property" means all the following business, properties, assets and rights of Seller and its Affiliates on the Closing Date, other than the Excluded Property: (i) Telephone Plant; (ii) Earned End-User Accounts Receivable; (iii) Material and Supply Inventories; 10 (iv) Non-Regulated Construction Work in Process; (v) FCC Licenses and Assigned Permits; (vi) Assigned Contracts; (vii) Transferred Books and Records; (viii) Real Property Leases; and (ix) all other business, property, assets, work in process and rights of Seller on the Closing Date not described above that relate primarily to the Purchased Exchanges. 2.3 Excluded Property. For purposes of this Agreement, "Excluded Property" means the following: (a) Cash, cash equivalents and investments; (b) All rights of Seller and its Affiliates under this Agreement, the Ancillary Documents and the certificates and other documents delivered to Seller by Buyer in connection with this Agreement; (c) All records prepared in connection with the sale of the Business, including bids received from third parties and analysis relating to the Business; (d) All rights related to the Retained Liabilities; (e) The Retained Books and Records; (f) Seller's and its Affiliates' interests in any business other than the Business, including the provision of wireless service (cellular and PCS), long distance and internet service or internet related services, air-to-ground communications (air phone service), and any Excluded Permits related thereto, and all assets of Seller and its Affiliates used in connection with any such business or related thereto, and all assets used by Seller and its Affiliates in rendering corporate services to Seller or the Business that are located outside the geographic area comprising the Purchased Exchanges; (g) Such other assets (i.e., encryption decoder devices, AWAS terminals, SODA, etc.), if any, as set forth on Schedule 2.3(g); (h) The Excluded Contracts; (i) The Excluded Marks; (j) All Intellectual Property, including the Licensed Intellectual Property and Third Party Intellectual Property (except for such rights to possess and use Third Party Intellectual Property as may be assigned in accordance with Section 10.1.4); and (k) All of Seller's and its Affiliates' insurance proceeds arising in connection with the operation of the Business or the Purchased Property prior to the Closing. 11 2.4 Assumption of Liabilities. 2.4.1 Assumed Liabilities. Upon the terms and subject to the conditions of this Agreement, Buyer hereby agrees to assume, as of the Closing Date, and agrees to pay, perform and discharge when due, all liabilities, responsibilities and obligations, beginning on the day following the Closing Date, relating to the Purchased Property other than the Retained Liabilities (subject to any different allocation of liability set forth in clauses (b), (c), (g) and (h) below) (the "Assumed Liabilities"), including the following: (a) Ordinary Course. All liabilities, responsibilities and obligations (including Taxes), arising out of or accruing or resulting from the use or ownership of the Purchased Property in the ordinary course after the Closing Date; (b) Employment Matters. All liabilities, responsibilities and obligations of Buyer as provided in Article 11 with respect to Transferred Employees; (c) Assigned Contracts, Real Property Interests and Real Property Leases. All liabilities, responsibilities and obligations that arise in connection with the performance of the Assigned Contracts, Real Property Interests and the Real Property Leases, other than performance obligations of Seller that mature prior to the Closing Date; (d) Joint Construction Projects. All liabilities, responsibilities and obligations to third parties that relate to arrangements and commitments between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (e) Construction in Progress. All liabilities, responsibilities and obligations relating to post-Closing engineering and construction required to complete scheduled construction and other capital expenditure projects for the Purchased Exchanges; (f) Customer Deposits and Construction Advances. All liabilities, responsibilities and obligations relating to Customer Advances, Customer Deposits and Construction Advances; (g) Future Regulatory Obligations. All liabilities, responsibilities and obligations, other than Future Capital Expenditure Obligations, related to the Purchased Exchanges arising out of any rule, regulation, law, mandate, decision or order of the FCC or the PUC after the Closing Date regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct or actions that occurred at any time prior to the Closing Date ("Future Regulatory Obligations"); provided that Buyer shall not be liable for any such Future Regulatory Obligation arising directly out of any intentional misconduct or material misstatement to the PUC by Seller that occurred prior to the Closing Date, except for such statements as may be based on reasonable interpretations of existing PUC regulations and current industry practice ("Retained Future Regulatory Obligations"); (h) Future Capital Expenditure Obligations. All liabilities, responsibilities and obligations related to the Purchased Exchanges arising out of any rule, 12 regulation, law, mandate, decision or order of the FCC or the PUC (i) issued at any time and requiring any capital expenditure after the Closing Date, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the Closing Date ("Future Capital Expenditure Obligations"); and (ii) issued after the date of this Agreement and requiring any capital expenditure after the date of this Agreement, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the date of this Agreement ("Interim Capital Expenditure Obligations"); provided that (i) Seller shall retain liability for Interim Capital Expenditure Obligations incurred prior to Closing to the extent related to (A) FCC or PUC orders that impose capital expenditure obligations as a result of Seller's overearnings, (B) Seller's efforts to comply with FCC or PUC rules, regulations, laws, mandates, decisions or orders existing as of the date of this Agreement, or (C) capital expenditures already planned by Seller; and (ii) Seller shall retain liability for all other Interim Capital Expenditure Obligations to the extent Seller is fully reimbursed by Buyer at Closing for such obligations. Prior to the Closing Date, Seller shall notify Buyer of all potential Future or Interim Capital Expenditure Obligations within a reasonable time after publication of said obligations by a Governmental Authority; and (i) Litigation and Claims. All liabilities and obligations arising out of (i) litigation and claims that arise out of an occurrence after the Closing Date, (ii) litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations) regardless of when filed, and (iii) claims of a Governmental Authority arising from or related to a Future Regulatory Obligation (other than Retained Future Regulatory Obligations). Notwithstanding anything in this Section 2.4.1 to the contrary, "Assumed Liabilities" shall not include any liabilities, responsibilities or obligations expressly included in Retained Liabilities pursuant to Section 2.4.2. 2.4.2 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller (the "Retained Liabilities"): (a) Subject to Section 10.5, all trade payables and other accrued payment obligations of Seller as of the Closing Date; (b) All long-term debt of Seller (including indebtedness to the Bondholders) and debt of Seller owed to any one or more of its Affiliates; (c) Subject to Section 10.5, all Taxes relating to the operation of the Business on or before the Closing Date or the use, ownership or operation of the Purchased Property on or before the Closing Date; (d) Except to the extent otherwise provided in Article 11, all liabilities and obligations arising on or before the Closing Date with respect to the Transferred Employees, including (i) all liabilities responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (ii) any such liabilities 13 or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date, but excluding any Future Regulatory Obligations with respect to the Transferred Employees; (e) All liabilities, responsibilities and obligations arising out of litigation and claims that arise out of an occurrence prior to the Closing Date other than litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations); (f) Any Retained Future Regulatory Obligations; and (g) All liabilities, responsibilities and obligations with respect to the Excluded Property and the Excluded Contracts. 2.5 No Assignment Without Consent. Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, conveyance, transfer, assignment or delivery or attempted sale, conveyance, transfer, assignment or delivery to Buyer of any Purchased Property (including any Contract) is prohibited by any applicable Law or would require any governmental or third-party authorizations, approvals, consents or waivers and such authorizations, approvals, consents or waivers shall not have been obtained prior to the Closing, this Agreement shall not constitute a sale, conveyance, transfer, assignment or delivery, or an attempted sale, conveyance, transfer, assignment or delivery thereof, if any of the foregoing would constitute a breach of applicable Law or the rights of any third party; provided, however, that, except to the extent that a condition to Closing set forth in Article 6 relating to the foregoing shall not be satisfied, the Closing shall occur notwithstanding the foregoing without any adjustment to the Purchase Price on account of such required authorization. Following the Closing, the parties shall use their commercially reasonable efforts, and shall cooperate with each other, to obtain promptly such authorizations, approvals, consents or waivers; provided, however, that neither Seller nor Buyer nor any of their respective Affiliates shall be required to pay any consideration therefor, other than filing, recordation or similar fees payable to any Governmental Authority, which fees shall be shared equally by Seller and Buyer. Pending or in the absence of such authorization, approval, consent or waiver, the parties shall cooperate with each other in any reasonable and lawful arrangements to provide to Buyer the benefits and liabilities of use of such Purchased Property, including, if permitted by the terms of any Real Property Lease or applicable Material Contract, through a sublease or subcontract in accordance with Section 4.3. If such authorization, approval, consent or waiver for the sale, conveyance, transfer, assignment or delivery of any such Purchased Property is obtained, Seller shall promptly convey, transfer, assign and deliver, or cause to be conveyed, transferred, assigned and delivered, such Purchased Property to Buyer. ARTICLE 3 PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Purchased Property shall be the sum of (i) One Hundred Seventy Million Nine Hundred Twenty-One Thousand dollars ($170,921,000) (the "Base Purchase Price"), (ii) amounts expended by Seller to comply with Interim Capital Expenditure Obligations (the "Regulatory Obligation Amount"), and (iii) the 14 Non-Regulated Construction Work in Process Amount, minus (iv) any Access Line Adjustment Amount calculated in accordance with Section 3.4. Payments from Buyer to Seller for Earned End-User Accounts Receivable and from Seller to Buyer for Customer Advances and Customer Deposits will occur subsequent to Closing in accordance with Article 10. 3.2 Closing Date Estimate. (a) Not less than three (3) business days prior to the Closing Date, Seller will give to Buyer a notice, setting forth Seller's good faith estimate as of the Closing Date of (i) the Regulatory Obligation Amount (the "Estimated Regulatory Obligation Amount"), (ii) the Non-Regulated Construction Work in Process Amount (the "Estimated Non-Regulated Construction Work in Process Amount") and (iii) the Access Line Adjustment Amount (the "Estimated Access Line Adjustment Amount"). (b) On the Closing Date, Buyer shall pay to Seller the sum of (i) the Base Purchase Price, (ii) the Estimated Regulatory Obligation Amount, and (iii) the Estimated Non-Regulated Construction Work in Process Amount, minus (iv) any Estimated Access Line Adjustment Amount (the "Closing Date Amount"). The Closing Date Amount shall be paid by delivery on the Closing Date of immediately available funds in U.S. dollars by wire transfer to an account that Seller shall designate to Buyer at least two (2) business days prior to the Closing Date. 3.3 Closing Date Statement. (a) Within sixty (60) days after Closing Date, Seller shall prepare and deliver to Buyer a written statement of the Base Purchase Price, Regulatory Obligation Amount, Non-Regulated Construction Work in Process Amount and any Access Line Adjustment Amount ("Closing Date Statement"). (b) Within fifteen (15) days after receipt of the Closing Date Statement, Buyer shall, in a written notice to Seller, either accept the Closing Date Statement or describe in reasonable detail any proposed adjustments to the Closing Date Statement and the reasons therefore. If Seller shall not have received a notice of proposed adjustments within such fifteen (15) day period, Buyer will be deemed irrevocably to have accepted such Closing Date Statement. (c) Upon the acceptance of any Closing Date Statement by Buyer, the parties shall, based thereupon, calculate the amount equal to the sum of the Base Purchase Price, Regulatory Obligation Amount and Non-Regulated Construction Work in Process Amount, minus any Access Line Adjustment Amount (collectively, the "Purchase Price"). If the Purchase Price as finally determined above is greater than the Closing Date Amount, Buyer shall promptly, but no later than three (3) business days after such acceptance, pay to Seller the amount of such difference. If the Purchase Price as determined above is less than the Closing Date Amount, Seller shall promptly, but no later than three (3) business days after such acceptance, pay to Buyer the amount of such difference. 15 (d) Seller and Buyer shall negotiate in good faith to resolve any disputes over any proposed adjustments to the Closing Date Statement, provided that if any such dispute is not resolved within thirty (30) days following Seller's receipt of the proposed adjustments, Buyer and Seller jointly shall select an independent public accounting firm that is nationally recognized in the United States to resolve such disputes in accordance with the standards set forth in this Section 3.3, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. (e) If Buyer disputes any portion of the Closing Date Statement, the parties shall calculate the portion of the Closing Statement that is not the subject of any dispute or proposed adjustment. If the undisputed portion of the Closing Statement (A) is greater than the respective estimated amounts paid on the Closing Date, Buyer shall promptly pay Seller the amount of such difference, or (B) is less than the respective estimated amounts paid on the Closing Date, Seller shall promptly pay Buyer the amount of such difference. Payments with respect to any undisputed portions of these adjustments shall be made no later than three (3) business days after delivery of notice of the proposed adjustments. Upon resolution of any dispute over any proposed adjustments as described above in Section 3.3(d), a party which is determined to owe the other party an amount shall pay that amount promptly, but no later than three (3) business days after resolution. (f) Any amount paid pursuant to this Section 3.3 after the Closing Date shall bear interest from the Closing Date through but excluding the date of payment, at a rate of eight percent (8%) per annum. Such interest shall accrue daily on the basis of a year of three hundred sixty-five (365) days and the actual number of days for which due and shall be payable together with the amount payable pursuant to this Section 3.3. All amounts payable pursuant to this Section 3.3 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer to, in the case of amounts payable by Buyer, the account identified by Seller as described in 3.2 above or to an alternate account that Seller may designate on the Closing Date Statement and, in the case of amounts payable by Seller, to such account of Buyer as Buyer shall designate in writing to Seller. 3.4 Access Line Adjustment Amount. The Purchase Price shall be subject to reduction in accordance with Section 3.1 if the number of access lines (including wholesale access lines) billed by Seller during the most recent month ended prior to the Closing Date (the "Closing Date Access Line Count") has decreased by more than ten percent (10%) from the number of access lines (including wholesale access lines) billed by Seller for the month ended December 31, 1998 (the "December 1998 Access Line Count"). Such reduction, if any, shall equal (a) the December 1998 Access Line Count minus the Closing Date Access Line Count, multiplied by (b) the Base Purchase Price divided by the December 1998 Access Line Count (collectively, the "Access Line Adjustment Amount"). 16 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS 4.1 State Regulatory Approval. Promptly after the date of this Agreement, Buyer and Seller shall file the appropriate applications and notices with the Arizona Corporations Commission and the California Public Utilities Commission (collectively, the "PUC"), seeking orders permitting the transfer of service in the Purchased Exchanges to Buyer (collectively, the "Regulatory Approvals"). Buyer will be responsible for establishing the tariff for its post-Closing operations in the Purchased Exchanges. Each party agrees to use its commercially reasonable efforts to obtain the Regulatory Approvals and the parties agree to cooperate fully with each other and with the applicable regulatory agency to obtain the Regulatory Approvals at the earliest practicable date. 4.2 Debtholder Consents. Seller shall use its commercially reasonable efforts to obtain from its Bondholders the termination or release, at Closing, of all security agreements, mortgages and financing statements relating to the Purchased Property (such termination or release being hereinafter referred to as the "Debtholder Consents"). 4.3 Landlord and Other Consents. Promptly after the date hereof, the parties shall use their commercially reasonable efforts to mutually seek the consent of (i) the lessor to any Leased Real Property that requires consent as a condition to an assignment of the lease (which consents are identified in Schedule 8.1.8) and (ii) the applicable third party with respect to certain Material Contracts that require consent as a condition to assignment of such Material Contract (which consents are identified on Schedule 8.1.11). If a lessor refuses to consent to such an assignment, and if the applicable lease or Material Contract permits a sublease or subcontract without the consent of the lessor or other third party, the parties hereto shall, effective as of the Closing, enter into a sublease or subcontract upon terms and conditions as similar and comparable to an assignment of the lease or Material Contract as is reasonably feasible. 4.4 FCC Consents. Promptly after the date of this Agreement, the parties shall use their commercially reasonable efforts to obtain (i) the FCC's consent to the transfer of the FCC Licenses from Seller to Buyer, and (ii) the FCC waivers set forth on Schedule 4.4 (all such consents or waivers are collectively referred to as the "FCC Consents"). 4.5 HSR Act Review. By June 30, 1999, or such later date as the parties may mutually agree, the parties will make such filings as may be required by the HSR Act with respect to the transactions contemplated by this Agreement. Thereafter, the parties will file as promptly as practicable all reports or other documents required or requested by the U.S. Federal Trade Commission or the U.S. Department of Justice pursuant to the HSR Act or otherwise and will comply promptly with any requests by the Federal Trade Commission or the U.S. Justice Department for additional information concerning such transactions, so that the waiting period specified in the HSR Act will expire as soon as reasonably possible after the execution and delivery of this Agreement. Without limiting the foregoing, Seller and Buyer agree to use their commercially reasonable efforts to cooperate and oppose any preliminary injunction sought by any Governmental Authority preventing the consummation of the transactions contemplated by 17 this Agreement. Buyer agrees to pay all application fees required in connection with any filings under the HSR Act. Seller and Buyer shall cause their respective counsel to furnish each other such necessary information and reasonable assistance as the other may reasonably request in connection with its preparation of necessary filings or submissions under the provisions of the HSR Act. Seller and Buyer will cause their respective counsel to supply to each other copies of all correspondence, filings or written communications by such party or its Affiliates with any Governmental Authority or staff members thereof, with respect to the transactions contemplated by this Agreement and any related or contemplated transactions, except for documents filed pursuant to Item 4(c) of the Hart-Scott-Rodino Notification and Report Form or communications regarding the same documents or information submitted in response to any request for additional information or documents pursuant to the HSR Act which reveal Seller's or Buyer's negotiating objectives or strategies or purchase price expectations. 4.6 GTE/Bell Atlantic Merger. Notwithstanding anything else contained in this Agreement, but without modification of the rights of Buyer under Sections 6.1, 11.6.2, 12.2(a) or 13.1, Seller shall not be obligated to take any action that would violate the terms of its agreements regarding the Merger, or that would interfere with, delay or prevent the consummation of the Merger. In the event that the Closing does not occur as a direct result of the Merger, and not through any fault of Buyer, Seller's liability to Buyer under this Agreement shall be limited to the amount of Buyer's reasonable out-of-pocket expenses incurred in connection with this Agreement. ARTICLE 5 PRE-CLOSING COVENANTS 5.1 Investigation by Buyer. Prior to the Closing, upon reasonable notice from Buyer to Seller given in accordance with this Agreement and subject to approval by Seller's appointed representative, Seller will afford to the authorized representatives of Buyer reasonable access during normal business hours to the Transferred Books and Records, the Owned Real Property the Leased Real Property and the other Purchased Property so as to afford Buyer the opportunity to make such review, examination and investigation of the Business and the Purchased Property as Buyer may reasonably request; provided, however, that no environmental sampling or other testing shall be performed without Seller's prior written consent, which consent may be given or withheld in Seller's sole discretion. Buyer will not contact any employee, customer or supplier of Seller with respect to this Agreement, the matters involved herein or the Purchased Property without the prior written consent of Seller. Nothing herein will obligate Seller to take actions that would unreasonably disrupt the normal course of the business of Seller or violate the terms of any applicable Law or any Contract to which Seller or any of its Affiliates is a party or to which any of its assets is subject. Any information or documentation provided to Buyer or acquired by Buyer during this investigation shall be deemed "Evaluation Material" as that term is defined in the Confidentiality Agreement and shall be subject in all cases to the terms of the Confidentiality Agreement. 18 5.2 Operation of the Business in the Ordinary Course. 5.2.1 Preservation of Business. Except as contemplated on Schedule 5.2.1 or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing Seller shall: (a) Conduct the Business in the ordinary course consistent with past practice and shall keep available to the Business its services and the services of its Affiliates to the same extent generally available on the date hereof; (b) Operate the Business in substantially the same manner as it is presently being conducted, and, with respect to the Business, refrain from entering into any Contract that would be a Material Contract other than in the ordinary course of business; (c) Not institute any proceeding with respect to, or otherwise change, amend or supplement any of its tariffs or make any other filings with the PUC except in the ordinary course of business, and except as disclosed on Schedule 8.1.15(a); (d) Maintain the Purchased Property in good repair, order and condition, reasonable wear and use excepted, and maintain the Materials and Supply Inventory in the ordinary course of business consistent with past practice; (e) Maintain insurance with respect to the Purchased Property consistent with past practice; (f) Make capital expenditures sufficient to support normal maintenance and customer growth in the Purchased Exchanges in a manner consistent with established regulatory performance objectives, which expenditures in (a) calendar year 1999 shall not be less than $4,145,000, and (b) calendar year 2000 shall not be less than $345,000 per month; and (g) Maintain the books and records of the Business substantially in accordance with prior practice, except as changes are mandated by Governmental Authorities or required by GAAP. 5.2.2 No Material Changes. Except as contemplated by this Agreement or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing, Seller will not: (a) Make any material change in the general nature of the Business; (b) Sell, lease or dispose of, or make any Contract for the sale, lease or disposition of any Purchased Property, other than in the ordinary course of business; (c) Increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its Transferred Employees, except (i) as required by Law, (ii) pursuant to any Contract to which Seller is a party existing on the date hereof and listed on Schedule 5.2.2(c), (iii) increases in base pay in the ordinary course of 19 business of Seller and in amounts consistent with the recent past practices of Seller, or (iv) as listed or described on Schedule 5.2.2(c); (d) (i) Materially amend, modify or terminate any Material Contract or permit any of the foregoing to occur other than in the ordinary course of business; or (ii) sell, transfer or otherwise dispose of any Purchased Property other than in the ordinary course of business or as listed or described on Schedule 5.2.2(d), or encumber any Purchased Property, except for Permitted Encumbrances; or (e) Enter into any new written employment agreement, or union agreement with, or commitment to, the Transferred Employees (including any new commitment to pay retirement or other benefits or other amendments to Seller's retirement plans), provided that Seller may enter into new union agreements to the extent the new union agreements succeed any union agreement that expires prior to the Closing. Prior to finalizing any such new union agreement, Seller shall advise Buyer of its material terms and following the execution of any such agreement, Seller shall deliver a copy to Buyer. 5.3 Satisfaction of Conditions. Without limiting the generality or effect of any provision of Article 6, the parties will use their commercially reasonable efforts to satisfy promptly all the conditions required to be satisfied prior to the Closing. 5.4 Approvals. (a) Between the date of this Agreement and the Closing Date, Buyer and Seller will (i) cooperate with one another and take all reasonable steps to obtain, as promptly as practicable, all consents, approvals, authorizations, waivers and permits of any Governmental Authorities required of either party to consummate the transactions contemplated by this Agreement and (ii) provide such other information and communications to any Governmental Authority as may be reasonably requested. (b) To the extent that any consents, approvals, authorization or waiver of a third party with respect to any (i) Assigned Contract, (ii) Assigned Permit or (iii) any Pole Attachment Agreement, government grant or railroad crossing agreement listed on Schedule 8.1.18, is required in connection with the transactions contemplated by this Agreement, Seller shall use its commercially reasonable efforts to obtain such authorization, consent, approval or waiver prior to the Closing Date. 5.5 Audit or Review of Financial Statements. To the extent Buyer requires an audit or review of financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission under Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer to audit or review the Financial Statements delivered by Buyer in accordance with Section 8.1.21 and such other financial statements as may be required by Buyer to comply with Regulations S-K and S-X (collectively, the "SEC Financial Statements"). Seller's cooperation will include such access to workpapers and other supporting documents used in the preparation of the SEC Financial Statements and delivery of one or more representation letters from Seller to such auditors as may be reasonably required by such auditors to perform an audit in accordance with generally 20 accepted auditing standards or a review in accordance with AICPA standards and to render an opinion acceptable to the SEC with respect to the audit or review of the SEC Financial Statements, it being understood that such representation letters shall acknowledge (i) Seller's extensive use of estimates and allocations in the preparation of the SEC Financial Statements, and (ii) Seller's belief that the SEC Financial Statements represent the financial condition and results of operations of the Business, in accordance with GAAP, and that such estimates and allocations were made on a reasonable basis and in accordance with GAAP. However, Buyer acknowledges that because the Business represents only a portion of Seller, Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. Seller will bear the cost of the preparation of its financial statements, including the SEC Financial Statements. Buyer will bear the cost of the preparation of any other financial statements that it will be required to file with the SEC, as well as the cost of the audit or review of the SEC Financial Statements. Buyer acknowledges that the SEC Financial Statements and any supporting documentation have been made available as an indication of the historical financial performance and condition of the Business. Except to the extent that the SEC Financial Statements reflect intentional misrepresentation or fraud, Buyer agrees not to make any claim related to the performance of the Business after the date of the SEC Financial Statements on the basis of a comparison to the SEC Financial Statements. 5.6 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller's transfer of the Purchased Property may, at Seller's election, be accomplished in a manner enabling such transfer to qualify as part of a like-kind exchange of property covered by Section 1031 of the IRC. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the IRC (including any actions required to facilitate the use of a "qualified intermediary" within the meaning of the United States Treasury Regulations), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Purchased Property as part of a like-kind exchange of property covered by Section 1031 of the IRC. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. 5.7 Interconnection Agreements. Seller shall furnish to Buyer such necessary information as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Purchased Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible. 5.8 Leased Vehicles; Capital Leases. Seller or its Affiliates, as applicable, will pay the remaining balances on any vehicle leases or any capital leases relating to assets included in 21 the Purchased Property and at Closing will deliver to Buyer title to such vehicles and assets, free and clear of all Liens. 5.9 Delivery of Interim Information. From the date of this Agreement until the Closing, Seller shall furnish Buyer monthly reports concerning the operating performance of the Business. Such reports shall contain such data as are typically reported to GTE management with respect to the Purchased Exchanges, including access line counts and service measures. Seller shall provide Buyer reasonable access to Seller's management in order to discuss such data. In the event of any significant deterioration in operating performance, Seller shall consult with Buyer concerning its response. All information provided in accordance with this Section 5.9 shall be subject to the Confidentiality Agreement and to compliance with applicable antitrust Laws. ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING 6.1 Conditions Precedent to Obligations of Buyer. The obligations of Buyer to consummate the Closing shall be subject to the satisfaction or waiver by Buyer, at or prior to the Closing, of each of the following conditions, any one or more of which may be waived at the option of Buyer: 6.1.1 No Misrepresentation or Breach of Covenants and Warranties. Seller shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Seller in Section 8.1 shall be true and correct as of the Closing, except for (i) such representations or warranties that are made expressly as of an earlier date, which shall have been true and correct as of such date except as would not have a Material Adverse Effect, and, (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Seller shall have delivered to Buyer a certificate ("Seller's Closing Certificate") in the form attached as Schedule 6.1.1, dated the Closing Date and signed by an Executive Officer of Seller, certifying each of the foregoing, or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.1.2 Documents. Seller shall have delivered to Buyer all documents required by Section 7.2. 6.1.3 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.1.4 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained, free of any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a Material Adverse Effect, and the FCC and PUC shall not otherwise have taken any action with respect to the Purchased Property that is reasonably likely to have a Material Adverse Effect. For purposes of this Section 6.1.4, any tariff that is substantially similar in all material respects to the existing tariff with respect to the applicable Purchased Exchange shall be deemed not to have a Material Adverse Effect. For purposes of this 22 Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any competent jurisdiction, the effect of which prohibits the Closing. 6.1.5 No Material Adverse Effect. There shall not have occurred any event or condition which individually or in the aggregate has resulted in a Material Adverse Effect. 6.1.6 Closing of GTE West Coast Transactions. The transactions contemplated by the Asset Purchase Agreement between GTE West Coast Incorporated and Citizens Utilities Company of even date herewith (the "GTE West Coast Agreement") shall be closed simultaneously with the closing of those transactions contemplated by this Agreement. 6.2 Conditions Precedent to Obligations of Seller. The obligations of Seller to consummate the Closing shall be subject to the satisfaction or waiver by Seller, at or prior to the Closing, of each of the following conditions: 6.2.1 No Misrepresentation or Breach of Covenants and Warranties. Buyer shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Buyer in Section 8.2 shall be true and correct in all material respects as of the Closing, except (i) for such representations or warranties made expressly as of and only as of an earlier date, which shall be true and correct as of such date except as would not have a Material Adverse Effect, and (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Buyer shall have delivered to Seller a certificate ("Buyer's Closing Certificate") in the form attached as Schedule 6.2.1, dated the Closing Date and signed by an Executive Officer of Buyer, certifying each of the foregoing or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.2.2 Documents. Buyer shall have delivered to Seller all documents required by Section 7.3. 6.2.3 Purchase Price. Buyer shall have delivered to Seller, in the manner specified in Section 3.1, the Closing Date Amount. 6.2.4 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.2.5 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained free of any special terms, conditions or restrictions that are materially adverse to Seller based upon good faith business concerns that are not commercially unreasonable (other than any such approvals or consents which, if not obtained, would not have a Material Adverse Effect). For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been 23 entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any jurisdiction, the effect of which prohibits the Closing. 6.2.6 Closing of GTE West Coast Transactions. The transactions contemplated by the Asset Purchase Agreement between GTE West Coast Incorporated and Citizens Utilities Company of even date herewith (the "GTE West Coast Agreement") shall be closed simultaneously with the closing of those transactions contemplated by this Agreement. ARTICLE 7 THE CLOSING 7.1 The Closing. Subject to the terms and conditions of this Agreement, the closing of the purchase and sale of the Purchased Property and the assumption of the Assumed Liabilities (the "Closing") shall be held at 9 A.M. local time at the offices of GTE Network Services at 600 Hidden Ridge, Irving, Texas 75038, on the date agreed upon by the parties, provided such date shall be (i) the last business day of the month, and (ii) at least five (5) business days, but not more than ninety (90) days, after the date that all required Regulatory Approvals, Debtholder Consents and FCC Consents have been obtained, or at such other time and place as the parties may agree (the "Closing Date"). Such Closing shall be deemed to have occurred as of 11:59 p.m., local time, on the Closing Date. 7.2 Seller's Obligations at Closing. At the Closing, Seller shall deliver to Buyer the following documents: (a) (i) Bill of Sale and Assignment and Assumption Agreement, (ii) subject to Permitted Encumbrances (except as provided in Section 10.10), special warranty deeds or their equivalent in respect of the Owned Real Property and assignments of Real Property Leases to the extent any required consents have been obtained pursuant to Section 4.3, and (iii) subject to Section 2.5, assignments of the Assigned Contracts, the Real Property Interests and the Assigned Permits. For purposes of this Agreement, the term "Bill of Sale and Assignment and Assumption Agreement" means the form attached hereto as Schedule 7.2(a) executed by Seller; (b) A legal opinion from William Mundy, general counsel for GTE Network Services, as counsel for Seller, dated as of the Closing Date and in the form of Schedule 7.2(b); (c) Seller's Closing Certificate; (d) Instruments of assignment or, to the extent set forth in Section 4.3, subleases for the Leased Real Property; (e) Mortgage satisfactions, UCC Form 3 Termination Statements and other instruments necessary to remove, release and terminate all security interests held by the Bondholders on the Purchased Property; 24 (f) All of the documents and papers required of Seller as conditions to Closing pursuant to Section 6.1, including the Regulatory Approvals, Debtholder Consents and FCC Consents; (g) A certificate substantially in the form of Schedule 7.2(g) certifying that Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC; (h) The License Agreement; and (i) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. 7.3 Buyer's Obligations at Closing. At the Closing, Buyer shall deliver to Seller the following: (a) The Closing Date Amount in the manner specified in Section 3.1; (b) The Bill of Sale, Assignment and Assumption Agreement, executed by Buyer; (c) A legal opinion from L. Russell Mitten II, Vice President and General Counsel of Buyer dated as of the Closing Date and in the form of Schedule 7.3(c); (d) Buyer's Closing Certificate; (e) All other documents and papers required of Buyer as conditions of Closing pursuant to Section 6.2, including the Regulatory Approvals; and (f) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. ARTICLE 8 REPRESENTATIONS AND WARRANTIES 8.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: 8.1.1 Authorization and Effect of Agreement. Seller has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by Seller of this Agreement and the Ancillary Agreements and the fulfillment of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Seller. This Agreement and the Ancillary Agreements have been duly executed and delivered by Seller and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Buyer, constitute valid and binding obligations of Seller enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, 25 moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.1.2 No Restrictions Against Sale of the Purchased Property. The execution and delivery of this Agreement and the Ancillary Agreements by Seller does not, and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws, (ii) subject to obtaining the approvals and or consents referred to in Section 2.5, Article 4 and Schedule 8.1.11(a-f), conflict with, violate or result in the breach of any provision of any Material Contract, or (iii) result in the creation of any Lien (other than Permitted Encumbrances) upon any of the Purchased Property under (a) any Material Contract or (b) any Law applicable to any of the Purchased Property, except in the case of clauses (ii) or (iii) for any such conflict, violation, breach or Lien that would not have a Material Adverse Effect. 8.1.3 Consents and Approvals of Governmental Authorities. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Seller or in connection with the execution and delivery of this Agreement by Seller or the fulfillment by Seller of its obligations under this Agreement, except (i) FCC Consents and HSR Act clearance, (ii) the Regulatory Approvals, and (iii) any consent approval, order or authorization or registration declaration or filing, which if not obtained or made would not have a Material Adverse Effect. 8.1.4 No Material Violations. Except as indicated in Schedule 8.1.4 or as would not reasonably be expected to have a Material Adverse Effect, (a) the execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not violate any applicable Law, and (b) Seller is not in violation of any Law relating to or affecting the operation, conduct or ownership of the Business or the Purchased Property. 8.1.5 Corporate Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of California, and is duly qualified to conduct business in California and Arizona. Seller has full power and authority to own its properties and to carry on the Business as it is now being conducted and to own, or hold under lease the Purchased Property. Seller holds valid permits, licenses, franchises, approvals and authorizations issued or granted by any Governmental Authority and adequate for the operation of the Business as currently conducted, except to the extent absence of any such permit, license, franchise, approval or authorization would not have an Material Adverse Effect. 8.1.6 Brokers. Seller has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Buyer for any broker's or finder's fees or similar fees or expenses. 8.1.7 Title to Owned Real Property. Seller has good fee simple title to all of the Owned Real Property, free and clear of any Lien other than Permitted Encumbrances and Liens of the Bondholders identified on Schedule 8.1.7(b). As of the date hereof, the address and a general description of each item of Owned Real Property are set forth on Schedule 8.1.7(a). 26 Seller represents that the only creditors that have a Lien (other than any Permitted Encumbrances) on any of the Owned Real Property are the Bondholders identified on Schedule 8.1.7(b). 8.1.8 Real Property Leases. As of the date hereof, set forth on Schedule 8.1.8 is a list of the Real Property Leases. Each of the leases for the Leased Real Property is enforceable in accordance with its terms, subject to bankruptcy, insolvency and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with the principles of equity, and except as otherwise disclosed in Schedule 8.1.8, there is not under any lease any material default or a material breach of covenant by Seller. 8.1.9 Tangible Assets. All of the tangible Purchased Property is in substantially good operating condition and repair, normal wear and tear excepted. Except as set forth on Schedule 8.1.9 or elsewhere in this Agreement, Seller has good title to each item of tangible Purchased Property (other than Real Property Interests or office equipment or vehicles subject to leases) with a fair market value in excess of $5,000, free and clear of any Lien (other than Permitted Encumbrances). Except as set forth on Schedule 8.1.9, Seller has not received any written notice within the past twelve (12) months of a violation of any ordinances, regulations or building, zoning and other similar laws with respect to such assets that would have a Material Adverse Effect. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 8.1.9, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE CONDITION OR FITNESS OF THE TANGIBLE PURCHASED PROPERTY AND HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY AGAINST INFRINGEMENT. 8.1.10 No Material Adverse Change. Except as disclosed in Schedule 8.1.10, between December 31, 1997 and the date of this Agreement there has not occurred (i) any event or condition that would have a Material Adverse Effect; (ii) any increase in compensation payable or to become payable by Seller to any of its Transferred Employees or agents, other than normal merit or promotional increases other than payment under the retention pay program announced in connection with the network business repositioning of Seller and its Affiliates; (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract; or (iv) any material change in any accounting method, practice or policy of Seller with respect to the Business. 8.1.11 Material Contracts. Except for the agreements set forth on Schedule 8.1.11 subparts (b) through (j), there is no Assigned Contract (other than the Assigned Contracts entered into after the date of this Agreement in the ordinary course of business) that is: (a) an agreement containing a non-compete agreement or other covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any material respect with respect to the Business with any third party; (b) an agreement granting a Lien (other than a Permitted Encumbrance); 27 (c) an agreement for the sale of any material Purchased Property or grant of any preferential rights to purchase any material Purchased Property; (d) an agreement for the provision of telephone service at public pay telephone locations; (e) an agreement made in the ordinary course of business other than as set forth above with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $100,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (f) an agreement not made in the ordinary course of business with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (g) an agreement with respect to 911 services or E911 services; (h) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (i) an agreement between Seller and a third party for the third party's co-location of equipment in facilities included in the Purchased Property pursuant to which Seller is currently providing facilities or a request to provide facilities is currently pending; or (j) an agreement with a third party in which the owner of utility poles has agreed to allow the other party to attach its telecommunications equipment or facilities to the utility poles (a "Pole Attachment Agreement"). Except as set forth on Schedule 8.1.11, to the knowledge of Seller, each Assigned Contract referred to in any of the clauses (a) to (j) above (collectively the "Material Contracts") is valid, binding and in full force and effect and is enforceable by Seller or Seller's Affiliate, as applicable, in accordance with its terms, except for any such failure to be valid, binding, in full force and effect or enforceable that is not reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 8.1.11, to the knowledge of Seller, Seller and Seller's Affiliates have performed all material obligations required to be performed by them to date under the Material Contracts, and they are not (with or without the lapse of time or the giving of notice, or both) in breach or default thereunder and, to the knowledge of Seller, no other party to any Material Contract is (with or without the lapse of time or the giving of notice, or both) in breach or default in any respect thereunder, in each case except for such noncompliance, breaches and defaults that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect. As of the date hereof, neither Seller nor any Seller's Affiliate has, except as disclosed on Schedule 8.1.11, received or given any written notice of the intention of any party to terminate any Material Contract. Complete and correct copies of all the Material Contracts, 28 together with all modifications and amendments thereto to the date of this Agreement by Closing will, have been made available to Buyer or its representatives. 8.1.12 Insurance. The Purchased Property of an insurable nature and of a character usually insured by companies carrying on similar businesses is insured under insurance policies or self insured in such amounts and against such losses or casualties as is usual in Seller's industry. On the Closing Date, the coverage under the insurance policies and programs applicable to the Purchased Property will be terminated, and Buyer will be responsible for providing all insurance coverage for the Purchased Property. 8.1.13 Taxes. Except as disclosed on Schedule 8.1.13, (i) all Tax Returns required to be filed by Seller on or before the Closing Date have or will have been filed, and all Taxes shown as due and payable on such Tax Returns have been or will be paid by Seller when required by law; (ii) no deficiencies or assessments for any Taxes have been asserted in writing or assessed against Seller that remain unpaid and that individually or in the aggregate are material to the Business; (iii) Seller has withheld all required federal, state and local payroll taxes relating to the Business and has remitted or will remit all amounts required to be remitted to the appropriate taxing authorities; (iv) there are no tax liens upon any of the Purchased Property except for statutory liens covering taxes not yet due and payable; (v) Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC and shall provide an appropriate certificate for purposes of Section 1445(b)(2) of the IRC and (vi) there are no material, current audits or material audits for which written notice has been received (in either case, specifically with respect to the Business). 8.1.14 No Material Claims or Suits. Except as disclosed in Schedule 8.1.14 or with respect to Taxes, there are no claims, actions, lawsuits or legal proceedings pending before any Governmental Authority, or, to the knowledge of Seller threatened against or affecting the Business or Purchased Property that in Seller's opinion, if determined adversely to Seller, would reasonably be expected to have a Material Adverse Effect on the Business or materially adversely affect ability of Seller to consummate the transactions contemplated hereby. 8.1.15 Tariffs; FCC Licenses. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material respect under any such tariff. Except as disclosed on Schedule 8.1.15(a), there are no applications by Seller or petitions by others or proceedings pending or threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. To the knowledge of Seller, there are no material violations 29 by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 8.1.15(b) are the FCC Licenses and other material Assigned Permits (the "Material Permits") held by Seller and used in the operation of the Business. Except as listed on Schedule 8.1.15(b), to Seller's knowledge, each such FCC License or Material Permit is in full force and effect on the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such FCC Licenses or Material Permits subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC Licenses are free from all security interests, liens, claims, or encumbrances of any nature whatsoever. There are no applications by Seller or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC Licenses that, in Seller's opinion, would reasonably be expected to have a Material Adverse Effect on the Business, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. 8.1.16 Employee Matters. (a) Schedule 8.1.16(a) lists (and identifies the sponsor of) each "Employee Pension Benefit Plan," as that term is defined in Section 3(2) of ERISA, each "Employee Welfare Benefit Plan," as that term is defined in Section 3(1) of ERISA (such plans being hereinafter referred to collectively as the "ERISA Plans"), and each other retirement, pension, profit-sharing, money purchase, deferred compensation, incentive compensation, bonus, stock option, stock purchase, severance pay, unemployment benefit, vacation pay, savings, medical, dental, post-retirement medical, accident, disability, weekly income, salary continuation, health, life or other insurance, fringe benefit, or other employee benefit plan, program, agreement, or arrangement maintained or contributed to by Seller or its Affiliates in respect of or for the benefit of any Transferred Employee or former employee of Seller, excluding any such plan, program, agreement, or arrangement maintained or contributed to solely in respect of or for the benefit of Transferred Employees or former employees employed or formerly employed by Seller outside of the United States, as of the date hereof (collectively, together with the ERISA Plans, referred to hereinafter as the "Plans"). Schedule 8.1.16(a) also includes a list of each written employment, severance, termination or similar-type agreement between Seller and its Affiliates and any Transferred Employee (the "Employment Agreements"). Seller has delivered to Buyer accurate and complete copies of all Plans and Employment Agreements (or representative samples in the case of form agreements) and, if applicable, summary plan descriptions with respect to such Plans and Employment Agreements and summary descriptions of any such Plan or Employment Agreement that is not otherwise in writing. Except for retention bonuses paid in connection with the closing of the transactions contemplated by this Agreement and except as otherwise disclosed on Schedule 8.1.16(a), the execution and delivery of this Agreement by Seller and the performance of this Agreement by Seller will not directly result now or at any time in the future in the payment to any Transferred 30 Employee of any severance, termination, or similar-type payments or benefits being paid to any Transferred Employee. (b) Except as set forth on Schedule 8.1.16(b): (i) Neither Seller nor any of its Affiliates, any of the ERISA Plans, any trust created thereunder, or any trustee or administrator thereof, has engaged in any transaction as a result of which Seller or any of its Affiliates could be subject to any material liability pursuant to Section 409 of ERISA or to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed pursuant to Section 4975 of the IRC; and (ii) Since the effective date of ERISA, no material liability under Title IV of ERISA has been incurred or is reasonably expected to be incurred by Seller or any of its Affiliates (other than liability for premiums due to the PBGC), unless such liability has been, or prior to the Closing Date will be, satisfied in full. (c) Except as set forth on Schedule 8.1.16(c), with respect to the ERISA Plans other than those ERISA Plans identified on Schedule 8.1.16(a) as "multiemployer plans": (i) the PBGC has not instituted proceedings to terminate any Plan that is subject to Title IV of ERISA (the "Retirement Plans"); (ii) none of the ERISA Plans has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived, as of the last day of the most recent fiscal year of each of the ERISA Plans ended prior to the date of this Agreement; (iii) each of the ERISA Plans has been operated and administered in all material respects in accordance with its provisions and with all applicable laws; (iv) each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the IRC and, to the extent applicable, Section 401(k) of the IRC, has been determined by the IRS to be so qualified, and nothing has occurred since the date of the most recent such determination (other than the effective date of certain amendments to the IRC, the remedial amendment period for which has not yet expired) that would adversely affect the qualified status of any of such ERISA Plans; (v) there are no pending material claims by or on behalf of any of the ERISA Plans, by any employee or beneficiary covered under any such ERISA Plan, or otherwise involving any such ERISA Plan (other than routine claims for benefits and routine expenses); (vi) each ERISA Plan which is a group health plan has been operated and administered in compliance with the continuation coverage provisions of Section 498B of the IRC and Part 6 of Title I of ERISA; 31 (vii) all contributions and premiums that would normally be made or paid with respect to any ERISA Plan or Employment Agreement on behalf of Transferred Employees as of the Closing Date will have been made by the Closing Date; and (viii) as of the Closing Date no Transferred Employee will be excluded from coverage under any employee welfare benefit plan (as defined in Section 3(1) of ERISA) maintained or contributed to by Seller. (d) Except as set forth on Schedule 8.1.16(d), none of the ERISA Plans is a "multiemployer Plan," as that term is defined in Section 3(37) of ERISA, and with respect to any such multiemployer plans (as so defined) listed in Schedule 8.1.16(d), Seller has not made or incurred a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of ERISA that would result in the incurrence of a material liability by Seller. Except as set forth on Schedule 8.1.16(d), neither Seller nor any Affiliates of Seller has made or incurred a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in Sections 4203 and 4205, respectively, of ERISA) that would result in the incurrence of liability by Seller or its Affiliates, and the performance of this Agreement will not result in such withdrawal(s) or liability. (e) Except as set forth on Schedule 8.1.16(e), (i) none of the Transferred Employees are represented by a labor union or labor organization; (ii) Seller is not subject to any collective bargaining agreement covering any Transferred Employee; (iii) there are no current, or to the best knowledge of Seller, any pending or threatened strikes, slowdowns, picketing, or work stoppages affecting the Business or with respect to any Transferred Employee covered by collective bargaining; (iv) there is no pending lockout by Seller of any employees of the Business, and no such action is contemplated by Seller; (v) to the best knowledge of Seller, there is no pending or threatened organizing activity or petition for certification of a collective bargaining representative involving employees of the Business and there has been none within the twelve (12) months preceding the date of the Agreement; (vi) to the best knowledge of Seller, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state or federal labor or employment law or regulation in connection with the Business, including any charge or complaint filed by any employee or labor organization with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any other administrative governmental agency, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business; (viii) with respect to employees of the Business, Seller has complied in all respects with all laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupational safety and health, immigration, and plant closings; and (ix) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the Transferred Employees. (f) This Agreement shall not result in any Transferred Employee becoming entitled to separation pay or severance which could be or become an obligation of Buyer. 32 8.1.17 Schedules of Telephone Plant. Schedule 8.1.17 sets forth, as of December 31, 1998, a materially accurate summary of the book value of the Telephone Plant as reflected in Seller's continuing property records. Schedule 8.1.17 also sets forth a materially accurate list of the vehicles, trailers and other mobile tools and mobile equipment that are part of the Purchased Property as of May 6, 1999. 8.1.18 Schedule of Real Property Interests. To the knowledge of Seller and as of the date of this Agreement, Schedule 8.1.18 sets forth a true and accurate list of all its Real Property Interests. 8.1.19 Compliance with Existing Environmental Requirements. Except as set forth in Schedule 8.1.19 or as would not have a Material Adverse Effect, to the knowledge of Seller: (a) Seller's operation of the Business and the Purchased Property has been and is presently in substantial compliance with Existing Environmental Requirements; (b) No environmental remediation is occurring on any parcel of Owned Real Property or Leased Real Property nor has Seller or any Affiliate issued a request for proposal or otherwise requested an environmental remediation contractor to begin plans for such environmental remediation; (c) No underground storage tanks ("USTs") or aboveground storage tanks ("ASTs") are located on the Owned Real Property or Leased Real Property; (d) None of the Owned Real Property or Leased Real Property is situated in a state or federal "superfund" site or study area; and (e) Seller has delivered, or within 60 days after the date of this Agreement will deliver, to Buyer complete copies of all reports and studies relating to Seller's liability under or non-compliance with any Existing Environmental Requirements in connection with Seller's operation of the Business or use or ownership of the Purchased Property. 8.1.20 Environmental Permits. Except as set forth in Schedule 8.1.20, to the knowledge of Seller, it has obtained or filed for all necessary environmental permits, authorizations and licenses required to operate the Business or the Purchased Property, except where failure to obtain or file such permits, authorizations and licenses would not have a Material Adverse Effect on the Business. 8.1.21 Financial Statements. Schedules 8.1.21(a), 8.1.21(b) and 8.1.21(c) present the income statements, balance sheets and statements of cash flows, respectively, for the Business for the years ended December 31, 1997 and December 31, 1998 (collectively, the "Financial Statements"). The Financial Statements have been prepared based on the books and records of Seller. Such books and records have been maintained in accordance with GAAP, and where required by law, the applicable regulations of the FCC and PUC. However, because the Business represents only a portion of Seller, the Financial Statements are based on the extensive use of estimates and allocations. Seller believes these estimates and allocations have been 33 performed on a reasonable basis in accordance with GAAP. However, Buyer acknowledges that because the Business represents only a portion of Seller, Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and the Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. 8.1.22 Year 2000 Compliance. (a) As of the Closing Date, Seller shall have caused the modification or remediation of the Automated Assets in accordance with applicable manufacturer or vendor recommendations such that the Automated Assets are Year 2000 Compliant; provided that any and all Buyer or third-party supplied computer software, computer firmware and computer hardware that directly interfaces with the Automated Assets, co-exists with the Automated Assets, or indirectly influences the operation of the Automated Assets are also demonstrated to be Year 2000 Compliant. (b) Seller shall be deemed to be in satisfaction of the requirements of subsection (a) of this Section 8.1.22 to the extent that Seller has (i) performed on or before the Closing Date any modification or remediation in accordance with applicable manufacturer or vendor recommendations for achieving Year 2000 compliance or Year 2000 readiness, or (ii) received on or before the Closing Date reasonable assurances from the applicable manufacturer or vendor that an Automated Asset, without modification or remediation, is Year 2000 compliant or Year 2000 ready. (c) When used in this Section 8.1.22, the following term shall have the respective meanings given below: "Automated Assets" means the computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software system(s) that are provided by Seller to Buyer as part of the Purchased Exchanges pursuant to this Agreement. "Calendar-Related" refers to the date values based on the Gregorian calendar, as defined in Encyclopedia Britannica, 15th edition, 1982, page 602, and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons and presentations. "Date Data" means any Calendar-Related data in the inclusive range January 1, 1900 through December 31, 2050, which the Automated Assets use in any manner. "System Date" means any Calendar-Related data value in the inclusive range January 1, 1985 through December 31, 2035 (including the natural transition between such values) which the Automated Assets shall be able to use as their current date while operating. 34 "Year 2000 Compliant" means: (i) As of the Closing Date, in connection with Calendar-Related data and Calendar-Related processing of Date Data or of any System Date, the Automated Assets will not malfunction, will not cease to function and will not produce incorrect results; and (ii) As of the Closing Date, the Automated Assets will represent dates without ambiguity as to century when providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized and/or software systems and users by way of user interfaces, electronic interfaces and data storage. 8.1.23 Native American and Federal Consents. Except as set forth on Schedule 8.1.23 or as would not have a Material Adverse Effect, to the knowledge of the Seller: (a) Schedule 8.1.23 sets forth all material easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA") (collectively, the "Native American Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducted, on Native American reservations; (b) All such Native American Authorizations are in full force and effect and Seller is not in default thereunder; (c) There are no material claims, actions, lawsuits or other proceedings pending or threatened with respect to any of the Purchased Property located, or any operations of the Business conducted, on Native American reservations, and no tribal authority has given written notice of any cancellation, revocation, termination or material amendment or modification of any Native American Authorization; and (d) No material consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement. 8.1.24 Loss of Major Customer. Except as set forth on Schedule 8.1.24, since January 1, 1997, Seller has not suffered the loss of any customer of the Business for which Seller billed in excess of $50,000 annually during the years ended December 31, 1997 or 1998. 8.1.25 Records. The continuing property records and other records related to the Purchased Property maintained by Seller conform in all material respects with the applicable rules and regulations of the FCC and PUC. Seller has retained substantially all original cost documentation relating to the Purchased Property regarding the expenditures made by Seller for the Telephone Plant within the period required by applicable Law. 8.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: 35 8.2.1 Corporate Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and is duly qualified to conduct business in California and Arizona and has the requisite corporate power and authority to own, lease or otherwise hold the assets owned, leased or held by it. 8.2.2 Authorization and Effect of Agreement. Buyer has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, to carry on the Business as presently conducted and to fulfill all other obligations of Buyer under this Agreement and the Ancillary Agreements. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements, and the fulfillment by it of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Buyer. Buyer has the requisite legal capacity to purchase, own and hold the Purchased Property upon the consummation of the sale of the Purchased Property. This Agreement and the Ancillary Agreements have been duly executed and delivered by Buyer and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Seller, constitute valid and binding obligations of Buyer enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.2.3 No Restrictions Against Purchase of the Purchased Properties. The execution and delivery of this Agreement and the Ancillary Agreements by Buyer do not, and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not, conflict with, violate or result in the breach of any provision of the certificate of incorporation or bylaws of Buyer or, conflict with, violate or result in the breach of any contract to which Buyer is a party. No material consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Buyer in connection with the execution and delivery of this Agreement by Buyer or the fulfillment by Buyer of its obligations under this Agreement, except the filings and approvals described in Article 4. 8.2.4 No Violation of Law. The execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not violate any Law except to the extent any such violation would not have a material adverse effect on the ability of Buyer to fulfill its obligations hereunder and thereunder. 8.2.5 Financial Capacity. (a) Buyer has sufficient cash or other sources of funds to pay the Purchase Price in the manner specified in Section 3.1 and all related fees and expenses. (b) Buyer has sufficient financial resources to operate the Business after the Closing Date. Without limiting the generality of the foregoing, Buyer has sufficient financial resources to satisfy any applicable requirement relating to financial capacity or capital imposed by any Governmental Authority in any state in which the Business is conducted. Buyer is solvent, is able to pay its debts as they become due, and owns property that has both a fair 36 value and a fair saleable value in excess of the amount required to pay its debts as they become due. 8.2.6 Brokers. Buyer has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Seller for any broker's or finder's fees or similar fees or expenses. 8.2.7 Consents and Approvals of Governmental Authority. Subject to Article 4 with respect to Regulatory Approvals and FCC Consents, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority or regulatory authority is required in connection with the execution, delivery and performance of this Agreement by Buyer or the consummation by Buyer of the transactions contemplated herein, except for filings with the Federal Trade Commission and Department of Justice pursuant to the HSR Act, if required. ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS 9.1 Transition Services Agreement. The parties agree to cooperate with each other to ensure that the transition of the ownership of the Purchased Property proceeds with minimal disruption to the services being provided to subscribers. The parties agree that it may be necessary for Seller to assist Buyer in converting Seller's systems and processes with respect to the Purchased Property to Buyer's systems and processes. Seller and Buyer agree to execute a separate "Transition Services Agreement" substantially in the form attached hereto as Schedule 9.1 for the provision of such services. 9.2 Optional Services Agreement. It is understood and agreed that Buyer may not have for a period of time after Closing Date, certain systems or processes necessary to provide some basic customer services. Seller will at Buyer's request and for the fees described in Schedule 9.2 provide any or all of the services described in a separate "Optional Services Agreement" signed by the parties substantially in the form attached hereto as Schedule 9.2. 9.3 Directory Publishing. 9.3.1 Assumption of Certain Directory Publishing Agreement Rights and Obligations. Seller is party to a directories publishing agreement with [GTE Directories Service Corporation n/k/a GTE Directories Corporation or GTE Directories Corporation as purchaser of the rights and interests of Associated Directory Services, Inc. f/k/a Mast Advertising and Publishing, Inc.] herein "Publisher." This [These] agreement[s] is [are] identified in Schedule 9.3.1 attached hereto ("Publishing Agreement[s]"). Pursuant to this [these] agreement[s] Publisher has the exclusive right and obligation to sell advertising, and to publish, print and distribute directories containing telephone numbers relating to the Purchased Exchanges. Buyer agrees to execute an agreement effective as of the Closing to assume and appropriately amend the Publishing Agreement[s] as it[they] relate to the Purchased Exchanges, including the extension of the Contel Publishing Agreements expiring prior to the Seller's Master 37 Publishing Agreement which expires December 31, 2001, so that such extensions expire on December 31, 2001. If the directories for any of the Purchased Exchanges are published by a third party non-Affiliate of Seller, then to the extent requested by Buyer, Seller agrees to assist Buyer in obtaining such third party's consents to the continuation of such publishing arrangements; provided that Seller shall have no obligation to pay compensation or other consideration in connection with such assistance. 9.3.2 Co-Bound Directories Acknowledgement. Buyer acknowledges that Publisher may have a pre-existing obligation (which Publisher may choose to continue) to sell advertising, publish, print and distribute the telephone numbers of third party local exchange telephone companies in the same directory as the Purchased Exchanges ("Co-Bound" directory). Co-Bound directory agreements of which Seller is aware, if any, are identified on Schedule 9.3.2. 9.3.3 Meeting to Discuss Directory Publication. Within ninety (90) days following the date of this Agreement, Buyer agrees to meet with Seller and Publisher for the purpose of having an initial discussion about the first directory publication after the Closing Date. This meeting will be held at Publisher's address unless otherwise agreed between the parties and Publisher. All parties shall employ their respective commercially reasonable efforts to ensure that directory publication is not interrupted following the Closing Date. 9.4 GTE Supply Relationship. Within 90 days of this Agreement, Buyer agrees to meet with representatives of GTE Supply for purposes of negotiating in good faith an agreement for GTE Supply to provide ongoing procurement and materials management functions for the Business on substantially the same terms as contained in the Buyer's existing agreement with GTE Supply; provided that Buyer may negotiate in good faith with respect to any volume discounts that may be available from GTE Supply. ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES 10.1 Intellectual Property. 10.1.1 No License. Buyer and Seller agree and understand that except as expressly set forth in writing in the License Agreement and Section 10.1.3, Seller has not granted any rights or licenses, express or implied, of, and nothing shall constitute or be construed as a license of Seller under any Intellectual Property now or hereafter owned, obtained or licensable by Seller or under any Third Party Intellectual Property. 10.1.2 Infringement. (a) Notwithstanding anything in this Agreement to the contrary, Seller shall have no obligation to defend, indemnify or hold harmless Buyer or any of its Affiliates, from any damages, costs or expenses resulting from any obligation, proceeding or suit based upon any claim that any activity subsequent to the Closing Date engaged in by Buyer, a customer of Buyer's or anyone claiming under Buyer, constitutes direct or contributory infringement, 38 misuse of, or misappropriation of, or inducement to infringe, any Third Party Intellectual Property. (b) Buyer shall defend, indemnify and hold harmless Seller and its Affiliates from and against any and all Indemnifiable Losses resulting from any obligation, proceeding or suit based upon any claim alleging or asserting direct or contributory infringement, or misuse or misappropriation of or inducement to infringe by Seller or any of its Affiliates of any Third Party Intellectual Property, to the extent that such claim is based on, or would not have arisen but for, activity conducted or engaged in subsequent to the Closing Date by Buyer, a customer of Buyer's, or anyone claiming under Buyer. 10.1.3 Trademark Phaseout. (a) Buyer acknowledges that Seller or its Affiliates are the owners of Excluded Marks that qualify as Excluded Property under Section 2.3. Buyer understands and agrees that the Excluded Marks, or any right to or license of the Excluded Marks, are not being transferred pursuant to this Agreement. Buyer acknowledges the exclusive and proprietary rights of Seller and its Affiliates in the use of the Excluded Marks, and Buyer agrees that it shall not use the Excluded Marks (or any names, domain names, marks or indicia confusingly similar to the Excluded Marks) except and to the extent expressly set forth in this Section 10.1.3 or assert any rights or claims in such Excluded Marks (or in any names, domain names, marks or when confusingly similar to the Excluded Marks). After the Closing, all Excluded Marks of Seller and its Affiliates shall be replaced by Buyer, at Buyer's expense, as soon as possible, but in no event later than one hundred twenty (120) days after the Closing Date for items with Excluded Marks affixed to them which Buyer has continued to use in Buyer's operation of the Business, including buildings, vehicles, heavy equipment, hard hats, tools, tool boxes, kits (safety and others), signs, public (pay) telephones, manual covers and notebooks. After the Closing, Buyer will not use, and will destroy or deliver to Seller, all such items with Excluded Marks affixed to them that have no valid continuing use in Buyer's operation of the Business, including items affecting customer or employee relations or items that do not reflect Buyer's true identity. Specific items to be destroyed or returned include items with Excluded Marks affixed to them including giveaways; order, purchase or materials forms; requisitions; invoices; statements; time sheets/labor reports; bill inserts; stationery; personalized note pads; maps; organization charts; bulletins/releases; sales/price literature; manuals or catalogs; report covers/folders; program materials; and materials such as media contact lists/cards. The one hundred twenty (120) day time period for replacement of Excluded Marks affixed to telephone directories that were already published or closed for publication at the Closing Date shall be extended to the expiration date of such directories. (b) Buyer recognizes the great value of the goodwill associated with the Excluded Marks, and acknowledges that the Excluded Marks and all rights therein and the goodwill pertaining thereto belong exclusively to Seller and that the Excluded Marks have a secondary meaning in the minds of the public. Buyer further agrees that any and all permitted use of the Excluded Marks pursuant to this Agreement shall inure to the sole and exclusive benefit of Seller. 39 (c) Buyer agrees that any permitted use of the Excluded Marks in the operation of the Business after the Closing shall be provided in accordance with all applicable federal, state and local laws, and that the same shall not reflect adversely upon the good name of Seller or its Affiliates, and that the operation of the Business will be of a high standard and skill. (d) Buyer acknowledges that its failure to cease use of the Excluded Marks as provided in this Agreement, or its improper use of the Excluded Marks, will result in immediate and irreparable harm to Seller and its Affiliates. Buyer acknowledges and admits that there is no adequate remedy at law for such failure to terminate use of the Excluded Marks, or for such improper use of the Excluded Marks. Buyer agrees that in the event of such failure or improper use, Seller and its Affiliates shall be entitled to equitable relief by way of temporary restraining order, or preliminary or permanent injunction, or any other relief available under this Agreement. (e) Buyer will not contest the ownership or validity of any rights of Seller or its Affiliates in the Excluded Marks. 10.1.4 Third Party Software. To the extent that the transfer of Purchased Property by Seller to Buyer under this Agreement results in the transfer of possession to Buyer of software that at the Closing Date is Third Party Intellectual Property, which software was located in and rightfully used by Seller in the geographical area of the Purchased Exchanges prior to the Closing Date in the normal and ordinary operation of the Business pursuant to Contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then subject to Section 2.5, effective as of the Closing and provided that no payments to any Person other than a Switch Software vendor (which, if any, shall be paid by Seller) are thereby required, at Closing Seller shall assign to Buyer, and Buyer shall accept all rights and licenses if any to posses and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. Buyer understands and agrees that except as provided above in this Section 10.1.4, or as expressly provided elsewhere in this Agreement or in another written agreement between Buyer and Seller, no rights or licenses to use or possess such software or any Third Party Intellectual Property are transferred to Buyer. Buyer shall properly dispose of, and shall not use, any software of which Buyer acquires possession in connection with Purchased Property and (i) which, after the Closing Date, Buyer knows, or reasonably should know, is not the subject of a Third Party Intellectual Property Contract that has been rightfully transferred to Buyer or for (ii) which Buyer does not have a separate license. Seller makes no warranty or representation that any Third Party Intellectual Property Contract or any right therein is assignable in whole or in part to Buyer. 10.2 Effect of Due Diligence and Related Matters. (a) Buyer represents that it is a sophisticated entity that was advised by knowledgeable counsel and financial advisors and, to the extent it deemed necessary, other advisors in connection with this Agreement and has conducted its own independent review and evaluation of the Purchased Property. Accordingly, Buyer covenants and agrees that (i) except 40 for the representations and warranties set forth in this Agreement, Buyer has not relied and will not rely upon any document or written or oral information furnished to or discovered by it or its representatives, including any financial data, (ii) there are no representations or warranties by or on behalf of Seller or its Affiliates or representatives except for those expressly set forth in this Agreement, and (iii) to the fullest extent permitted by law, Buyer's rights and obligations with respect to all of the foregoing matters will be solely as set forth in this Agreement. (b) Upon the Closing, Buyer shall be deemed to have waived any claim with respect to a breach of any representation, warranty, covenant or obligation of Seller, or any failure of a condition, hereunder of which Buyer had knowledge; provided that Buyer shall be deemed to have knowledge of the information made available to Buyer and/or its representatives during its review of the Purchased Property prior to the date of this Agreement, which information is contained in the Due Diligence Documents. (c) After the date of this Agreement and prior to the Closing Date, Buyer shall promptly notify Seller if Buyer obtains knowledge of any actual breach of any representation, warranty, covenant or obligation of Seller or any actual or prospective failure of a condition, hereunder of which Buyer obtains knowledge. Failure to provide timely notice shall be deemed to constitute a waiver of any claim with respect to such breach. 10.3 Confidentiality. Whether or not the Closing occurs, the parties hereto and their respective officers, directors, employees and representatives will comply with the Confidentiality Agreement, the provisions of which are expressly incorporated herein in their entirety by this reference. 10.4 Further Assurances. After the Closing, Seller will use its commercially reasonable efforts to furnish to Buyer such other instruments and information as Buyer may reasonably request in order to convey to Buyer title to the Purchased Property, to be delivered from time to time upon Buyer's reasonable request. 10.5 Prorations. The following liabilities shall be prorated between Seller and Buyer: (i) utility charges (which shall include water, sewer, electricity, gas and other utility charges) with respect to the Owned Real Property, the property subject to the Real Property Leases and customer owned equipment, (ii) rental charges (which shall include rental charges and other lease payments under the Real Property Leases), (iii) personal services (these services are charged for a period which includes the Closing Date; this shall include contract labor), and (iv) real and personal property taxes, ad valorem taxes, and franchise fees or taxes (collectively, "Periodic Taxes"). With respect to measurement periods during which the Closing Date occurs (all such periods of time being hereinafter called "Proration Periods"), the liabilities described in clauses (i), (ii) and (iii) of the preceding sentence shall be apportioned between Seller and Buyer as of the Closing Date, with Buyer bearing only the expense thereof in the proportion that the number of days remaining in the applicable Proration Period on and after the Closing Date bears to the total number of days covered by such Proration Period. Periodic Taxes attributable to Proration Periods shall be prorated between Buyer and Seller based on the relative periods the Purchased Property was owned by each respective party during the fiscal period of the taxing jurisdiction for which such taxes were imposed by such jurisdiction (as such fiscal period is or may be reflected on the bill rendered by such taxing jurisdiction). On the Closing Date, Buyer and Seller 41 shall pay or be reimbursed, on this prorated basis, for Periodic Taxes that have been paid before the Closing Date. On the Closing Date, Buyer and Seller shall also be reimbursed, on this prorated basis, for Periodic Taxes that are to be paid on or after the Closing Date. The reimbursement of Periodic Taxes that are to be paid on or after the Closing Date shall be based on a reasonable estimate of the amount of such Periodic Taxes to be paid (based on past experience). To the extent that Buyer or Seller are not reimbursed on the Closing Date for Periodic Taxes that are paid after the Closing Date, or, in the event the estimated amount of the preceding sentence proves to have been inaccurate, Buyer or Seller shall promptly forward an invoice to the other party for its reimbursable pro rata share, if any. If the other party does not pay the invoice within thirty (30) calendar days of receipt, the amount of such payment shall bear interest at the rate of eight percent (8%) per annum. Similarly, all prepayments made or received by Seller or Buyer with respect to service or maintenance agreements with third parties or license or other fees payable to or by third parties and relating to the Business shall be prorated on an appropriate basis between Seller and Buyer. 10.6 Cost Studies/NECA Matters. 10.6.1 Prior to Closing. Seller agrees that, with respect to all toll revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Purchased Property prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any matters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Long Term Support ("LTS"), and Telecommunications Relay Services funds. 10.6.2 From and After Closing. (a) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC Rules and Regulations as stated in Part 36.601(c) for rural carriers. The USF Funds due to Buyer shall be determined by multiplying the number of lines sold times a per-line amount of USF support received by Seller prior to the date of sale of the Business. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36, but will receive support in accordance with guidelines using forward-looking economic cost. Buyer shall make its own filing in accordance with said FCC Rules and Regulations, Part 36.611 and Part 36.612 for rural carriers and Part 54 for non-rural carriers. Within a reasonable time after Buyer's written request, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Purchased Property during the partial calendar year prior to the Closing Date and such reasonable assistance as required in connection with Buyer's preparation of necessary filings or submissions. (b) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (USAC) based on end-user retail revenues for the previous year 42 generated by assets being sold. The resulting Buyer's annual USF obligation for assets purchased shall be prorated in proportion to the number of months in the year from and after the Closing Date. 10.7 Customer Deposits. Within thirty (30) days after Closing, Seller agrees to transfer to Buyer the customer deposits together with any interest accrued thereon (collectively "Customer Deposits"), together with all of Seller's obligations and rights to hold the Customer Deposits of the Business, up to the Closing Date, and Buyer agrees to hold, disburse and retain such deposits so delivered to it as if it were Seller. 10.8 Access to Books and Records. (a) After the Closing, Seller will retain all Retained Books and Records for a period of three (3) years. (b) After the Closing, upon reasonable notice and subject to the Confidentiality Agreement, the parties will give to the representatives, employees, counsel and accountants of the other, access, during normal business hours, to books and records relating to the Business and the Purchased Property, and will permit such persons to examine and copy such records, in each case to the extent reasonably requested by the other party in connection with tax and financial reporting matters (including any Tax Returns and related information, but not attorney work product or similar work product prepared by accountants), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any Contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any Tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any Tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 10.8(b). 10.9 Purchase Price Allocation. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the IRC. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the IRC and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable Law. 43 10.10 Owned Real Property Transfers. Within sixty (60) days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies in Seller's possession covering the Owned Real Property. Thereafter, no later than thirty (30) days before the Closing Date, Seller shall deliver (at Seller's expense) to Buyer title commitments for owners' policies of title insurance prepared by a title insurance company reasonably acceptable to Buyer and a certified current survey, with respect to all Owned Real Property included in the Purchased Property and in which Seller purports to own fee title. Buyer acknowledges that such title commitments shall be for CLTA owners' policies of title insurance (or its equivalent) unless Buyer has requested in writing, prior to the date hereof, that such commitments be issued for other forms of title insurance (in which event, Buyer shall bear all costs and premiums for such title insurance to the extent attributable to such coverage being in excess of CLTA coverage or its equivalent). Such title commitments shall reflect that upon the consummation of the sale to Buyer contemplated by this Agreement and the payment of all premiums and charges due for such title insurance, Buyer will be vested with good, fee simple title to such Owned Real Property, subject only to the exceptions show thereon, the title company's standard exceptions and exclusions, and such matters that arise after the date and time of such title commitment. Except as provided in the following sentence, in the event that Buyer requires endorsements to such title commitments or the applicable title insurance policies, such endorsements shall be obtained at Buyer's sole cost and expense and shall not be a condition to Closing. On the Closing Date, Seller shall convey the Owned Real Property to be transferred to Buyer subject only to Permitted Encumbrances, provided that Seller may transfer such property subject to one or more exceptions that are not Permitted Encumbrances if Seller commits in writing, in form and substance reasonably acceptable to Buyer on or before the Closing Date, to cause any such exception that is not a Permitted Encumbrance to be removed, insured or bonded over to Buyer's reasonable satisfaction, or if Seller indemnifies Buyer with respect to such exceptions to Buyer's reasonable satisfaction on or before the Closing Date. With respect to each parcel of Owned Real Property covered by a title commitment referenced above, the amount of title insurance provided under the applicable title insurance policy shall be the fair market value of the applicable property, which shall be determined by Buyer at its sole cost and expense using commercially reasonable methods of valuation, provided that all such valuations shall be consistent with all allocations of the Purchase Price made hereunder or pursuant to this Agreement, and shall be acceptable to the title insurance company. The determination of fair market value shall be made in a timely manner such that the title commitments can be issued in a timely manner prior to the Closing Date. Seller agrees that prior to Closing it will provide the title company with such instructions, authorizations, affidavits, and indemnities as may be reasonably necessary for the title company to issue title policies to Buyer, dated as of the Closing Date, for all of the Owned Real Property with so-called non-imputation endorsements. By no later than forty-five (45) days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering each parcel of the Owned Real Property covered by the title commitments. Buyer will use its commercially reasonable efforts to work with the title company between the date hereof and fifty-five (45) days after Closing Date to resolve any issues with respect to such title commitments. Seller shall be responsible for the payment of all title insurance premiums attributable to the CLTA portion of the coverage afforded by each such policy obtained, and Buyer shall be responsible for the payment of all title insurance premiums in excess of such amount and for the payment of all endorsement charges and other fees and costs imposed by the title company. 44 10.11 Transaction Taxes. Buyer shall bear and be responsible for paying any sales, use, transfer, documentary, registration, business and occupation and other similar taxes (including related penalties (civil or criminal), additions to tax and interest) imposed by any Governmental Authorities with respect to the transfer of Purchased Property to Buyer (including the Owned Real Property) ("Transaction Taxes"), regardless of whether the tax authority seeks to collect the such taxes from Seller or Buyer. Seller shall prepare all tax filings related to any sales, use, transfer, documentary, registration, business and occupation and other similar taxes. Seller, fifteen (15) days prior to making such filings shall provide to the Buyer Seller's work papers for the Buyer's review and approval. Buyer shall provide to the Seller ten (10) days prior to the filing date approval of such work papers. Buyer shall also be responsible for (i) administering the payment of such Transaction Taxes, (ii) defending or pursuing any proceedings related thereto, and (iii) paying any expenses related thereto. Seller shall give prompt written notice to Buyer of any proposed adjustment or assessment of any Transaction Taxes with respect to the transaction, or of any examination of said transaction in a sales, use, transfer or similar tax audit. In any proceedings, whether formal or informal, Seller shall permit Buyer to participate and control the defense of such proceeding, and shall take all actions and execute all documents required to allow such participation. Seller shall not negotiate a settlement or compromise of any Transaction Taxes without the written consent of Buyer, which consent shall not be unreasonably withheld. 10.12 Bulk Sales Laws. Seller and Buyer waive compliance with applicable laws under any version of Article 6 of the Uniform Commercial Code adopted by any state or any similar law relating to the sale of inventory, equipment or other assets in bulk in connection with the sale of the Purchased Property. 10.13 Prepaid Non-Regulated Maintenance Agreements. Within thirty (30) days following Closing, Seller shall pay to Buyer an amount equal to the pro rata portion of all prepaid but unearned revenues from Seller's customers for all non-regulated maintenance agreements as of the Closing Date. 10.14 Vehicle Registration. Buyer agrees to use its commercially reasonable efforts to file promptly the appropriate vehicle title applications and registrations to change the name of the titled owner on each vehicle title certificate and change the motor vehicle registration (with respect to license plate information) on each vehicle being transferred to Buyer from Seller pursuant to this Agreement. Buyer agrees that it shall remove and destroy Seller's existing license plates from all vehicles received upon the earlier of receipt of new license plates or sixty (60) days following Closing. 10.15 Carrier Access Billing and Accounts Receivable Transition. Seller shall render its own final carrier access bills to its interexchange carriers for minutes, messages and other applicable charges up to the Closing Date. Seller shall be responsible for collecting and settling any disputes associated with its final bills to the interexchange carriers. 10.16 End-User Billing and Accounts Receivable Transition. Buyer agrees to purchase Seller's Earned End-User Accounts Receivable and make payment to Seller for those accounts in the manner described below: 45 (a) Seller shall transfer to Buyer, as soon as reasonably available after Closing, all open end-user customer account records to Buyer as of the end of business on the Closing Date. Following the Closing, Buyer shall be responsible for administering those records including the application of cash receipts to customer accounts, whether related to services rendered before or after the Closing. Seller shall promptly forward to Buyer all customer payments and related remittance documents received by Seller after the Closing for processing by Buyer. (b) Within twenty (20) days following the Closing, Seller shall provide an accounting to Buyer of the Earned End-User Accounts Receivable Amount and the Customer Advances as well as the most recent twelve (12) month history of Seller's uncollectible net writeoffs expressed as a percentage of billings for the Business (the "Uncollectible Factor"). This data and the resulting calculation of the Earned End-User Accounts Receivable Amount shall be summarized in an accounts receivable settlement statement (the "Accounts Receivable Settlement Statement"). Within thirty (30) days following the Closing, Buyer shall remit to Seller an amount equal to 80% of the Earned End-User Accounts Receivable Amount less 100% of the Customer Advances. Within sixty (60) days following the Closing, Buyer shall remit an additional 15% of the Earned End-User Accounts Receivable Amount and within ninety (90) days will remit the final 5%. (c) Not later than ten (10) days prior to the due dates for the sixty (60) and ninety (90) day payments referred to in Section 10.16(b), Seller will provide Buyer with an updated Accounts Receivable Settlement Statement reflecting any adjustments based upon non-sufficient funds checks, billing adjustments or other facts that relate to pre-closing activity that became known after the preparation of the original statement. (d) If at any time during the ninety (90) day period following the Closing, Buyer or Seller discovers any material discrepancy in the Accounts Receivable Settlement Statement, both parties agree to use commercially reasonable efforts to resolve any discrepancy in a timely manner, and also agree to make payments related to any undisputed amounts as set forth above. (e) At any time between ninety (90) and two hundred seventy (270) days following the Closing, Buyer may, at its discretion, prepare an analysis of actual bad debt write-off experience related to the Earned End-User Accounts Receivable purchased from Seller. If such analysis reasonably demonstrates that write-offs have exceeded the estimated amount in the final Accounts Receivable Settlement Statement (as had been calculated using the Uncollectible Factor) by more than 10%, Seller will pay to Buyer the full amount of the difference within thirty (30) days of receipt of Buyer's request for payment, together with Buyer's write-off analysis, Buyer will provide Seller sufficient detail in its write-off analysis, and as reasonably necessary, access to billing and collection records, to allow Seller to validate the accuracy of Buyer's request. Any disputes regarding the amounts of such request shall be settled using the procedure described in Section 3.3(d). 46 ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS 11.1 Employment of Transferred Employees. Subject to the other provisions of this Section 11.1, all Active Employees of Seller employed in the Business, and all Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date (hereinafter collectively referred to as "Transferred Employees") shall be employed by (or become the responsibility of, as applicable) Buyer as of the Closing Date in the same or comparable positions, and at the same or comparable total compensation (including base pay and bonus), as were in effect on the Closing Date, except as otherwise provided in this Agreement. For purposes of the preceding sentence, the term "Active Employees" shall include all full-time and part-time employees, employees on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights, and employees on other approved leaves of absence with a legal or contractual right to reinstatement. For a period of twelve (12) months following the Closing Date, Buyer shall not actively solicit either directly or indirectly through any agents, and Buyer shall not permit any of its Affiliates to actively solicit either directly or indirectly through any agents, any person who retires or otherwise terminates from any employment at or in association with Seller during the six-month period beginning three (3) months before the Closing Date, and Buyer shall neither employ nor permit any of its Affiliates to employ any individuals who are identified to Buyer by Seller as individuals who terminated from any employment or association with Seller during such six-month period. On or before the execution date of this Agreement, Seller shall have delivered to Buyer a list of the persons who would have been Transferred Employees had the Closing Date occurred on March 31, 1999, showing the following information for each such person: (i) the name of each such person; (ii) the name of his or her current employer; (iii) his or her current base pay, 1998 bonus and projected 1999 bonus; (iv) his or her hire date, any rehire date (if available) and years of service; (v) his or her then-current position; (vi) whether such employee is (x) subject to a collective bargaining agreement or represented by a labor organization, if any, and including the name and date of each such bargaining agreement or (y) on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights or on other approved leave of absence with a legal or contractual right to reinstatement; and (vii) for any employee who is not employed exclusively in the Business, a description of the nature of his or her employment and the percentage of his or her time actually allocated to the Business in calendar year 1998. Seller shall update such list at such time or times requested by Buyer, but not more often than as of the end of each calendar quarter occurring between the execution date hereof and the Closing Date, commencing with the quarter ending June 30, 1999, and as of the month ending immediately prior to the Closing Date, in each case assuming the Closing Date had occurred on such date, and shall deliver such updated lists to Buyer within ten (10) days after the end of each such calendar quarter or month-end, as applicable. Any person who is not on such list as updated as of the end of the month immediately preceding the Closing Date shall not be a Transferred Employee, and for all purposes under this Agreement the Transferred Employees shall include only those persons on such list as updated as of such month-end who continue to be Active Employees of Seller employed in the Business or Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date. 47 11.1.1 Assumption of Collective Bargaining Agreement Obligations. On and after the Closing Date, Buyer, as successor employer to Seller, shall assume all of the employer's obligations under, and be bound by the provisions of, each collective bargaining agreement to the extent of provisions covering Transferred Employees. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. 11.1.2 Assumption of Employment and Other Agreements. On and after the Closing Date, except as otherwise provided in this Agreement or in Schedule 11.1.2, Buyer, as successor employer to Seller, shall assume all obligations of each employment agreement or any other agreement by Seller relating to conditions of employment, employment separation, severance, or employee benefits in connection with the Transferred Employees, but only to the extent that they have been disclosed to Buyer on Schedule 8.1.16(a) and copies have been furnished to Buyer as soon as administratively practicable prior to the execution of this Agreement. To the extent that Buyer assumes any obligations under this Article 11, Buyer may reduce or eliminate benefits under any agreement, plan, policy or program only to the extent required to comply with applicable law, or to the extent that Seller, its Affiliates, or any successors or assigns, make amendments or changes to its benefit plans, policies or programs to eliminate or reduce benefits. Until the fifth anniversary of the Closing Date, Seller promptly shall deliver to Buyer a copy of each material amendment or change that Seller makes to its Plans and Employment Agreements to eliminate or reduce benefits thereunder and shall confirm to Buyer on an annual basis whether, and the extent to which, it has amended its Plans and Employment Agreements and provide sufficient detail to enable Buyer to determine whether Seller has reduced or eliminated benefits thereunder. After the fifth anniversary of the Closing Date, Buyer may amend such plans, policies, and programs in any manner it determines, consistent with applicable law and collective bargaining agreements. 11.1.3 Recognition of Transferred Employee Service. On and after the Closing Date, and subject to the provisions of any applicable collective bargaining agreement, and except as otherwise provided in this Article 11, Buyer shall recognize the service of each Transferred Employee for all employment-related purposes determined in accordance with the practices and procedures of Seller in effect on the Closing Date, as if such service had been rendered to Buyer. 11.1.4 Assumption of Obligation to Pay Bonuses. Transferred Employees shall not accrue benefits under any employee benefit policies, plans, arrangements, programs, practices, or agreements of Seller or any of its Affiliates after the Closing Date. Buyer shall assume the obligation to pay to Transferred Employees any bonuses that would have been payable to the Transferred Employees with respect to the calendar year in which the Closing Date occurs had the Transferred Employees remained employees of Seller or one of its Affiliates, in accordance with the provisions of the policy, plan, arrangement, program, practice or agreement under which the bonus would have been paid. 11.1.5 No Duplicate Benefits. Nothing in this Agreement shall cause duplicate benefits to be paid or provided to or with respect to a Transferred Employee under any employee benefit policies, plans, arrangements, programs, practices, or agreements. 11.1.6 Affiliate Employees. If any employee identified in the list provided pursuant to Section 11.1 is an employee of an Affiliate of Seller whose duties relate primarily to 48 the Business, he or she shall be considered a Transferred Employee and shall be treated under this Agreement in a manner that is comparable to the treatment given to the Transferred Employees who are employed by Seller, except that his or her service as of the Closing Date shall be determined in accordance with the practices and procedures of his or her employer, as disclosed to Buyer in accordance with Section 11.1.2. 11.2 Transferred Employee Benefit Matters. 11.2.1 Defined Benefit Plans. (a) Seller Pension Plans. As of the date of this Agreement, Seller participates in the following single-employer defined benefit pension plans maintained in the United States: (i) the GTE Service Corporation Plan for Employees' Pensions (the "Seller Salaried Pension Plan"); and (ii) the GTE California/GTE Northwest Plans for Hourly-Paid Employees' Pensions (collectively, the "Seller Hourly Pension Plan"). The plans identified in this Section 11.2.1(a) shall be referred to collectively in this Agreement as the "Seller Pension Plans," and each such plan shall be referred to individually as a "Seller Pension Plan." (b) Buyer Obligations. Buyer shall take all actions necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more pension plans (hereinafter referred to in the aggregate as the "Buyer Pension Plans" and individually as the "Buyer Pension Plan") effective as of the Closing Date and to ensure that each Buyer Pension Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Pension Plan is a qualified, single-employer defined benefit plan under Section 401(a) of the IRC; (ii) any Buyer Pension Plan that was in effect before the Closing Date shall not have any "accumulated funding deficiency," as defined in Section 302 of ERISA and Section 412 of the IRC, whether or not waived, immediately before the Closing Date; (iii) the Buyer Pension Plan is not the subject of termination proceedings or a notice of termination under Title IV of ERISA; (iv) the Buyer Pension Plan does not exclude Transferred Employees from eligibility to participate therein; (v) the Buyer Pension Plan does not violate the requirements of any applicable collective bargaining agreement; and (vi) with respect to Transferred Employees who were participants in the Seller Hourly Pension Plan by virtue of their coverage under a collective bargaining agreement on the Closing Date, the terms of the Buyer Pension Plan are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. For purposes of this Section 11.2.1, Transferred Employees who were participants in the Seller Hourly Pension Plan other than by virtue of their coverage under a collective bargaining agreement on the Closing Date shall be treated as Transferred Employees who, on the Closing Date, participate in the Seller Salaried Pension Plan. Within the 30-day period immediately preceding any transfer of assets and liabilities from a Seller Pension Plan to a Buyer Pension Plan pursuant to this Section 11.2.1(b), Buyer shall provide Seller with a written certification, in 49 a form acceptable to Seller, that the Buyer Pension Plan satisfies each of the requirements set forth in this Section 11.2.1(b). (c) Transfer of Liabilities. (i) In accordance with the provisions of this Section 11.2.1, Buyer shall cause the Buyer Pension Plans to accept all liabilities for benefits under the Seller Pension Plans, whether or not vested, that would have been paid or payable (but for the transfer of assets and liabilities pursuant to this Section 11.2.1) to or with respect to the Transferred Employees under the terms of the Seller Pension Plans and that are "Section 411(d)(6) protected benefits" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder) that have accrued under the Seller Pension Plan to or with respect to the Transferred Employees based on accredited service and compensation under the Seller Pension Plans as of the Closing Date. For a period of not less than five (5) years after the Closing Date, and unless otherwise required to comply with applicable law or permitted by Section 11.1.2, Buyer shall not amend the Buyer Pension Plans, or permit the Buyer Pension Plans to be amended, to eliminate any benefit, whether or not vested, with respect to which liabilities are transferred pursuant to the foregoing provisions of this subsection (i), to the extent any such benefit is a "Section 411(d)(6) protected benefit" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder). On or before the Closing Date, Seller or an Affiliate thereof shall take action to fully vest Transferred Employees in their benefits (if any) under the Seller Pension Plans. (ii) (A) For purposes of eligibility and vesting under the Buyer Pension Plans, each Transferred Employee whose accrued benefit is transferred from a Seller Pension Plan to a Buyer Pension Plan shall be credited with service as of the Closing Date as determined under the terms of the Seller Pension Plan. The benefit under the Buyer Pension Plan for each Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be calculated under terms of the Buyer Pension Plan that are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. The benefit for each Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall not be less than the greater of (x) the sum of the Transferred Employee's "Seller Pension" and "Buyer Pension," or (y) the Transferred Employee's "Total Service Pension," each as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1. (B) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Salaried Pension Plan and who, under the terms of the Seller Salaried Pension Plan, has at least 15 years of accredited service and combined years of age and accredited service of at least 74 as of the Closing Date shall be eligible, after the Transferred Employee's employment with the Buyer and its Affiliates is terminated and after the Transferred Employee's combined years of age and years of accredited service equal or exceed 76, to receive his or her "Seller Pension" (as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1) as an immediate early retirement pension under the applicable Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Salaried Pension Plan as of the Closing Date. For a period of at least five (5) years following the Closing Date, the Buyer shall cause any agreement, pursuant 50 to which the accrued benefit of any Transferred Employee under a Buyer Pension Plan is transferred to another pension plan, to incorporate a provision in substance identical to this subsection (ii)( B). (C) Except as provided in paragraph (E), below, the benefit under the Buyer Pension Plan of a GATT Grandfathered Participant, when expressed in the form of a lump sum, shall not be less than the benefit under the Buyer Pension Plan determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. The method used to convert a GATT Grandfathered Participant's accrued benefit into a lump-sum amount under the Buyer Pension Plan after 1999 shall be not less favorable to a GATT Grandfathered Participant than the method used for similar purposes by the Seller Pension Plan. For purposes of this paragraph (c)(ii)(C), "GATT Grandfathered Participant" shall mean a Transferred Employee (x) with respect to whom liabilities are transferred pursuant to this subsection (c) and (y) who, taking service from Buyer into account as service with Seller, would have been eligible under the Seller Pension Plan, but for the transfer of liabilities pursuant to this subsection (c), to have his benefit under the Seller Pension Plan (when expressed in the form of a lump sum) determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. (D) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Hourly Pension Plan shall be eligible, after the Transferred Employee's employment with Buyer and its Affiliates is terminated, to receive an early retirement pension under the Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Hourly Pension Plan as of the Closing Date. (E) Notwithstanding paragraphs (B), (C), and (D), above, if the actuary for the Buyer Pension Plan certifies in writing (with a copy to Seller) that the Buyer Pension Plan will violate the requirements imposed by Treasury Regulation section 1.401(a)(4)-4 unless certain benefits otherwise called for by such paragraphs are not provided by the Buyer Pension Plan, Buyer shall cause such benefits to be provided under a nonqualified deferred compensation plan, rather than under the Buyer Pension Plan, at the same time and in the same form as they otherwise would have been provided under the Buyer Pension Plan; provided that (1) such benefits shall be provided by the Buyer Pension Plan to the maximum extent possible without causing the Buyer Pension Plan to violate Treasury Regulation section 1.401(a)(4)-4; and (2) to the extent that any benefit payable outside of the Buyer Pension Plan pursuant to this paragraph (E) is payable to an individual who is not a member of a "select group of management or highly compensated employees" within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, Buyer shall cause a cash payment or payments to be made to each such individual within 24 months of the termination of the individual's employment with Buyer, in addition to all other payments due or otherwise payable to such individual, in an amount that is reasonably calculated to be actuarially equivalent, on a pre-tax basis, to the value of such benefit. (iii) (A) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of 51 his or her coverage under a collective bargaining agreement, shall be calculated as set forth in paragraph (c)(ii)(A) of this Section 11.2.1. (B) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall be calculated by applying the benefit formula set forth in paragraph (c)(ii)(A) of this Section 11.2.1, in accordance with the rules described in the remainder of this paragraph (B). A Transferred Employee's "Seller Pension" shall be calculated by applying the benefit formula under the Seller Salaried Pension Plan (as in effect on the Closing Date) to the Transferred Employee's service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date. A Transferred Employee's "Buyer Pension" shall be not less than an amount calculated by applying the benefit formula under the Buyer Pension Plan to the Transferred Employee's total accredited service and compensation under the Buyer Pension Plan (including service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation had been earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan after the Closing Date), multiplied by the ratio of accredited service earned after the Closing Date to such total accredited service; provided that for a period of at least five (5) years following the Closing Date, Buyer shall cause the benefit formula used in determining such "Buyer Pension" to provide "section 411(d)(6)" benefits at least as valuable as were provided under the benefit formula applicable to the Transferred Employee under the Seller Salaried Pension Plan on the Closing Date. A Transferred Employee's "Total Service Pension" shall be calculated by applying the benefit formula under the Buyer Pension Plan (before its amendment to reflect the five (5) year inclusion of Seller's formula) to the Transferred Employee's accredited service (including service and compensation credited with the Seller under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation was earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan on and after the Closing Date). For purposes of computing a Transferred Employee's "Total Service Pension," compensation received by such a Transferred Employee from the Seller shall be treated as compensation received from the Buyer. The Seller Pension, the Buyer Pension, and the Total Service Pension shall take into account the Transferred Employee's actual age and entire period of service (including service credited under the Seller Salaried Pension Plan as of the Closing Date and service credited under the Buyer Pension Plan on and after the Closing Date) for vesting and benefit eligibility purposes. (C) Each Transferred Employee who is eligible to receive a benefit under the Buyer Pension Plan may elect to receive the portion of said benefit that is equal to the Seller Pension in any form, and with any early retirement or other actuarial subsidy, that was available under the Seller Pension Plan on the Closing Date, without regard to whether the Transferred Employee is eligible to elect or receive, or does elect or receive, the same form of payment or early retirement or actuarial subsidy for the remainder of the pension under the Buyer Pension Plan. (iv) Within sixty (60) days after the Closing Date, Seller shall deliver to Buyer a list reflecting each Transferred Employee's service and compensation under 52 each of the Seller Pension Plans and each Transferred Employee's accrued benefit thereunder as of the Closing Date. (d) Transfer of Assets. (i) In accordance with the provisions of subsection (d)(i) of this Section 11.2.1 and subject to the provisions of subsection (d)(vi) of this Section 11.2.1, Seller shall direct the trustee of the Seller Pension Plans to transfer to the trustee or funding agent of the Buyer Pension Plan the amount required to be transferred by Section 414(l) of the IRC and the regulations thereunder for all Transferred Employees whose accrued benefits are transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, determined using the following assumptions (the "Pension Assets"): Interest Rate: Rate used to value annuities under PBGC Regulation ss. 4044.52(a)(1) for the month in which the Closing Date occurs Annual Rate of Increase in Salaries: 0% Annual Rate of Increase in Social Security Taxable Wage Base: 0% Annual Rate of Increase in Consumer Price Index: 0% Annual Rate of Increase in Limits on Benefits and Compensation: 0% Mortality: Rates specified under PBGC Regulation ss. 4044.53(c) Termination: None Disability: None Retirement: Expected retirement age as specified under PBGC Regulation ss. 4044.55 Lump Sums: None All other demographic assumptions to match those used by Seller in the preparation of financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. In no event shall the amount of Pension Assets transferred be less than the Projected Benefit Obligation associated with all the liabilities being assumed in the aggregate in Section 11.2.1(c) using the assumptions specified by Seller in the preparation of its financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. The Pension Assets shall be transferred in cash. Except in the case of an arithmetical error in the calculation of the amount of Pension Assets to be transferred, under no circumstances shall Seller or the Seller Pension Plans be liable to transfer any additional amount to Buyer or a Buyer 53 Pension Plan or any other person in respect of the accrued benefits transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, including but not limited to any circumstance under which any person (including a governmental agency) states a claim to some portion or all of the Pension Assets. (ii) Seller shall appoint an actuary ("Seller's Actuary") to determine the amount to be transferred pursuant to subsection (d)(i) of this Section 11.2.1 and shall provide such determination to Buyer, together with a computer file containing all of the data used by Seller's actuary to calculate Pension Assets, within ninety (90) days after the Closing Date. Buyer shall appoint an actuary ("Buyer's Actuary") who shall have the right to audit and review the determination made by Seller's Actuary. If Buyer's Actuary is unable to agree with Seller's Actuary on the amount of the transfer within ninety (90) days after Seller informs Buyer of the amount to be transferred and provides Buyer with the computer file containing all of the data used by Seller's actuary to calculate Pension Assets, Seller and Buyer shall jointly select a third actuary, whose determination shall be binding on Seller and Buyer. Each of Seller and Buyer shall bear the fees, costs and expenses of their respective actuaries, and the fees, costs, and expenses of the third actuary shall be borne one-half by Seller and one-half by Buyer. (iii) Interest on the Pension Assets shall accrue from the Closing Date to the actual date of transfer at the assumed discount rate used in accordance with paragraph (i) of this Section (d); provided that any Pension Assets that are distributed from the Seller Pension Plans before the date of transfer pursuant to subsection (d)(vi) of this Section 11.2.1 shall be credited with interest (such interest to be credited to the Buyer Pension Plans) only from the Closing Date to the date of distribution. (iv) Under the terms of each Buyer Pension Plan, the accrued benefit of each Transferred Employee immediately after the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not be less than the sum of each Transferred Employee's accrued benefits under the Seller Pension Plan and the Buyer Pension Plan immediately before the transfer of assets and liabilities. Neither Seller nor its Affiliates nor the Seller Pension Plans nor any trustee thereof shall retain any liability for benefits under the Seller Pension Plans for any Transferred Employee with respect to whom cash has been transferred to a Buyer Pension Plan pursuant to this Section 11.2.1 or distributed pursuant to subsection (d)(vi) of this Section 11.2.1. (v) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.1, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not take place until as soon as practicable after the latest of (i) the expiration of the 30-day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, or (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Pension Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Pension Plan is qualified under Section 401(a) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Pension Plan required by the IRS as a condition to 54 such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired), and (yy) information enabling the enrolled actuary for the Buyer Pension Plan to issue the certification required by Section 6058(b) of the IRC. (vi) (A) If, after the Closing Date and before the date of transfer of assets and liabilities from the Seller Pension Plans pursuant to this Section 11.2.1, the accrued benefit as of the Closing Date becomes payable under a Seller Pension Plan to or with respect to a Transferred Employee, Buyer shall (xx) furnish GTE Service Corporation with a copy of a properly completed application for such benefits, and (yy) direct GTE Service Corporation to instruct the trustee of the Seller Pension Plan to make benefit payments in the form and amount determined by GTE Service Corporation in accordance with the properly completed application for benefits. Seller shall cause GTE Service Corporation to comply with any such direction. (B) Notwithstanding anything herein to the contrary, the assets and liabilities to be transferred from the trustee of the Seller Pension Plans to the trustee or funding agent of the Buyer Pension Plan pursuant to this Section 11.2.1 shall be reduced, as provided in this subsection (vi), to reflect any benefit payments made pursuant to this subsection (vi) regardless of the form in which paid and any expenses described in paragraph (B) of this subsection (vi) that have not otherwise been paid pursuant to this subsection (vi). 11.2.2 Savings Plans. (a) As of the date of this Agreement, Seller participates in the GTE Savings Plan and the GTE Hourly Savings Plan (collectively referred to as the "Seller Savings Plans"). Except as provided in Section (g) of this Section 11.2.2, Transferred Employees shall not be entitled to make contributions to or to benefit from matching or other contributions under the Seller Savings Plans on and after the Closing Date. (b) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more savings plans (hereinafter referred to in the aggregate as the "Buyer Savings Plans" and individually as the "Buyer Savings Plan") effective as of the Closing Date and to ensure that each Buyer Savings Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Savings Plan is a qualified, single-employer individual account plan under Section 401(a) of the IRC; (ii) the Buyer Savings Plan does not exclude Transferred Employees from eligibility to participate therein; (iii) the Buyer Savings Plan permits Transferred Employees to make before-tax contributions (under Section 401(k) of the IRC) and provides for matching contributions by the Buyer; and (iv) the Buyer Savings Plan does not violate the requirements of any applicable collective bargaining agreement. Within the thirty (30) day period immediately preceding any transfer of assets and liabilities from a Seller Savings Plan to a Buyer Savings Plan pursuant to this Section 11.2.2, Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Savings Plan satisfies each of the requirements set forth in this Section (b). 55 (c) (i) Seller shall fully vest the Transferred Employees in their account balances under the Seller Savings Plan as of the Closing Date and shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans an amount in cash equal in value to the account balances of the Transferred Employees covered by the Seller Savings Plans as of the date of the transfer; provided that to the extent the account balances to be transferred consist in whole or in part of outstanding loans, Seller shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans, in lieu of cash, the promissory notes and related documents evidencing such loans. Buyer and Seller shall take such actions as may be required to effect the assignment of such loans by the trustee of the Seller Savings Plan to the trustee or funding agent of the Buyer Savings Plan, and Buyer shall cause the trustee or funding agent of the Buyer Savings Plan to accept the assignment of such loans. (ii) After the date of the transfer of assets and liabilities pursuant to this Section 11.2.2, Buyer shall assume all liabilities for the benefits payable to or with respect to such Transferred Employees under the Seller Savings Plans, and Seller and the Seller Savings Plans and their implementing trust shall retain no liability for such benefits. (d) For purposes of eligibility and vesting under the Buyer Savings Plans, each Transferred Employee shall be credited with service as of the Closing Date as determined under the terms of the Seller Savings Plans. As soon as practicable after the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees covered by the Seller Savings Plans, together with each Transferred Employee's service under each of the Seller Savings Plans as of the Closing Date. (e) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.2, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.2 shall not take place until as soon as practicable after the latest of (i) the expiration of the thirty (30) day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, and (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Savings Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Savings Plan is qualified under Sections 401(a) and 401(k) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Savings Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired). (f) As of the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees who have outstanding loans under the Seller Savings Plans, together with copies of said Transferred Employees' notes, disclosure statements, and security agreements under the Seller Savings Plans. Seller shall also notify Buyer within thirty (30) days after the Closing Date of any Transferred Employee who initiated a loan within thirty (30) days before the Closing Date. Subject to obtaining the consent of the applicable Transferred Employee if required by law, from the Closing Date until the earliest of (i) the actual 56 date of transfer of assets and liabilities pursuant to this Section 11.2.2; (ii) the full amortization of the Transferred Employee's indebtedness; (iii) the distribution of the entire balance of the Transferred Employee's accounts; or (iv) the last date on which Buyer or one of its Affiliates pays remuneration to the Transferred Employee, Buyer or its Affiliate shall (x) continue the payroll deductions pursuant to which each such Transferred Employee is discharging indebtedness to a Seller Savings Plan and (y) remit the deducted funds to Fidelity Management Trust Company, the trustee of the Seller Savings Plans, as soon as practicable, but in no event more than thirty (30) days, after the date of deduction, together with an accounting that identifies the Transferred Employees with respect to whom the funds were deducted and the amount deducted for each Transferred Employee. All such remitted funds shall be transferred to the appropriate Seller Savings Plan and applied to reduce the appropriate Transferred Employee's outstanding indebtedness. Buyer's obligations under this Section (f) are limited to payroll deductions of loan repayments by the Transferred Employees and remittance of those funds, and nothing herein shall be construed to obligate Buyer to repay to Seller any portion of the outstanding indebtedness of the Transferred Employees that are not otherwise discharged by the Transferred Employees themselves. (g) Seller shall make all required matching contributions with respect to the Transferred Employees' contributions made to the Seller Savings Plan by the Transferred Employees in respect of the period ending on or before the Closing Date in the year containing the Closing Date that would have been eligible for matching contributions without regard to any continued service (e.g., last day of the year employment or 1000 hours) requirements. Such matching contributions shall be made not later than the date on which all other matching contributions are made to the Seller Savings Plans with respect to contributions made at the same time as the Transferred Employees' contributions. For not less than five (5) calendar years following the Closing Date (including the year in which the Closing occurs), Buyer shall, subject to applicable plan qualification requirements, provide salaried Transferred Employees with a matching contribution in the Buyer's Savings Plan equal to $.75 for each $1 contributed by Transferred Employees up to six percent (6%) of compensation (as defined in Buyer's Savings Plan). 11.2.3 Welfare Plans. (a) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts, as of the Closing Date, one or more employee welfare benefit plans, including medical, health, dental, flexible spending account, accident, life, short-term disability, and long-term disability and other employee welfare benefit plans providing preretirement welfare benefits for the benefit of (i) the non-bargained Transferred Employees (the "Non-union Welfare Plans") and (ii) the union-represented Transferred Employees in accordance with the provisions of applicable collective bargaining agreements (the "Bargained Welfare Plans"). The Non-union Welfare Plans and the Bargained Welfare Plans are hereinafter referred to collectively as the "Buyer Welfare Plans." The Buyer Welfare Plans shall provide as of the Closing Date pre-retirement benefits to Transferred Employees (and their dependents and beneficiaries) that, in the aggregate, are comparable to the pre-retirement benefits to which they were entitled under the corresponding employee welfare benefit plans maintained by Seller on the Closing Date. For purposes of determining eligibility 57 to participate in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions or requirements for evidence of insurability under the Buyer Welfare Plans shall be waived for Transferred Employees, and Transferred Employees shall receive credit under the Buyer Welfare Plans for co-payments and payments under a deductible limit made by them and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in accordance with the corresponding Seller Welfare Plans. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees who had credited service under a Seller Welfare Plan, together with each such Transferred Employee's service, co-payment amounts, and deductible and out-of-pocket limits under such plan. (b) (i) Except as otherwise provided in subsection (b)(ii) or (b)(iii) of this Section (b) or in an applicable collective bargaining agreement, Buyer shall provide or cause to be provided retiree medical, health, and life benefits to each Transferred Employee (or the dependents or beneficiaries of such Transferred Employee, as the case may be) under the same terms and conditions as apply to comparable employees of Buyer, and Seller shall have no obligation to provide retiree medical, health, and life benefits in respect of any Transferred Employee on or after the Closing Date. (ii) Subject to Section 11.4, below, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is not subject to a collective bargaining agreement as of the Closing Date, who has combined age and years of accredited service (within the meaning of the Seller Pension Plan) as of the Closing Date equal to at least 66, and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Nonunion Transferred Employee"), Seller shall provide or cause to be provided to each such Retired Nonunion Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits under terms and conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated noncollectively bargained employees retiring as of the Closing Date; provided that nothing in this subsection (b)(ii) shall be construed to prevent any Retired Nonunion Transferred Employee (or his or her dependents or beneficiaries) from voluntarily relinquishing such benefits. For a period of five (5) years following the retirement of each Retired Nonunion Transferred Employee from Buyer and its Affiliates or any successor thereof, Buyer shall reimburse Seller, in accordance with this subsection (b)(ii), for the cost of the retiree medical, health, and life coverage for which Seller is responsible and that Seller actually provides pursuant to this subsection (b)(ii). The five (5) year time period for this reimbursement obligation shall be determined separately in respect of each Retired Nonunion Transferred Employee. For each year for which Buyer is required to reimburse Seller under this subsection (b)(ii), Buyer shall pay Seller annually in arrears, within 30 days after Seller provides a statement therefor to Buyer, (A) $4,000 with respect to each Retired Nonunion Transferred Employee who has not yet attained age 65 during the year for which the payment is made and $4,000 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has not yet 58 attained age 65 during the year for which the payment is made, and (B) $1,800 with respect to each Retired Nonunion Transferred Employee who has attained at least age 65 during the year for which the payment is made and $1,800 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has attained at least age 65 during the year for which the payment is made. No reimbursement shall be due with respect to any dependent, other than a spouse, covered with respect to a Retired Nonunion Transferred Employee. The reimbursement obligation for partial years shall be prorated based on the portion of the year covered by the obligation. Each Retired Nonunion Transferred Employee (or his or her dependent or beneficiary, as the case may be) who is provided benefits by Seller under this subsection (b)(ii) shall be required to pay to Seller any premium, contribution or other payment required under, and shall be subject to any copayment or deductible required under, the terms of Seller's applicable retiree medical, health, or life benefit plan; to the extent that any amount constituting such a payment is deducted from any plan, program, or arrangement maintained by Buyer or one of its Affiliates or is otherwise paid to Buyer or one of its Affiliates by such person, Buyer shall cause such amount to be paid to Seller as soon as administratively practicable. (iii) In addition to any other benefits to be provided pursuant to this Article XI, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is subject to a collective bargaining agreement as of the Closing Date and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Union Transferred Employee"), Buyer shall provide or cause to be provided to each such Retired Union Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits, for a period of at least five (5) years following the Closing Date, under terms and conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated collectively bargained employees retiring as of the Closing Date. As of the date of this Agreement, Seller maintains one or more voluntary employees' beneficiary associations (within the meaning of Section 501(c)(9) of the IRC) to fund retiree medical, health, and life benefits with respect to the Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date (the "Seller VEBA"). Within 90 days following the Closing Date, Seller shall direct the trustee of the Seller VEBA to transfer an amount in cash from the Seller VEBA to the trustee of one or more voluntary employees' beneficiary associations (within the meaning of Section 501(c)(9) of the IRC) that Buyer maintains or shall cause to be maintained to fund retiree medical, health, and life benefits with respect to the Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date. The amount to be transferred pursuant to the preceding sentence shall be equal, based on the actuarial assumptions set forth in Schedule 11.2.3(b)(iii) (which shall be the actuarial assumptions used by Seller in developing the level of expense under Statement of Financial Accounting Standards No. 106 for the 1999 fiscal year), to the aggregate Accumulated Postretirement Benefit Obligation (as defined in Statement of Financial Accounting Standards No. 106) as of the Closing Date attributable to retiree medical, health, and life benefits for Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date. 59 (iv) Benefits provided pursuant to subsections (b)(ii) and (b)(iii) of this Section (b) (including for this purpose, the determination of who is eligible for such benefits) shall take into account service with Buyer or any of its Affiliates on and after the Closing Date in the same manner as if such post-Closing Date service was performed with Seller. Buyer shall provide Seller with such information as shall be reasonably required to implement the immediately preceding sentence with respect to subsection (b)(ii) of this Section (b). (c) Buyer shall refer to GTE Service Corporation and GTE Service Corporation shall assume responsibility for any valid claim under a Seller Welfare Plan for disability, medical, or dental benefits made by a Transferred Employee on or after the Closing Date arising from a disability or loss incurred on or before the Closing Date. Nothing in this Section 11.2.3 shall require Seller, any Affiliate of Seller, or the Seller Welfare Plans to make any payment or to provide any benefit not otherwise provided by the terms of the Seller Welfare Plans. (d) Seller, Buyer, their respective Affiliates, and the Seller Welfare Plans and the Buyer Welfare Plans shall assist and cooperate with each other in the disposition of claims made under the Seller Welfare Plans pursuant to subsection (c) of this Section 11.2.3, and in providing each other with any records, documents, or other information within its control or to which it has access that is reasonably requested by any other as necessary or appropriate to the disposition, settlement, or defense of such claims. (e) Except as otherwise provided in Section 11.2.3(b)(iii) or in Section 11.2.3(f), nothing in this Agreement shall require Seller or its Affiliates to transfer assets or reserves with respect to the Seller Welfare Plans to Buyer or the Buyer Welfare Plans. (f) Seller will make available to Buyer, prior to the Closing Date, a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller under the GTE Flexible Reimbursement Plan (the "FRP"), together with the elections made prior to the Closing Date with respect to such accounts through the Closing Date, any balances standing to the credit of Transferred Employees, and the corresponding amounts being transferred to the corresponding Buyer's plan in accordance with the following sentence. As of the Closing Date, Seller shall cause the portion of the FRP applicable to Transferred Employees to be segregated into a separate component and all account balances of the Transferred Employees in the FRP shall be transferred to a flexible reimbursement plan that Buyer shall cause to be maintained for the duration of the calendar year in which the Closing Date occurs. (g) On and for a period of at least three (3) years after the Closing Date, Transferred Employees not subject to a collective bargaining agreement shall be eligible for benefits under a Buyer severance or separation pay policy or plans that are the same as or comparable to the severance or separation pay policy benefits that are provided by Seller (or the applicable Affiliate, if the Transferred Employee is employed by an employer other than the Seller) or a Seller Pension Plan as of the Closing Date. Buyer shall recognize the service of each such Transferred Employee with Seller and its Affiliates for eligibility, vesting, and benefit determinations under the Buyer severance or separation pay policy or plan. Transferred Employees subject to a collective bargaining agreement shall be eligible for severance or 60 separation pay benefits in accordance with the terms of the applicable collective bargaining agreement. 11.3 Miscellaneous Benefits. 11.3.1 Vacation. (a) On or after the Closing Date, Buyer shall allow Transferred Employees to receive paid time off in the calendar year of the Closing for any unused vacation time accrued prior to the Closing Date. Seller and its Affiliates shall have no liability to Transferred Employees for the vacation payments described in this Section 11.3.1. Seller shall pay Transferred Employees any banked vacation on or before the Closing Date. Schedule 11.3.1 to be prepared by Seller and submitted to Buyer on or before the Closing Date shall list the accrued but unused vacation pay, as of the Closing Date, of each Transferred Employee for the calendar year in which the Closing Date occurs. (b) For purposes of determining a Transferred Employee's eligibility for vacation under Buyer's vacation plan, a Transferred Employee shall be credited, as of the first day of the first calendar year that begins after the calendar year in which the Closing Date occurs, with service for the calendar year in which the Closing Date occurs in an amount equal to the aggregate of the Transferred Employee's service with both Seller and Buyer during the calendar year in which the Closing Date occurs. 11.3.2 Transferred Employee Statements. Within sixty (60) days after the Closing Date, Seller shall prepare and distribute to all Transferred Employees an accurate and complete statement of their accrued benefits under Seller's Pension Plans as of the Closing Date and shall provide Buyer with a true and complete copy of the same. Such statements shall be sufficiently detailed to readily permit Buyer and the Transferred Employees to determine the accuracy thereof. 11.4 Employee Rights. Nothing herein expressed or implied shall confer upon any employee of Seller or its Affiliates, or Buyer or its Affiliates, or upon any legal representative of such employee, or upon any collective bargaining agent, any rights or remedies, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement. Nothing in this Agreement shall be deemed to confer upon any person (nor any beneficiary thereof) any rights under or with respect to any plan, program, or arrangement described in or contemplated by this Agreement, and each person (and any beneficiary thereof) shall be entitled to look only to the express terms of any such plan, program, or arrangement for his or her rights thereunder. Nothing in this Agreement shall cause Buyer or its Affiliates, nor Seller or its Affiliates to have any obligation to provide employment or any employee benefits to any individual who is not a Transferred Employee or, except as otherwise provided in Section 11.1.2 61 with respect to employment agreements, to continue to employ any Transferred Employee for any period of time following the Closing Date. 11.5 WARN Act Requirements. On and after the Closing Date, Buyer shall be responsible with respect to Transferred Employees and their beneficiaries for compliance with the Worker Adjustment and Retraining Notification Act of 1988 and any other applicable law, including any requirement to provide for and discharge any and all notifications, benefits, and liabilities to Transferred Employees and government agencies that might be imposed as a result of the consummation of the transactions contemplated by this Agreement or otherwise. 11.6 Indemnification. 11.6.1 Indemnification of Seller. Notwithstanding anything to the contrary in Article 12 of this Agreement, Buyer shall indemnify and hold harmless Seller, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Buyer, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, except as otherwise expressly permitted under this Agreement, to change, reduce contributions to, terminate, fail to continue, fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) on or after the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. 11.6.2 Indemnification of Buyer. Notwithstanding anything to the contrary in Article 12 of the Agreement, Seller shall indemnify and hold harmless Buyer, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Seller, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, to fail to pay benefits under, or fail to manage or administer properly any employee 62 benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) before the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 Survival of Representations. Warranties and Covenants. (a) The representations and warranties contained in Sections 8.1.6 and 8.2.6 will survive the Closing and remain in full force and effect indefinitely. Each of the other representations and warranties contained in Article 8 will terminate, without further action, on the date which is fifteen (15) months following the Closing Date (the "Expiration Date"). (b) This Article 12 shall survive any termination of this Agreement and the Ancillary Agreements and the indemnification contained in this Article 12 shall survive the Closing and shall remain in effect (i) indefinitely, with respect to any Indemnifiable Claim related to the breach of any representation or warranty which pursuant to Section 12.1(a) survives indefinitely, (ii) indefinitely or for the applicable period of performance for such covenant (provided that in the case of covenants, the Indemnitee shall have 60 days after the end of such performance period to provide notice to the Indemnifying Party of a claim for indemnification arising during the performance period), with respect to any Indemnifiable Claim arising under Section 12.2(a)(ii)(B) (post closing covenants), (iii) indefinitely, with respect to any Indemnifiable Claim arising under Section 12.2(a)(iii) (Retained Liabilities) or 12.2(b)(iii) (Assumed Liabilities), and (iv) until the Expiration Date for any Indemnifiable Claims that are not specified in any of the preceding clauses. Unless a claim for indemnification with respect to any alleged breach of any representation or warranty is asserted by notice given as herein provided that specifically identifies a particular breach and the underlying facts relating thereto, which notice is given within the applicable period of survival for such representation or warranty, such claim may not be pursued and is irrevocably waived after such time. Without limiting the generality or effect of the foregoing, no claim for indemnification with respect to any representation or warranty will be deemed to have been properly made except (i) to the extent it is based upon a Third Party Claim made or brought prior to the expiration of the survival period for such representation or warranty, or (ii) to the extent based on Indemnifiable Losses actually incurred by an Indemnitee prior to the expiration of the survival period for such representation or warranty. 12.2 Indemnification. (a) Following the Closing and subject to the other sections of this Article 12, Seller will indemnify, defend and hold harmless Buyer and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations and warranties made by Seller in Section 8.1 of this Agreement, (ii) a breach by Seller of any covenant of Seller contained in this Agreement, which covenant requires performance by Seller (A) prior to or at the Closing, or (B) after the Closing, and (iii) any of the Retained Liabilities. 63 (b) Following the Closing and subject to the other sections of this Article 12, Buyer will indemnify, defend and hold harmless Seller and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations or warranties made by Buyer in Section 8.2 of this Agreement, (ii) a breach by Buyer of any covenant of Buyer contained in this Agreement, which covenant requires performance by Buyer prior to, at or after the Closing, and (iii) any of the Assumed Liabilities. (c) Payments made under this Section 12.2 shall be treated by Buyer and Seller as purchase price adjustments and Buyer and Seller shall file all Tax Returns consistent with such treatment. Notwithstanding anything to the contrary contained herein, neither party shall be indemnified or reimbursed for any Tax consequences arising from the receipt or accrual of an indemnity payment hereunder including any Tax consequences arising from adjustments to the basis of any asset resulting from an adjustment to the Purchase Price or any additional or reduced taxes resulting from any such basis adjustment. (d) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(ii), or under both Section 12.2(b)(i) and Section 12.2(b)(ii), then the Indemnitee's rights to pursue its claim under Section 12.2(a)(ii) or Section 12.29b)(ii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). (e) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(iii), or under both Section 12.2(b)(i) and Section 12.2(b)(iii), then the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Sections 12.3(d). (f) In the event a claim against an Indemnifying Party arises under both Section 12.2(a)(ii) and 12.2(a)(iii), or under both Section 12.2(b)(ii) and 12.2(b)(iii), then the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). 12.3 Limitations on Liability. (a) For purposes of this Agreement, (i) "Indemnification Payment" means any amount of Indemnifiable Losses required to be paid pursuant to this Agreement, (ii) "Indemnitee" means any person or entity entitled to indemnification under this Agreement, (iii) "Indemnifying Party" means any person or entity required to provide indemnification under this Agreement, and (iv) "Indemnifiable Losses" means any losses, liabilities, damages, costs and expenses (including reasonable attorneys' fees and expenses) actually incurred in connection with any actions, suits, demands, assessments, judgments and settlements, in any such case (x) reduced by the amount of insurance proceeds recovered from any person or entity with respect thereto, and (y) excluding any such losses, liabilities damages, costs and expenses to the extent that the underlying liability or obligation is the result of any action taken or omitted to be taken by any Indemnitee. (b) Notwithstanding anything to the contrary contained in this Agreement, if the Closing occurs, (i) no claim for indemnification may be asserted under Section 64 12.2(a) with respect to any matter discovered by or known to Buyer on or before the date of this Agreement, or after the date of this Agreement and on or before the Closing Date to the extent that Buyer has not provided timely notice to Seller of the existence of such claim in accordance with Section 10.2, and (ii) no claim for indemnification may be asserted under Section 12.2(b) with respect to any matter discovered by or known to Seller on or before the Closing Date. (c) As between Seller and any Affiliate of Seller, on the one hand, and Buyer and any Affiliate of Buyer, on the other hand, the remedies, rights and obligations set forth in this Article 12, Sections 10.1.2, 11.2.2, 11.6, 13.3 and the Ancillary Agreements will be the exclusive remedies, rights and obligations with respect to the liabilities and obligations referred to in Section 12.2 and any breach of the representations, warranties or covenants set forth in this Agreement. Without limiting the foregoing, as a material inducement to entering into this Agreement, to the fullest extent permitted by law, each of the parties waives any claim or cause of action that it otherwise might assert, and any breach of the representations, warranties or covenants set forth in this Agreement, except for claims or causes of action brought under and subject to the terms and conditions of this Article 12 and Sections 10.1.2, 11.6 and 13.3 or any Indemnifiable Losses arising out of actual fraud. (d) Notwithstanding any other provision of this Agreement or of any applicable Law, no Indemnitee will be entitled to make a claim against an Indemnifying Party under Sections 11.2.2, 11.6, 12.2(a)(i) or 12.2(b)(i) until: (i) the aggregate amount of Indemnifiable Losses incurred by the Indemnitee for any individual occurrence or related series of occurrences giving rise to such Indemnifiable Losses exceeds $25,000, and (ii) the aggregate amount of claims that may be asserted for such Indemnifiable Losses pursuant to Section 12.3(d)(i) exceeds an amount equal to 2% of the Purchase Price, but only to the extent such amount, if any, (a) exceeds an amount equal to 2% of the Purchase Price and (b) is less than the amount set forth in Section 12.3(e). (e) Notwithstanding any other provision of this Agreement, the indemnification obligations of Seller under Section 12.2(a) (except with respect to indemnification for inaccuracies of the representations contained in Sections 8.1.1 through 8.1.6) or the indemnification obligation of Buyer under Section 12.2(b) will not exceed the amount of an amount equal to 6.5% of the Purchase Price respectively. (f) No Indemnifying Party shall be liable to or obligated to indemnify any Indemnitee hereunder for any consequential, special, multiple, punitive or exemplary damages including, but not limited to, damages arising from loss or interruption of business, profits, business opportunities or goodwill, loss of use of facilities, loss of capital, claims of customers, or any cost or expense related thereto, except to the extent such damages have been recovered by a third person and are the subject of a Third Party Claim for which indemnification is available under the express terms of this Section 12. (g) Seller and Buyer shall cooperate with each other with respect to resolving any claim or liability with respect to which one party is obligated to indemnify the 65 other party hereunder, including by making commercially reasonable efforts to mitigate or resolve any such claim or liability. 12.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any action or proceeding by any entity that is not a party to this Agreement or an Affiliate of such a party (a "Third Party Claim") against such Indemnitee, with respect to which an Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnitee will give such Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) calendar days after receipt of notice of such Third Party Claim; provided, however, that the failure of the Indemnitee to notify the Indemnifying Party shall only relieve the Indemnifying Party from its obligation to indemnify the Indemnitee pursuant to this Article 12 to the extent that the Indemnifying Party is materially prejudiced by such failure (whether as a result of the forfeiture of substantive rights or defenses or otherwise). Upon receipt of notification of a Third Party Claim, the Indemnifying Party shall be entitled, upon written notice to the Indemnitee, to assume the investigation and defense thereof with counsel reasonably satisfactory to the Indemnitee. Whether or not the Indemnifying Party elects to assume the investigation and defense of any Third Party Claim, the Indemnitee shall have the right to employ separate counsel and to participate in the investigation and defense thereof; provided, however, that the Indemnitee shall pay the fees and disbursements of such separate counsel unless (i) the employment of such separate counsel has been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party has failed to assume the defense of such Third Party Claim within reasonable time after receipt of notice thereof with counsel reasonably satisfactory to such Indemnitee, or (iii) the named parties to the proceeding in which such claim, demand, action or cause of action has been asserted include both the Indemnifying Party and such Indemnitee and, in the reasonable judgment of counsel to such Indemnitee, there exists one or more defenses that may be available to the Indemnitee that are in conflict with those available to the Indemnifying Party. Notwithstanding the foregoing, the Indemnifying Party shall not be liable for the fees and disbursements of more than one counsel for all Indemnified Parties in connection with any one proceeding or any similar or related proceedings arising from the same general allegations or circumstances. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim that would lead to liability or create any financial or other obligation on the part of the Indemnitee unless such settlement includes as an unconditional term thereof the release of the Indemnitee from all liability in respect of such Third Party Claim. If a settlement offer solely for money damages is made by the applicable third party claimant, and the Indemnifying Party notifies the Indemnitee in writing of the Indemnifying Party's willingness to accept the settlement offer and pay the amount called for by such offer without reservation of any rights or defenses against the Indemnitee, the Indemnitee may continue to contest such claim, free of any participation by the Indemnifying Party, and the amount of any ultimate liability with respect to such Third Party Claim that the Indemnifying Party has an obligation to pay hereunder shall be limited to the lesser of (A) the amount of the settlement offer that the Indemnitee declined to accept plus the Losses of the Indemnitee relating to such Third Party Claim through the date of its rejection of the settlement offer or (B) the aggregate Losses of the Indemnitee with respect to such claim. 66 (b) Any claim by an Indemnitee on account of an Indemnifiable Loss that does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after an Executive Officer of the Indemnitee becomes actually aware of the incurrence thereof, and the Indemnifying Party will have a period of thirty (30) calendar days within which to respond in writing to such Direct Claim. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have rejected such claim, in which event the Indemnitee will be free to pursue such remedies as may be available to the Indemnitee on the terms and subject to the provisions of this Article 12. (c) If after the making of any Indemnification Payment the amount of the Indemnifiable Loss to which such payment relates is reduced by recovery, settlement or otherwise under any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction (less any costs, expenses, premiums or taxes incurred in connection therewith) will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any Indemnification Payment, the Indemnifying Party will, to the extent of such Indemnification Payment, be subrogated to all rights of the Indemnitee against any third party that is not an Affiliate of the Indemnitee in respect of the Indemnifiable Loss to which the Indemnification Payment relates; provided that (i) the Indemnifying Party shall then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss, and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, all claims of the Indemnifying Party against any such third party on account of said Indemnification Payment will be subrogated and subordinated in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision of this Article 12, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action. Buyer has no indemnifiable or otherwise compensable claim that any of Seller's representations or warranties in Section 8.1 (other than Sections 8.1.4(b), 8.1.15 and 8.1.25) is inaccurate, or that any covenant has been breached, to the extent that such claim is predicated on any action by the FCC or PUC undertaken after Closing or any action the FCC or PUC requires Seller to undertake after Closing. Buyer may only bring such a claim to the extent that its basis is independent of any such FCC or PUC action. ARTICLE 13 TERMINATION 13.1 Termination Rights. This Agreement may be terminated at any time prior to the Closing Date: (a) at any time by mutual written consent of the parties; (b) by Buyer if any of the conditions provided in Section 6.1 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Buyer; 67 (c) by Seller if any of the conditions provided in Section 6.2 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Seller; (d) by Seller if any obligations of Buyer provided in Article 3 become incapable of being fulfilled; or (e) by either party immediately upon written notice to the other party if any Governmental Authority issues an order forbidding or enjoining the consummation of the transaction contemplated hereby and such order has become final and non-appealable, or if the GTE West Coast Agreement has been terminated. 13.2 Goodfaith Performance. Neither party shall be entitled to exercise any right of termination pursuant to subsection 13.1(b), (c) or (d) above if such party shall not have performed diligently and in good faith the obligations required to be performed by such party hereunder prior to the date of termination. 13.3 Effect of Termination. (a) If this Agreement is terminated as a result of a Material Adverse Effect or Section 13.1(a), this Agreement shall be of no further force and effect and there shall be no further liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives. (b) If this Agreement is terminated by Buyer pursuant to Section 13.1(b), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that no such termination shall relieve Seller of liability for any claims, damages or losses suffered by Buyer as a result of the negligent or willful failure of Seller to perform any obligations required to be performed by it hereunder on or prior to the date of termination. Notwithstanding anything herein to the contrary, in no event shall the any act or omission of Seller in connection with the Merger be deemed to be a breach of the terms and conditions of this Agreement for purposes of this Section 13.3(b). (c) If this Agreement is terminated by Seller pursuant to Section 13.1(c) or (d), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that in the event such termination is the result of the breach by Buyer of any of its obligations required to be performed by it hereunder on or prior to the date of termination, and Buyer has failed to cure such non-performance within a reasonable period after notice from Seller, then Buyer shall pay to Seller liquidated damages in an amount equal to ten (10) percent of the Purchase Price. Such liquidated damages amount is designed to compensate Seller for its lost 68 opportunity costs and reliance damages caused by such termination. Buyer shall promptly pay such amount to Seller in immediately available funds following such termination. (d) Upon any termination of the Agreement, each of the parties shall promptly comply with the obligations of the Confidentiality Agreement regarding return or destruction of Evaluation Material of the other party. (e) Notwithstanding anything to the contrary contained herein, the provisions of this Section 13.3 and of Sections 14.1, 14.2, 14.3, 14.8, 14.11, 14.13 and 14.14, shall survive any termination of this Agreement. ARTICLE 14 MISCELLANEOUS 14.1 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, will be deemed to have been given when delivered in person or dispatched by electronic facsimile transfer (confirmed in writing by certified mail, concurrently dispatched) or one business day after having been dispatched for next-day delivery by a nationally recognized overnight courier service to the appropriate party at the address specified below: (a) If to Buyer, to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: Donald P. Weinstein Facsimile No.: (203) 614-4625 With a copy to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: L. Russell Mitten, II, Esq. Facsimile No.: (203) 614-4625 Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin, Esq. Facsimile No.: (202) 387-3467 69 (b) If to Seller, to: William M. Edwards, III Vice President - Property Repositioning 600 Hidden Ridge, HQE02J27 Irving, TX 75038 Facsimile No. (972) 719-7062 With a copy to: Dale R. Chamberlain Legal Counsel - Property Repositioning 600 Hidden Ridge, HQE02J34 Irving, TX 75038 Facsimile No. (972) 719-7162 or to such other address or addresses as any such party may from time to time designate for itself by like notice. 14.2 Information Releases. The parties shall consult with each other (and allow the other party notice, and a reasonable time to comment) in preparing any employee announcement, press release, public announcement, news media response or other form of release of information concerning this Agreement or the transactions contemplated hereby that is intended to provide such information to the employees generally, news media or the public. Neither party shall issue or cause the publication of any press release, public announcement or media response without the prior written consent of the other party; provided, however, that, after allowing the other party notice and a reasonable time to comment prior to issuance, nothing herein will prohibit either party from making an employee announcement, or issuing or causing publication of any press release, public announcement or media response to the extent that such action is required by applicable Law or the rules of any national stock exchange applicable to such party or its Affiliates. 14.3 Expenses. Whether or not the transactions contemplated hereby are consummated and except as otherwise expressly provided herein, each party will pay any expenses (including attorneys' fees) incurred by it incidental to this Agreement and in consummating the transactions provided for herein. 14.4 Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but is not assignable or delegable by any party without the prior written consent of the other party; provided, that (a) Seller may assign this Agreement to an Affiliate of Seller without the consent of Buyer including, on and after the closing of the Merger, the ultimate parent entity of the successor corporation to such merger or any entity controlled thereby; and (b) Buyer may assign this Agreement, without the prior written consent of Seller, to any directly or indirectly wholly owned subsidiary of Buyer provided such subsidiary assumes in writing all the duties and obligations of Buyer hereunder. No such assignment by Buyer shall in any way operate to enlarge, alter or change any obligation due to Seller or relieve Buyer of its obligations hereunder 70 if such subsidiary fails to perform such obligations, with the understanding that Buyer shall be jointly and severally liable with such subsidiary for any non-performance of Buyer's obligations hereunder. 14.5 Amendments. This Agreement may be amended or modified only by a subsequent writing signed by authorized representatives of both parties. 14.6 Captions. The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement, nor as in any way limiting or amplifying the terms and provisions hereof. 14.7 Entire Agreement. The term " Agreement" shall mean collectively this document, the Schedules hereto and any agreements expressly incorporated herein, including that certain letter agreement between the parties of even date herewith. This Agreement supersedes and revokes any prior discussions and representations, other agreements, commitments, arrangements or understandings of any sort whatsoever, whether oral or written, that may have been made or entered into by the parties relating to the matters contemplated hereby. This Agreement, the Confidentiality Agreement and the Ancillary Documents constitute the entire agreement by and among the parties with respect to the subject matter hereof, and there are no representations, warranties, agreements, commitments, arrangements or understandings except as expressly set forth herein. 14.8 Waiver. Except as otherwise expressly provided in this Agreement, neither the failure nor any delay on the part of any party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any such right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege available to each party at law or in equity. 14.9 Third Parties. Except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any Person, other than the parties hereto and their successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 14.10 Counterparts. This Agreement may be executed in two or more counterparts, any or all of which shall constitute one and the same instrument. 14.11 Governing Law. This Agreement and the Ancillary Agreements shall in all respects be governed by and construed in accordance with the laws of the State of New York (except that no effect shall be given to any conflicts of law principles of the State of New York that would require the application of the laws of any other jurisdiction). The parties irrevocably submit to the exclusive jurisdiction of any New York State Court or any Federal Court located in the borough of Manhattan in the City of New York for purposes of any suit, action or other proceeding arising out of this Agreement, the Ancillary Agreements or any transaction contemplated hereby or thereby. The parties agree that service of process, summons or notice or document by U.S. registered mail to such party's respective address set forth in Section 14.1 shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence. The parties hereto irrevocably and unconditionally waive trial by jury in any 71 legal action or proceeding relating to this Agreement or any other agreement entered into in connection therewith and for any counterclaim with respect thereto. In the event of any breach of the provisions of this Agreement or any other agreement entered into in connection therewith, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. 14.12 Further Assurances. From time to time, as and when requested by one of the parties, the other party will use its commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary or appropriate, in the reasonable opinion of counsel for Seller and Buyer, to consummate and make effective the transactions contemplated by this Agreement. 14.13 Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any Governmental Authority, the remaining provisions of this Agreement to the extent permitted by Law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for both parties remain valid, binding and enforceable and provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In the event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by Law, the parties hereby to the same extent waive any provision of Law that renders any provision hereof prohibited or unenforceable in any respect. 14.14 Representation by Counsel; Interpretation. Seller and Buyer each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of Law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of Buyer and Seller. 72 IN WITNESS WHEREOF, the parties, acting through their duly authorized agents, have caused this Agreement to be duly executed and delivered as of the date first above written. GTE CALIFORNIA INCORPORATED CITIZENS UTILITIES COMPANY By: _____________________________ By: ____________________________ Name: ___________________________ Name: __________________________ Title: __________________________ Title: _________________________ By: _____________________________ Name: ___________________________ Title: __________________________ 73 ================================================================================ ASSET PURCHASE AGREEMENT Between GTE MIDWEST INCORPORATED and CITIZENS UTILITIES COMPANY September 21, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Terms............................................................1 1.2 Interpretation..................................................10 ARTICLE 2 PURCHASE AND SALE OF ASSETS.....................................10 2.1 Purchase and Sale of Assets.....................................10 2.2 Purchased Property..............................................10 2.3 Excluded Property...............................................10 2.4 Assumption of Liabilities.......................................11 2.4.1 Assumed Liabilities.......................................11 2.4.2 Retained Liabilities......................................13 2.5 No Assignment Without Consent...................................13 ARTICLE 3 PURCHASE PRICE..................................................14 3.1 Purchase Price..................................................14 3.2 Closing Date Estimate...........................................14 3.3 Closing Date Statement..........................................15 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS..................16 4.1 State Regulatory Approval.......................................16 4.2 Debtholder Consents.............................................16 4.3 Landlord and Other Consents.....................................16 4.4 FCC Consents....................................................16 4.5 HSR Act Review..................................................16 4.6 GTE/Bell Atlantic Merger........................................17 ARTICLE 5 PRE-CLOSING COVENANTS...........................................17 5.1 Investigation by Buyer..........................................17 5.2 Operation of the Business in the Ordinary Course................18 5.2.1 Preservation of Business..................................18 5.2.2 No Material Changes.......................................18 5.3 Satisfaction of Conditions......................................19 5.4 Approvals.......................................................19 -i- TABLE OF CONTENTS (continued) Page 5.5 Audit or Review of Financial Statements........................19 5.6 Cooperation with Respect to Like-Kind Exchange..................20 5.7 Interconnection Agreements......................................21 5.8 Leased Vehicles; Capital Leases.................................21 5.9 Delivery of Interim Information.................................21 ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING.............................21 6.1 Conditions Precedent to Obligations of Buyer....................21 6.1.1 No Misrepresentation or Breach of Covenants and Warranties ...........................................21 6.1.2 Documents.................................................21 6.1.3 HSR.......................................................21 6.1.4 No Legal Obstruction......................................22 6.1.5 No Material Adverse Effect................................22 6.2 Conditions Precedent to Obligations of Seller...................22 6.2.1 No Misrepresentation or Breach of Covenants and Warranties ...........................................22 6.2.2 Documents.................................................22 6.2.3 Purchase Price............................................22 6.2.4 HSR.......................................................22 6.2.5 No Legal Obstruction......................................22 ARTICLE 7 THE CLOSING.....................................................23 7.1 The Closing.....................................................23 7.2 Seller's Obligations at Closing.................................23 7.3 Buyer's Obligations at Closing..................................24 ARTICLE 8 REPRESENTATIONS AND WARRANTIES..................................24 8.1 Representations and Warranties of Seller........................24 8.1.1 Authorization and Effect of Agreement.....................24 8.1.2 No Restrictions Against Sale of the Purchased Property....24 8.1.3 Consents and Approvals of Governmental Authorities........25 8.1.4 No Material Violations....................................25 8.1.5 Corporate Organization....................................25 -ii- TABLE OF CONTENTS (continued) Page 8.1.6 Brokers...................................................25 8.1.7 Title to Owned Real Property..............................25 8.1.8 Real Property Leases......................................25 8.1.9 Tangible Assets...........................................26 8.1.10 No Material Adverse Change ..............................26 8.1.11 Material Contracts ......................................26 8.1.12 Insurance ...............................................27 8.1.13 Taxes ...................................................28 8.1.14 No Material Claims or Suits .............................28 8.1.15 Tariffs; FCC Licenses ...................................28 8.1.16 Employee Matters ........................................29 8.1.17 Schedules of Telephone Plant ............................31 8.1.18 Schedule of Real Property Interests .....................32 8.1.19 Compliance with Existing Environmental Requirements .....32 8.1.20 Environmental Permits ...................................32 8.1.21 Financial Statements ....................................32 8.1.22 Year 2000 Compliance ....................................33 8.1.23 Native American and Federal Consents ....................34 8.1.24 Loss of Major Customer ..................................34 8.1.25 Records .................................................34 8.2 Representations and Warranties of Buyer.........................34 8.2.1 Corporate Organization....................................34 8.2.2 Authorization and Effect of Agreement.....................35 8.2.3 No Restrictions Against Purchase of the Purchased Properties .....................................35 8.2.4 No Violation of Law.......................................35 8.2.5 Financial Capacity........................................35 8.2.6 Brokers...................................................35 8.2.7 Consents and Approvals of Governmental Authority..........36 -iii- TABLE OF CONTENTS (continued) Page ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS...............................36 9.1 Transition Services Agreement...................................36 9.2 Optional Services Agreement.....................................36 9.3 Directory Publishing............................................36 9.3.1 Assumption of Certain Directory Publishing Agreement Rights and Obligations....................................36 9.3.2 Co-Bound Directories Acknowledgement......................37 9.3.3 Meeting to Discuss Directory Publication..................37 9.4 GTE Supply Relationship.........................................37 ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES.............................37 10.1 Intellectual Property...........................................37 10.1.1. No License..............................................37 10.1.2. Infringement............................................37 10.1.3. Trademark Phaseout......................................38 10.1.4 Third Party Software.....................................39 10.2 Effect of Due Diligence and Related Matters.....................39 10.3 Confidentiality.................................................40 10.4 Further Assurances..............................................40 10.5 Prorations......................................................40 10.6 Cost Studies/NECA Matters.......................................41 10.6.1. Prior to Closing .......................................41 10.6.2. From and After Closing .................................41 10.7 Customer Deposits...............................................41 10.8 Access to Books and Records.....................................41 10.9 Purchase Price Allocation.......................................42 10.10 Owned Real Property Transfers...................................42 10.11 Transaction Taxes...............................................43 10.12 Bulk Sales Laws.................................................44 10.13 Prepaid Non-Regulated Maintenance Agreements....................44 -iv- TABLE OF CONTENTS (continued) Page 10.14 Vehicle Registration............................................44 10.15 Carrier Access Billing and Accounts Receivable Transition.......44 10.16 End-User Billing and Accounts Receivable Transition.............44 ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS..................................45 11.1 Employment of Transferred Employees.............................45 11.1.1 Assumption of Collective Bargaining Agreement Obligations .............................................46 11.1.2 Assumption of Employment and Other Agreements ...........46 11.1.3 Recognition of Transferred Employee Service .............47 11.1.4 Assumption of Obligation to Pay Bonuses .................47 11.1.5 No Duplicate Benefits ...................................47 11.1.6 Affiliate Employees .....................................47 11.2 Transferred Employee Benefit Matters............................47 11.2.1 Defined Benefit Plans ...................................47 11.2.2 Savings Plans ...........................................54 11.2.3 Welfare Plans ...........................................56 11.3 Miscellaneous Benefits..........................................59 11.3.1 Vacation ................................................59 11.3.2 Transferred Employee Statements .........................59 11.4 Employee Rights.................................................60 11.5 WARN Act Requirements...........................................60 11.6 Indemnification.................................................60 11.6.1 Indemnification of Seller ...............................60 11.6.2 Indemnification of Buyer ................................61 ARTICLE 12 INDEMNIFICATION.................................................61 12.1 Survival of Representations.....................................61 12.2 Indemnification.................................................62 12.3 Limitations on Liability........................................63 12.4 Defense of Claims...............................................64 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action ...............................................66 -v- TABLE OF CONTENTS (continued) Page ARTICLE 13 TERMINATION.....................................................66 13.1 Termination Rights..............................................66 13.2 Goodfaith Performance...........................................66 13.3 Effect of Termination...........................................66 ARTICLE 14 MISCELLANEOUS...................................................67 14.1 Notices.........................................................67 14.2 Information Releases............................................68 14.3 Expenses........................................................69 14.4 Successors and Assigns..........................................69 14.5 Amendments......................................................69 14.6 Captions........................................................69 14.7 Entire Agreement................................................69 14.8 Waiver..........................................................69 14.9 Third Parties...................................................69 14.10 Counterparts....................................................70 14.11 Governing Law...................................................70 14.12 Further Assurances..............................................70 14.13 Severability....................................................70 14.14 Representation by Counsel; Interpretation.......................71 INDEX OF SCHEDULES Schedule* Title 1.1-A Assigned Contracts 1.1-B Excluded Contracts 1.1-C Purchased Exchanges 1.1-D License Agreement 2.3(g) Other Excluded Property 4.4 FCC Consents / Waivers 5.2.1 Operation of the Business 5.2.2(c) Material Increase to Transferred Employee Benefits 5.2.2(d) Dispositions 6.1.1 Seller's Closing Certificate 6.2.1 Buyer's Closing Certificate 7.2(a) Bill of Sale and Assignment and Assumption Agreement 7.2(b) Legal Opinion of Seller's Counsel 7.2(g) Affidavit as to Status of Foreign Person 7.3(c) Legal Opinion of Buyer's Counsel 8.1.4 Violation of Law 8.1.7(a) Owned Real Property 8.1.7(b) Bondholders 8.1.8 Real Property Leases 8.1.9 Notices of Violations of Building / Zoning Ordinances 8.1.10 Material Adverse Changes 8.1.11(a-j) Material Contracts 8.1.13 Exceptions to Tax Return Filings 8.1.14 State and Federal Claims/Suits 8.1.15(a) Tariff Proceedings 8.1.15(b) FCC Licenses 8.1.16(a) Employee Matters - Seller Employee Benefit Plans 8.1.16(b) Employee Matters - Seller Material Liabilities under ERISA 8.1.16(c) Employee Matters - Seller ERISA Plans - Compliance 8.1.16(d) Employee Matters - Seller Multiemployer Plans 8.1.16(e) Employee Matters - Seller Union Representation 8.1.17 Telephone Plant 8.1.18 Real Property Interests List 8.1.19 Exceptions to Compliance with Existing Environmental Requirements 8.1.20 Environmental Permits 8.1.21(a-c) Financial Statements 8.1.23 Native American Authorizations 8.1.24 Loss of Major Customer 9.1 Transition Services Agreement 9.2 Optional Services Agreement 9.3.1 Directory Publishing Agreements 9.3.2 Co-Bound Directory Agreements vii 11.1.2 Employees and Employee Matters - Employment Agreement Obligation Exceptions 11.3.1 Employees and Employee Matters - Vacation * The Schedule numbers refer to the appropriate Section within the Agreement. viii ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the 21st day of September, 1999, by and between Citizens Utilities Company, a Delaware corporation ("Buyer"), and GTE Midwest Incorporated, a Delaware corporation ("Seller"). RECITALS WHEREAS, Seller is in the business of providing regulated local exchange telephone service in certain areas of the state of Nebraska; and WHEREAS, Seller desires to sell, convey, assign, transfer and deliver to Buyer, and Buyer desires to purchase and accept from Seller, certain of its telephone properties and related assets used in the provision of such service, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS 1.1 Terms. For purposes of this Agreement and any amendment hereto, the following terms are defined as set out below or in the Section referenced below: "Accounts Receivable Settlement Statement" is defined in Section 10.16(b). "Accounts Payable" means accounts payable owed by Seller arising primarily from the operation of the Business. "Active Employees" is defined in Section 11.1. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Allocation" is defined in Section 10.9. "Ancillary Documents" means the Transition Services Agreement, the Optional Services Agreement, the License Agreement, and the Bill of Sale and Assignment and Assumption Agreement. "Assigned Contracts" means Contracts to which Seller or any of its Affiliates is a party (i) which relate primarily to the operation of the Business, other than the Excluded 1 Contracts, Real Property Interests, Real Property Leases and Third Party Intellectual Property Contracts, and (ii) any other contract to which Seller is a party and is listed on Schedule 1.1-A. "Assigned Permits" means, to the extent assignable, all permits, licenses, franchises, approvals and authorizations of Seller or any of its Affiliates issued or granted by any Governmental Authority that relate primarily to the operation of the Business, other than the FCC Licenses and the Excluded Permits. "Assumed Liabilities" is defined in Section 2.4.1 "Automated Assets" is defined in Section 8.1.22(c). "Bargained Welfare Plans" is defined in Section 11.2.3(a). "BIA" is defined in Section 8.1.23. "Base Purchase Price" is defined in Section 3.1. "Bill of Sale and Assignment and Assumption Agreement" is defined in Section 7.2(a). "Bondholders" means the Persons listed on Schedule 8.1.7(b). "Business" means the business of providing in the geographic area comprising the Purchased Exchanges (i) local exchange, exchange access and intra-LATA toll telecommunications services to end users, (ii) exchange access telecommunications services to interexchange carriers and other local exchange carriers, (iii) retail sales of telephone equipment and products, and (iv) non-tariffed public communications (pay telephones), commercial telecommunications services facilities leasing and other non-regulated services and products. "Buyer Pension" is defined in Section 11.2.1(c)(iii)(B). "Buyer Pension Plan" and "Buyer Pension Plans" are defined in Section 11.2.1(b). "Buyer Savings Plan" and "Buyer Savings Plans" are defined in Section 11.2.2(b). "Buyer Welfare Plans" is defined in Section 11.2.3(a). "Buyer's Actuary" is defined in Section 11.2.1(d)(ii). "Buyer's Closing Certificate" is defined in Section 6.2.1. "Calendar-Related" is defined in Section 8.1.22(c). "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. 2 "Closing" is defined in Section 7.1. "Closing Date" is defined in Section 7.1. "Closing Date Amount" is defined in Section 3.2(b) "Closing Date Statement" is defined in Section 3.3 "Confidentiality Agreement" means the Confidentiality Agreement dated as of November 20, 1998, among Buyer, Seller and certain Affiliates of Seller. "Construction Advances" means advances collected by Seller or any Affiliate for the future performance of non-regulated construction in the Purchased Exchanges. "Contracts" means all contracts, leases, indentures, agreements, and other legally binding arrangements. "Customer Advances" means amounts arising from the operation of the Business that have been billed and collected by Seller as of the Closing Date but that are unearned because they relate to the provision of service after the Closing Date. "Customer Deposits" is defined in Section 10.7. "Date Data" is defined in Section 8.1.22(c). "Direct Claim" is defined in Section 12.4(b). "Due Diligence Documents" means those documents contained in the six volumes of information delivered to Buyer in connection with its review of the Purchased Property. "Earned End-User Accounts Receivable" means accounts receivable arising primarily from the operation of the Business that have been earned by Seller's provision of service on or before the Closing Date excluding amounts billed through the carrier access billing system to interexchange carriers. "Earned End-User Accounts Receivable Amount" means the aggregate amount of all Earned Unbilled Accounts Receivable as of the Closing Date, less a discount for anticipated uncollectible Earned End-User Accounts Receivable in an amount equal to the Uncollectible Factor multiplied by Earned End-User Accounts Receivable as of the Closing Date. "Employment Agreements" is defined in Section 8.1.16(a). "Environmental Requirements" means all federal, state, interstate and local government or agency Laws relating to pollution or protection of human health and safety or the environment (including, without limitation, air, surface water, ground water, land surface and subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Regulated Materials; or otherwise relating to the 3 manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of Regulated Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Plans" is defined in Section 8.1.16(a). "Estimated Non-Regulated Construction Work in Process Amount" is defined in Section 3.2(a). "Estimated Regulatory Obligation Amount" is defined in Section 3.2(a). "Evaluation Material" is defined in the first paragraph of the Confidentiality Agreement. "Excluded Contracts" means (i) all billing and collection agreements, interconnection agreements, national account agreements, billing media agreements, vehicle leasing agreements, capital leases, Contracts between Seller and Affiliates of Seller, except to the extent expressly listed on Schedule 1.1-A, and (ii) such other agreements as are listed on Schedule 1.1-B. "Excluded Marks" means all trademarks, applications for trademark registration, service marks, applications for service mark registration, trade names, domain names and related registrations owned by Seller or an Affiliate of Seller, or licensed to Seller or an Affiliate of Seller by any Person, and any derivations of the foregoing. "Excluded Permits" means the permits, licenses, franchises, approvals and authorizations of Seller or any Affiliates by Governmental Authorities that relate to the Excluded Property. "Excluded Property" is defined in Section 2.3. "Executive Officer" of an entity means (i) in the case of Seller, the regional president of the region that includes the Purchased Exchanges, the general manager of infrastructure provisioning for the Purchased Exchanges and the general manager of customer operations for the Purchased Exchanges, and (ii) the case of Buyer, the executive officer(s) in charge of the transactions contemplated by this Agreement. "Existing Environmental Requirements" means those applicable provisions of any Environmental Requirements that are both in effect and required to be met by Seller prior to the Closing Date. "Expiration Date" is defined in Section 12.1(a). "FCC" means the Federal Communications Commission. "FCC Consents" is defined in Section 4.4. 4 "FCC Licenses" means all licenses, certificates, permits or other authorizations granted to Seller or any Affiliates by the FCC that are used primarily in the operation of the Business. "Financial Statements" is defined in Section 8.1.21. "Final Order" shall mean action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority of the action is pending, no such stay is in effect, and if any deadline for any such request is designated by statute or regulation, such deadline is passed; (ii) no petition for rehearing or reconsideration of the action is pending before any Governmental Authority, and the time for filing any such petition has passed; (iii) the Governmental Authority does not have the action under reconsideration or its own motion and the time for such reconsideration has passed; and (iv) no appeal to a court, or request to stay by a court, of the Governmental Authority's action is pending or in effect and, if any deadline of filing any such appeal or request is designated by statute or rule, it has passed. "FRP" is defined in Section 11.2.3(f). "Future Capital Expenditure Obligations" is defined in Section 2.4.1(h). "Future Regulatory Obligations" is defined in Section 2.4.1(g). "GAAP" means United States generally accepted accounting principles. "GATT Grandfathered Participant" is defined in Section 11.2.1(c)(ii)(C). "Governmental Authority" means any court or any federal, state or foreign governmental, legislative or regulatory body, agency, department, authority or instrumentality. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnifiable Losses" is defined in Section 12.3(a). "Indemnification Payment" is defined in Section 12.3(a). "Indemnifying Party" is defined in Section 12.3(a). "Indemnitee" is defined in Section 12.3(a). "Intellectual Property" means all inventions (whether patentable or not and whether or not such inventions are described or claimed in any patent or patent application), designs (useful or ornamental), and works subject to copyright protection, invention disclosures, specifications, manuals, drawings, functional or system block diagrams, flow charts, circuit diagrams, design or user documentation, engineering notebooks, schematics, test programs, documented procedures, documented processes, documented flows, devices, software (in any form), or firmware, and all intellectual property rights therein or based thereon, including patents, patent applications (including continuations, continuations-in-part, divisions, reissues), 5 reexamined patents and extensions thereof, copyrights (whether registered or unregistered), and trade secrets. "Interim Capital Expenditure Obligations" is defined in Section 2.4.1(h). "IRC" means the Internal Revenue Code of 1986, as amended. "IRS" means the Internal Revenue Service. "Law" or "Laws" means any statute, rule, regulation, ordinance, judgment, order or decree of any Governmental Authority. "Leased Real Property" means the real property leased to Seller or its Affiliates under the Real Property Leases. "License Agreement" means the license agreement attached hereto as Schedule 1.1-D pursuant to which Seller grants to Buyer certain rights and licenses under Licensed Intellectual Property. "Licensed Intellectual Property" means Intellectual Property owned by Seller or its Affiliates, and Third Party Intellectual Property licensed to Seller or its Affiliates which Seller or its Affiliates can sublicense to Buyer without the payment of compensation or other consideration to any Person, and which Intellectual Property and Third Party Intellectual Property are required for the use or maintenance (to the extent not provided by the owner or licensor of the Third Party Intellectual Property) of or are included in or with the Purchased Property in the operation of the Business as of the Closing; provided that Licensed Intellectual Property shall at all times be Excluded Property. "Lien" means any lien, charge, pledge, option, mortgage, security interest or other encumbrance. "Material Adverse Effect" means a materially adverse effect on the Business or the Purchased Property, taken as a whole, other than effects relating to or arising from (i) the execution of this Agreement, (ii) the United States economy generally or the state of Nebraska in particular, or (iii) events or circumstances that affect the Business in the same manner and to the same extent as other businesses in the industry generally. "Material and Supply Inventory" is defined in the FCC's Part 32 Uniform System of Accounts. "Material Contracts" is defined in Section 8.1.11. "Material Permits" is defined in Section 8.1.15(b). "Merger" means the proposed merger involving GTE Corporation and Bell Atlantic Corporation and their respective Subsidiaries. "Native American Authorizations" is defined in Section 8.1.23(a). 6 "Non-Regulated Construction Work in Process Amount" means the total amount expended but not yet billed by Seller for non-regulated construction work not completed prior to the Closing Date, minus any Construction Advances outstanding as of the Closing Date. The Non-Regulated Construction Work in Process Amount shall be billable by Buyer to third parties after the Closing Date under open customer orders or other agreements. "Non-Union Welfare Plans" is defined in Section 11.2.3(a). "Optional Services Agreement" is defined in Section 9.2. "Owned Real Property" means the real property owned in fee by Seller or its Affiliates and used primarily in the operation of the Business, including all land, buildings, structures, appurtenances and improvements located thereon. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Assets" is defined in Section 11.2.1(d)(i). "Periodic Taxes" is defined in Section 10.5. "Permitted Encumbrances" means (i) liens for current taxes and assessments not yet delinquent, or the amount or validity of which is being contested in good faith by appropriate proceedings during which collection or enforcement against the relevant property is stayed, (ii) standard utility easements, and covenants, conditions and restrictions of record that do not individually or in the aggregate materially interfere with the operation of the present Business on, or materially detract from the value of, the Owned Real Property affected thereby, (iii) mechanics', carriers', workers', repairers' and other statutory liens, (iv) existing zoning or similar laws or ordinances that do not interfere with the operation of the Business, (v) leases otherwise disclosed herein, and (vi) any other Liens and, in the case of Owned Real Property, any title defects or exceptions, that do not materially interfere with the operations of the Purchased Property in a manner consistent with the current use by Seller or that do not materially detract from the value of, or materially impair the marketability of, the Purchased Property affected. "Person" means an individual, corporation, partnership, trust, association, limited liability company or similar entity or organization. "Plans" is defined in Section 8.1.16(a). "Pole Attachment Agreement" is defined in Section 8.1.11(j). "Proration Periods" is defined in Section 10.5. "PSC" is defined in Section 4.1. "Purchase Price" is defined in Section 3.3(c). "Purchased Exchanges" means the telephone exchanges listed in Schedule 1.1-C and any cross-border community served from any such exchange. 7 "Purchased Property" is defined in Section 2.2. "Real Property Interests" means all easements, rights of way, licenses or other interests in real property of Seller or its Affiliates that are used primarily in the operation of the Business, other than Owned Real Property or Leased Real Property. "Real Property Leases" means the Leases set forth on Schedule 8.1.8. "Regulated Material" means (i) any "hazardous substance" as defined in CERCLA, (ii) any petroleum or petroleum substance, and (iii) any other pollutant, waste, contaminant, or other substance regulated under Environmental Requirements. "Regulatory Approvals" is defined in Section 4.1. "Regulatory Obligation Amount" is defined in Section 3.1. "Retained Books and Records" means, collectively, all corporate records and stock books of Seller and its Affiliates, the general ledger, all records required by Law to be retained by Seller and all books and records relating to (i) Tax Returns and Tax records, (ii) Excluded Property, (iii) attorney work product, and (iv) the Retained Liabilities. "Retained Future Regulatory Obligations" is defined in Section 2.4.1(g). "Retained Liabilities" is defined in Section 2.4.2. "SEC Financial Statements" is defined in Section 5.5. "Seller Hourly Pension Plan" is defined in Section 11.2.1(a)(ii). "Seller Pension" is defined in Section 11.2.1(c)(iii)(B). "Seller Pension Plan" and "Seller Pension Plans" are defined in Section 11.2.1(a)(ii). "Seller Salaried Pension Plan" is defined in Section 11.2.1(a)(i). "Seller Savings Plans" are defined in Section 11.2.2(a). "Seller Welfare Plans" is defined in Section 11.2.3(a). "Seller's Actuary" is defined in Section 11.2.1(d)(ii). "Seller's Closing Certificate" is defined in Section 6.1.1. "Switch Software" shall mean software currently used by Seller to operate telecommunications switching equipment that is part of the Telephone Plant. "System Date" is defined in Section 8.1.22(c). 8 "Tax Returns" means a report, return or other information statement required to be supplied to or filed with a Governmental Authority with respect to Taxes. "Tax(es)" means any foreign, federal, state, county or local income, sales, use, transfer, excise, franchise, stamp duty, custom duty, real and personal property, gross receipt, capital stock, business and occupation, disability, employment, payroll, recording, ad valorem, unemployment compensation, profits, registration, social security, estimated, add-on, minimum, or withholding tax relating to the Business or the Purchased Exchanges and any interest and penalties and additions to such taxes (civil or criminal) related thereto or to the nonpayment thereof and related notarial fees. "Telephone Plant" means (i) Owned Real Property, (ii) Real Property Interests, and (iii) the machinery, equipment, inventory, vehicles and all other assets and properties used primarily in the operation of the Business, including all plant, systems, structures, construction work in progress, telephone cable (whether in service or under construction), microwave facilities (including frequency spectrum assignment), telephone line facilities, machinery, furniture, fixtures, tools, implements, conduits, stations, substations, equipment (including central office equipment, subscriber station equipment and other equipment in general), instruments and house wiring connections. Without limiting the generality of the foregoing, Telephone Plant includes the assets used primarily in the operation of the Business that would be properly included in the fixed assets referenced in Part 32 of the FCC Rules and Regulations (47 CFR, Part 32), as such accounts are reflected in Schedule 8.1.17. "Third Party Claim" is defined in Section 12.4(a). "Third Party Intellectual Property" means Intellectual Property owned by any Person, other than Seller, without regard as to whether Seller has any rights therein or the right to assign such rights to Buyer. "Third Party Intellectual Property Contracts" is defined in Section 10.1.4. "Total Service Pension" is defined in Section 11.2.1(c)(iii)(B). "Transaction Taxes" is defined in Section 10.11. "Transferred Books and Records" means all of Seller's or its Affiliates' customer or subscriber lists and records, accounts and billing records, plans, blueprints, specifications, drawings, surveys, engineering reports, personnel records of Transferred Employees (where applicable) and all other documents, computer data and records, in each case relating primarily to the operation of the Business, except for the Retained Books and Records. "Transferred Employees" is defined in Section 11.1. "Transition Services Agreement" is defined in Section 9.1. "Uncollectible Factor" is defined in Section 10.16(b). "Year 2000 Compliant" is defined in Section 8.1.22(c). 9 1.2 Interpretation. (a) Unless the context otherwise requires, (i) all references to Sections, Articles or Schedules are to Sections, Articles or Schedules of or to this Agreement, (ii) each accounting term not otherwise defined in this Agreement has the meaning assigned to it in accordance with GAAP, (iii) all references to the "knowledge" of Seller are deemed to refer to the actual knowledge of the Executive Officers of Seller, (iv) all references to the "knowledge" of Buyer or "knowledge" obtained by Buyer are deemed to refer to the actual knowledge of the Executive Officers of Buyer, except as otherwise provided herein, (v) the term "primarily" means primarily or exclusively, and (vi) the term "including" means including without limitation. (b) No provision of this Agreement will be interpreted in favor of or against either of the parties by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft of such provision or of this Agreement. ARTICLE 2 PURCHASE AND SALE OF ASSETS 2.1 Purchase and Sale of Assets. Upon the terms and subject to the conditions of this Agreement, Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer and Buyer hereby agrees to purchase, acquire and accept from Seller, in each case effective as of the Closing, all of Seller's and each of its Affiliates' right, title and interest in and to the Purchased Property. 2.2 Purchased Property. The term "Purchased Property" means all the following business, properties, assets and rights of Seller and its Affiliates on the Closing Date, other than the Excluded Property: (i) Telephone Plant; (ii) Earned End-User Accounts Receivable; (iii) Material and Supply Inventories; (iv) Non-Regulated Construction Work in Process; (v) FCC Licenses and Assigned Permits; (vi) Assigned Contracts; (vii) Transferred Books and Records; (viii) Real Property Leases; and (ix) all other business, property, assets, work in process and rights of Seller on the Closing Date not described above that relate primarily to the Purchased Exchanges. 2.3 Excluded Property. For purposes of this Agreement, "Excluded Property" means the following: (a) Cash, cash equivalents and investments; 10 (b) All rights of Seller and its Affiliates under this Agreement, the Ancillary Documents and the certificates and other documents delivered to Seller by Buyer in connection with this Agreement; (c) All records prepared in connection with the sale of the Business, including bids received from third parties and analysis relating to the Business; (d) All rights related to the Retained Liabilities; (e) The Retained Books and Records; (f) Seller's and its Affiliates' interests in any business other than the Business, including the provision of wireless service (cellular and PCS), long distance and internet service or internet related services, air-to-ground communications (air phone service), and any Excluded Permits related thereto, and all assets of Seller and its Affiliates used in connection with any such business or related thereto, and all assets used by Seller and its Affiliates in rendering corporate services to Seller or the Business that are located outside the geographic area comprising the Purchased Exchanges; (g) Such other assets (i.e., encryption decoder devices, AWAS terminals, SODA, etc.), if any, as set forth on Schedule 2.3(g); (h) The Excluded Contracts; (i) The Excluded Marks; (j) All Intellectual Property, including the Licensed Intellectual Property and Third Party Intellectual Property (except for such rights to possess and use Third Party Intellectual Property as may be assigned in accordance with Section 10.1.4); and (k) All of Seller's and its Affiliates' insurance proceeds arising in connection with the operation of the Business or the Purchased Property prior to the Closing. 2.4 Assumption of Liabilities. 2.4.1 Assumed Liabilities. Upon the terms and subject to the conditions of this Agreement, Buyer hereby agrees to assume, as of the Closing Date, and agrees to pay, perform and discharge when due, all liabilities, responsibilities and obligations, beginning on the day following the Closing Date, relating to the Purchased Property other than the Retained Liabilities (subject to any different allocation of liability set forth in clauses (b), (c), (g) and (h) below) (the "Assumed Liabilities"), including the following: (a) Ordinary Course. All liabilities, responsibilities and obligations (including Taxes), arising out of or accruing or resulting from the use or ownership of the Purchased Property in the ordinary course after the Closing Date; (b) Employment Matters. All liabilities, responsibilities and obligations of Buyer as provided in Article 11 with respect to Transferred Employees; 11 (c) Assigned Contracts, Real Property Interests and Real Property Leases. All liabilities, responsibilities and obligations that arise in connection with the performance of the Assigned Contracts, Real Property Interests and the Real Property Leases, other than performance obligations of Seller that mature prior to the Closing Date; (d) Joint Construction Projects. All liabilities, responsibilities and obligations to third parties that relate to arrangements and commitments between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (e) Construction in Progress. All liabilities, responsibilities and obligations relating to post-Closing engineering and construction required to complete scheduled construction and other capital expenditure projects for the Purchased Exchanges; (f) Customer Deposits and Construction Advances. All liabilities, responsibilities and obligations relating to Customer Advances, Customer Deposits and Construction Advances; (g) Future Regulatory Obligations. All liabilities, responsibilities and obligations, other than Future Capital Expenditure Obligations, related to the Purchased Exchanges arising out of any rule, regulation, law, mandate, decision or order of the FCC or the PSC after the Closing Date regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct or actions that occurred at any time prior to the Closing Date ("Future Regulatory Obligations"); provided that Buyer shall not be liable for any such Future Regulatory Obligation arising directly out of any intentional misconduct or material misstatement to the PSC by Seller that occurred prior to the Closing Date, except for such statements as may be based on reasonable interpretations of existing PSC regulations and current industry practice ("Retained Future Regulatory Obligations"); (h) Future Capital Expenditure Obligations. All liabilities, responsibilities and obligations related to the Purchased Exchanges arising out of any rule, regulation, law, mandate, decision or order of the FCC or the PSC (i) issued at any time and requiring any capital expenditure after the Closing Date, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the Closing Date ("Future Capital Expenditure Obligations"); and (ii) issued after the date of this Agreement and requiring any capital expenditure after the date of this Agreement, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the date of this Agreement ("Interim Capital Expenditure Obligations"); provided that (i) Seller shall retain liability for Interim Capital Expenditure Obligations incurred prior to Closing to the extent related to (A) FCC or PSC orders that impose capital expenditure obligations as a result of Seller's overearnings, (B) Seller's efforts to comply with FCC or PSC rules, regulations, laws, mandates, decisions or orders existing as of the date of this Agreement, or (C) capital expenditures already planned by Seller; and (ii) Seller shall retain liability for all other Interim Capital Expenditure Obligations to the extent Seller is fully reimbursed by Buyer at Closing for such obligations. Prior to the Closing Date, Seller shall notify Buyer of all potential Future or 12 Interim Capital Expenditure Obligations within a reasonable time after publication of said obligations by a Governmental Authority; and (i) Litigation and Claims. All liabilities and obligations arising out of (i) litigation and claims that arise out of an occurrence after the Closing Date, (ii) litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations) regardless of when filed, and (iii) claims of a Governmental Authority arising from or related to a Future Regulatory Obligation (other than Retained Future Regulatory Obligations). Notwithstanding anything in this Section 2.4.1 to the contrary, "Assumed Liabilities" shall not include any liabilities, responsibilities or obligations expressly included in Retained Liabilities pursuant to Section 2.4.2. 2.4.2 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller (the "Retained Liabilities"): (a) Subject to Section 10.5, all trade payables and other accrued payment obligations of Seller as of the Closing Date; (b) All long-term debt of Seller (including indebtedness to the Bondholders) and debt of Seller owed to any one or more of its Affiliates; (c) Subject to Section 10.5, all Taxes relating to the operation of the Business on or before the Closing Date or the use, ownership or operation of the Purchased Property on or before the Closing Date; (d) Except to the extent otherwise provided in Article 11, all liabilities and obligations arising on or before the Closing Date with respect to the Transferred Employees, including (i) all liabilities responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (ii) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date, but excluding any Future Regulatory Obligations with respect to the Transferred Employees; (e) All liabilities, responsibilities and obligations arising out of litigation and claims that arise out of an occurrence prior to the Closing Date other than litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations); (f) Any Retained Future Regulatory Obligations; and (g) All liabilities, responsibilities and obligations with respect to the Excluded Property and the Excluded Contracts. 2.5 No Assignment Without Consent. Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, conveyance, transfer, assignment or 13 delivery or attempted sale, conveyance, transfer, assignment or delivery to Buyer of any Purchased Property (including any Contract) is prohibited by any applicable Law or would require any governmental or third-party authorizations, approvals, consents or waivers and such authorizations, approvals, consents or waivers shall not have been obtained prior to the Closing, this Agreement shall not constitute a sale, conveyance, transfer, assignment or delivery, or an attempted sale, conveyance, transfer, assignment or delivery thereof, if any of the foregoing would constitute a breach of applicable Law or the rights of any third party; provided, however, that, except to the extent that a condition to Closing set forth in Article 6 relating to the foregoing shall not be satisfied, the Closing shall occur notwithstanding the foregoing without any adjustment to the Purchase Price on account of such required authorization. Following the Closing, the parties shall use their commercially reasonable efforts, and shall cooperate with each other, to obtain promptly such authorizations, approvals, consents or waivers; provided, however, that neither Seller nor Buyer nor any of their respective Affiliates shall be required to pay any consideration therefor, other than filing, recordation or similar fees payable to any Governmental Authority, which fees shall be shared equally by Seller and Buyer. Pending or in the absence of such authorization, approval, consent or waiver, the parties shall cooperate with each other in any reasonable and lawful arrangements to provide to Buyer the benefits and liabilities of use of such Purchased Property, including, if permitted by the terms of any Real Property Lease or applicable Material Contract, through a sublease or subcontract in accordance with Section 4.3. If such authorization, approval, consent or waiver for the sale, conveyance, transfer, assignment or delivery of any such Purchased Property is obtained, Seller shall promptly convey, transfer, assign and deliver, or cause to be conveyed, transferred, assigned and delivered, such Purchased Property to Buyer. ARTICLE 3 PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Purchased Property shall be the sum of (i) Two Hundred and Four Million dollars ($204 million) (the "Base Purchase Price"), (ii) amounts expended by Seller to comply with Interim Capital Expenditure Obligations (the "Regulatory Obligation Amount"), and (iii) the Non-Regulated Construction Work in Process Amount. Payments from Buyer to Seller for Earned End-User Accounts Receivable and from Seller to Buyer for Customer Advances and Customer Deposits will occur subsequent to Closing in accordance with Article 10. 3.2 Closing Date Estimate. (a) Not less than three (3) business days prior to the Closing Date, Seller will give to Buyer a notice, setting forth Seller's good faith estimate as of the Closing Date of (i) the Regulatory Obligation Amount (the "Estimated Regulatory Obligation Amount") and (ii) the Non-Regulated Construction Work in Process Amount (the "Estimated Non-Regulated Construction Work in Process Amount"). (b) On the Closing Date, Buyer shall pay to Seller the sum of (i) the Base Purchase Price, (ii) the Estimated Regulatory Obligation Amount, and (iii) the Estimated Non-Regulated Construction Work in Process Amount, (the "Closing Date Amount"). The Closing Date Amount shall be paid by delivery on the Closing Date of immediately available 14 funds in U.S. dollars by wire transfer to an account that Seller shall designate to Buyer at least two (2) business days prior to the Closing Date. 3.3 Closing Date Statement. (a) Within sixty (60) days after Closing Date, Seller shall prepare and deliver to Buyer a written statement of the Base Purchase Price, Regulatory Obligation Amount and the Non-Regulated Construction Work in Process Amount ("Closing Date Statement"). (b) Within fifteen (15) days after receipt of the Closing Date Statement, Buyer shall, in a written notice to Seller, either accept the Closing Date Statement or describe in reasonable detail any proposed adjustments to the Closing Date Statement and the reasons therefore. If Seller shall not have received a notice of proposed adjustments within such fifteen (15) day period, Buyer will be deemed irrevocably to have accepted such Closing Date Statement. (c) Upon the acceptance of any Closing Date Statement by Buyer, the parties shall, based thereupon, calculate the amount equal to the sum of the Base Purchase Price, Regulatory Obligation Amount and Non-Regulated Construction Work in Process Amount (collectively, the "Purchase Price"). If the Purchase Price as finally determined above is greater than the Closing Date Amount, Buyer shall promptly, but no later than three (3) business days after such acceptance, pay to Seller the amount of such difference. If the Purchase Price as determined above is less than the Closing Date Amount, Seller shall promptly, but no later than three (3) business days after such acceptance, pay to Buyer the amount of such difference. (d) Seller and Buyer shall negotiate in good faith to resolve any disputes over any proposed adjustments to the Closing Date Statement, provided that if any such dispute is not resolved within thirty (30) days following Seller's receipt of the proposed adjustments, Buyer and Seller jointly shall select an independent public accounting firm that is nationally recognized in the United States to resolve such disputes in accordance with the standards set forth in this Section 3.3, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. (e) If Buyer disputes any portion of the Closing Date Statement, the parties shall calculate the portion of the Closing Statement that is not the subject of any dispute or proposed adjustment. If the undisputed portion of the Closing Statement (A) is greater than the respective estimated amounts paid on the Closing Date, Buyer shall promptly pay Seller the amount of such difference, or (B) is less than the respective estimated amounts paid on the Closing Date, Seller shall promptly pay Buyer the amount of such difference. Payments with respect to any undisputed portions of these adjustments shall be made no later than three (3) business days after delivery of notice of the proposed adjustments. Upon resolution of any dispute over any proposed adjustments as described above in Section 3.3(d), a party which is determined to owe the other party an amount shall pay that amount promptly, but no later than three (3) business days after resolution. 15 (f) Any amount paid pursuant to this Section 3.3 after the Closing Date shall bear interest from the Closing Date through but excluding the date of payment, at a rate of eight percent (8%) per annum. Such interest shall accrue daily on the basis of a year of three hundred sixty-five (365) days and the actual number of days for which due and shall be payable together with the amount payable pursuant to this Section 3.3. All amounts payable pursuant to this Section 3.3 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer to, in the case of amounts payable by Buyer, the account identified by Seller as described in 3.2 above or to an alternate account that Seller may designate on the Closing Date Statement and, in the case of amounts payable by Seller, to such account of Buyer as Buyer shall designate in writing to Seller. ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS 4.1 State Regulatory Approval. Promptly after the date of this Agreement, Buyer and Seller shall file the appropriate applications and notices with the Nebraska Public Service Commission (collectively, the "PSC"), seeking orders permitting the transfer of service in the Purchased Exchanges to Buyer (collectively, the "Regulatory Approvals"). Buyer will be responsible for establishing the tariff for its post-Closing operations in the Purchased Exchanges. Each party agrees to use its commercially reasonable efforts to obtain the Regulatory Approvals and the parties agree to cooperate fully with each other and with the applicable regulatory agency to obtain the Regulatory Approvals at the earliest practicable date. 4.2 Debtholder Consents. Seller shall use its commercially reasonable efforts to obtain from its Bondholders the termination or release, at Closing, of all security agreements, mortgages and financing statements relating to the Purchased Property (such termination or release being hereinafter referred to as the "Debtholder Consents"). 4.3 Landlord and Other Consents. Promptly after the date hereof, the parties shall use their commercially reasonable efforts to mutually seek the consent of (i) the lessor to any Leased Real Property that requires consent as a condition to an assignment of the lease (which consents are identified in Schedule 8.1.8) and (ii) the applicable third party with respect to certain Material Contracts that require consent as a condition to assignment of such Material Contract (which consents are identified on Schedule 8.1.11). If a lessor refuses to consent to such an assignment, and if the applicable lease or Material Contract permits a sublease or subcontract without the consent of the lessor or other third party, the parties hereto shall, effective as of the Closing, enter into a sublease or subcontract upon terms and conditions as similar and comparable to an assignment of the lease or Material Contract as is reasonably feasible. 4.4 FCC Consents. Promptly after the date of this Agreement, the parties shall use their commercially reasonable efforts to obtain (i) the FCC's consent to the transfer of the FCC Licenses from Seller to Buyer, and (ii) the FCC waivers set forth on Schedule 4.4 (all such consents or waivers are collectively referred to as the "FCC Consents"). 4.5 HSR Act Review. Within thirty (30) days after the date hereof, or such later date as the parties may mutually agree, the parties will make such filings as may be required by the 16 HSR Act with respect to the transactions contemplated by this Agreement. Thereafter, the parties will file as promptly as practicable all reports or other documents required or requested by the U.S. Federal Trade Commission or the U.S. Department of Justice pursuant to the HSR Act or otherwise and will comply promptly with any requests by the Federal Trade Commission or the U.S. Justice Department for additional information concerning such transactions, so that the waiting period specified in the HSR Act will expire as soon as reasonably possible after the execution and delivery of this Agreement. Without limiting the foregoing, Seller and Buyer agree to use their commercially reasonable efforts to cooperate and oppose any preliminary injunction sought by any Governmental Authority preventing the consummation of the transactions contemplated by this Agreement. Buyer agrees to pay all application fees required in connection with any filings under the HSR Act. Seller and Buyer shall cause their respective counsel to furnish each other such necessary information and reasonable assistance as the other may reasonably request in connection with its preparation of necessary filings or submissions under the provisions of the HSR Act. Seller and Buyer will cause their respective counsel to supply to each other copies of all correspondence, filings or written communications by such party or its Affiliates with any Governmental Authority or staff members thereof, with respect to the transactions contemplated by this Agreement and any related or contemplated transactions, except for documents filed pursuant to Item 4(c) of the Hart-Scott-Rodino Notification and Report Form or communications regarding the same documents or information submitted in response to any request for additional information or documents pursuant to the HSR Act which reveal Seller's or Buyer's negotiating objectives or strategies or purchase price expectations. 4.6 GTE/Bell Atlantic Merger. Notwithstanding anything else contained in this Agreement, but without modification of the rights of Buyer under Sections 6.1, 11.6.2, 12.2(a) or 13.1, Seller shall not be obligated to take any action that would violate the terms of its agreements regarding the Merger, or that would interfere with, delay or prevent the consummation of the Merger. In the event that the Closing does not occur as a direct result of the Merger, and not through any fault of Buyer, Seller's liability to Buyer under this Agreement shall be limited to the amount of Buyer's reasonable out-of-pocket expenses incurred in connection with this Agreement. ARTICLE 5 PRE-CLOSING COVENANTS 5.1 Investigation by Buyer. Prior to the Closing, upon reasonable notice from Buyer to Seller given in accordance with this Agreement and subject to approval by Seller's appointed representative, Seller will afford to the authorized representatives of Buyer reasonable access during normal business hours to the Transferred Books and Records, the Owned Real Property the Leased Real Property and the other Purchased Property so as to afford Buyer the opportunity to make such review, examination and investigation of the Business and the Purchased Property as Buyer may reasonably request; provided, however, that no environmental sampling or other testing shall be performed without Seller's prior written consent, which consent may be given or withheld in Seller's sole discretion. Buyer will not contact any employee, customer or supplier of Seller with respect to this Agreement, the matters involved herein or the Purchased Property without the prior written consent of Seller. Nothing herein will obligate Seller to take actions 17 that would unreasonably disrupt the normal course of the business of Seller or violate the terms of any applicable Law or any Contract to which Seller or any of its Affiliates is a party or to which any of its assets is subject. Any information or documentation provided to Buyer or acquired by Buyer during this investigation shall be deemed "Evaluation Material" as that term is defined in the Confidentiality Agreement and shall be subject in all cases to the terms of the Confidentiality Agreement. 5.2 Operation of the Business in the Ordinary Course. 5.2.1 Preservation of Business. Except as contemplated on Schedule 5.2.1 or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing Seller shall: (a) Conduct the Business in the ordinary course consistent with past practice and shall keep available to the Business its services and the services of its Affiliates to the same extent generally available on the date hereof; (b) Operate the Business in substantially the same manner as it is presently being conducted, and, with respect to the Business, refrain from entering into any Contract that would be a Material Contract other than in the ordinary course of business; (c) Not institute any proceeding with respect to, or otherwise change, amend or supplement any of its tariffs or make any other filings with the PSC except in the ordinary course of business, and except as disclosed on Schedule 8.1.15(a); (d) Maintain the Purchased Property in good repair, order and condition, reasonable wear and use excepted, and maintain the Materials and Supply Inventory in the ordinary course of business consistent with past practice; (e) Maintain insurance with respect to the Purchased Property consistent with past practice; (f) Make capital expenditures sufficient to support normal maintenance and customer growth in the Purchased Exchanges in a manner consistent with established regulatory performance objectives, which expenditures in (a) calendar year 1999 shall not be less than $4,881,000, and (b) calendar year 2000 shall not be less than $300,000 per month; and (g) Maintain the books and records of the Business substantially in accordance with prior practice, except as changes are mandated by Governmental Authorities or required by GAAP. 5.2.2 No Material Changes. Except as contemplated by this Agreement or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing, Seller will not: (a) Make any material change in the general nature of the Business; 18 (b) Sell, lease or dispose of, or make any Contract for the sale, lease or disposition of any Purchased Property, other than in the ordinary course of business; (c) Increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its Transferred Employees, except (i) as required by Law, (ii) pursuant to any Contract to which Seller is a party existing on the date hereof and listed on Schedule 5.2.2(c), (iii) increases in base pay in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (iv) as listed or described on Schedule 5.2.2(c); (d) (i) Materially amend, modify or terminate any Material Contract or permit any of the foregoing to occur other than in the ordinary course of business; or (ii) sell, transfer or otherwise dispose of any Purchased Property other than in the ordinary course of business or as listed or described on Schedule 5.2.2(d), or encumber any Purchased Property, except for Permitted Encumbrances; or (e) Enter into any new written employment agreement, or union agreement with, or commitment to, the Transferred Employees (including any new commitment to pay retirement or other benefits or other amendments to Seller's retirement plans), provided that Seller may enter into new union agreements to the extent the new union agreements succeed any union agreement that expires prior to the Closing. Prior to finalizing any such new union agreement, Seller shall advise Buyer of its material terms and following the execution of any such agreement, Seller shall deliver a copy to Buyer. 5.3 Satisfaction of Conditions. Without limiting the generality or effect of any provision of Article 6, the parties will use their commercially reasonable efforts to satisfy promptly all the conditions required to be satisfied prior to the Closing. 5.4 Approvals. (a) Between the date of this Agreement and the Closing Date, Buyer and Seller will (i) cooperate with one another and take all reasonable steps to obtain, as promptly as practicable, all consents, approvals, authorizations, waivers and permits of any Governmental Authorities required of either party to consummate the transactions contemplated by this Agreement and (ii) provide such other information and communications to any Governmental Authority as may be reasonably requested. (b) To the extent that any consents, approvals, authorization or waiver of a third party with respect to any (i) Assigned Contract, (ii) Assigned Permit or (iii) any Pole Attachment Agreement, government grant or railroad crossing agreement listed on Schedule 8.1.18, is required in connection with the transactions contemplated by this Agreement, Seller shall use its commercially reasonable efforts to obtain such authorization, consent, approval or waiver prior to the Closing Date. 5.5 Audit or Review of Financial Statements. To the extent Buyer requires an additional audit or review of financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission under Regulations 19 S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer to audit or review the Financial Statements delivered by Buyer in accordance with Section 8.1.21 and such other financial statements as may be required by Buyer to comply with Regulations S-K and S-X (collectively, the "SEC Financial Statements"). Seller's cooperation will include such access to workpapers and other supporting documents used in the preparation of the SEC Financial Statements and delivery of one or more representation letters from Seller to such auditors as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards or a review in accordance with AICPA standards and to render an opinion acceptable to the SEC with respect to the audit or review of the SEC Financial Statements, it being understood that such representation letters shall acknowledge (i) Seller's extensive use of estimates and allocations in the preparation of the SEC Financial Statements, and (ii) Seller's belief that the SEC Financial Statements represent the financial condition and results of operations of the Business, in accordance with GAAP, and that such estimates and allocations were made on a reasonable basis and in accordance with GAAP. However, Buyer acknowledges that because the Business represents only a portion of Seller, Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. Seller will bear the cost of the preparation of its financial statements, including the SEC Financial Statements. Buyer will bear the cost of the preparation of any other financial statements that it will be required to file with the SEC, as well as the cost of the audit or review of the SEC Financial Statements. Buyer acknowledges that the SEC Financial Statements and any supporting documentation have been made available as an indication of the historical financial performance and condition of the Business. Except to the extent that the SEC Financial Statements reflect intentional misrepresentation or fraud, Buyer agrees not to make any claim related to the performance of the Business after the date of the SEC Financial Statements on the basis of a comparison to the SEC Financial Statements. 5.6 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller's transfer of the Purchased Property may, at Seller's election, be accomplished in a manner enabling such transfer to qualify as part of a like-kind exchange of property covered by Section 1031 of the IRC. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the IRC (including any actions required to facilitate the use of a "qualified intermediary" within the meaning of the United States Treasury Regulations), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Purchased Property as part of a like-kind exchange of property covered by Section 1031 of the IRC. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. 20 5.7 Interconnection Agreements. Seller shall furnish to Buyer such necessary information as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Purchased Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible. 5.8 Leased Vehicles; Capital Leases. Seller or its Affiliates, as applicable, will pay the remaining balances on any vehicle leases or any capital leases relating to assets included in the Purchased Property and at Closing will deliver to Buyer title to such vehicles and assets, free and clear of all Liens. 5.9 Delivery of Interim Information. From the date of this Agreement until the Closing, Seller shall furnish Buyer monthly reports concerning the operating performance of the Business. Such reports shall contain such data as are typically reported to GTE management with respect to the Purchased Exchanges, including access line counts and service measures. Seller shall provide Buyer reasonable access to Seller's management in order to discuss such data. In the event of any significant deterioration in operating performance, Seller shall consult with Buyer concerning its response. All information provided in accordance with this Section 5.9 shall be subject to the Confidentiality Agreement and to compliance with applicable antitrust Laws. ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING 6.1 Conditions Precedent to Obligations of Buyer. The obligations of Buyer to consummate the Closing shall be subject to the satisfaction or waiver by Buyer, at or prior to the Closing, of each of the following conditions, any one or more of which may be waived at the option of Buyer: 6.1.1 No Misrepresentation or Breach of Covenants and Warranties. Seller shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Seller in Section 8.1 shall be true and correct as of the Closing, except for (i) such representations or warranties that are made expressly as of an earlier date, which shall have been true and correct as of such date except as would not have a Material Adverse Effect, and, (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Seller shall have delivered to Buyer a certificate ("Seller's Closing Certificate") in the form attached as Schedule 6.1.1, dated the Closing Date and signed by an Executive Officer of Seller, certifying each of the foregoing, or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.1.2 Documents. Seller shall have delivered to Buyer all documents required by Section 7.2. 6.1.3 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 21 6.1.4 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained, free of any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a Material Adverse Effect, and the FCC and PSC shall not otherwise have taken any action with respect to the Purchased Property that is reasonably likely to have a Material Adverse Effect. For purposes of this Section 6.1.4, any tariff that is substantially similar in all material respects to the existing tariff with respect to the applicable Purchased Exchange shall be deemed not to have a Material Adverse Effect. For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any competent jurisdiction, the effect of which prohibits the Closing. 6.1.5 No Material Adverse Effect. There shall not have occurred any event or condition which individually or in the aggregate has resulted in a Material Adverse Effect. 6.2 Conditions Precedent to Obligations of Seller. The obligations of Seller to consummate the Closing shall be subject to the satisfaction or waiver by Seller, at or prior to the Closing, of each of the following conditions: 6.2.1 No Misrepresentation or Breach of Covenants and Warranties. Buyer shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Buyer in Section 8.2 shall be true and correct in all material respects as of the Closing, except (i) for such representations or warranties made expressly as of and only as of an earlier date, which shall be true and correct as of such date except as would not have a Material Adverse Effect, and (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Buyer shall have delivered to Seller a certificate ("Buyer's Closing Certificate") in the form attached as Schedule 6.2.1, dated the Closing Date and signed by an Executive Officer of Buyer, certifying each of the foregoing or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.2.2 Documents. Buyer shall have delivered to Seller all documents required by Section 7.3. 6.2.3 Purchase Price. Buyer shall have delivered to Seller, in the manner specified in Section 3.1, the Closing Date Amount. 6.2.4 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.2.5 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained free of any special terms, conditions or restrictions that are materially adverse to Seller based upon good faith business concerns that are not commercially unreasonable (other than any such approvals or consents which, if not obtained, would not have a Material Adverse 22 Effect). For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any jurisdiction, the effect of which prohibits the Closing. ARTICLE 7 THE CLOSING 7.1 The Closing. Subject to the terms and conditions of this Agreement, the closing of the purchase and sale of the Purchased Property and the assumption of the Assumed Liabilities (the "Closing") shall be held at 9 A.M. local time at the offices of GTE Network Services at 600 Hidden Ridge, Irving, Texas 75038, on the date agreed upon by the parties, provided such date shall be (i) the last business day of the month, and (ii) at least five (5) business days, but not more than ninety (90) days, after the date that all required Regulatory Approvals, Debtholder Consents and FCC Consents have been obtained, or at such other time and place as the parties may agree (the "Closing Date"). Such Closing shall be deemed to have occurred as of 11:59 p.m., local time, on the Closing Date. 7.2 Seller's Obligations at Closing. At the Closing, Seller shall deliver to Buyer the following documents: (a) (i) Bill of Sale and Assignment and Assumption Agreement, (ii) subject to Permitted Encumbrances (except as provided in Section 10.10), special warranty deeds or their equivalent in respect of the Owned Real Property and assignments of Real Property Leases to the extent any required consents have been obtained pursuant to Section 4.3, and (iii) subject to Section 2.5, assignments of the Assigned Contracts, the Real Property Interests and the Assigned Permits. For purposes of this Agreement, the term "Bill of Sale and Assignment and Assumption Agreement" means the form attached hereto as Schedule 7.2(a) executed by Seller; (b) A legal opinion from William Mundy, general counsel for GTE Network Services, as counsel for Seller, dated as of the Closing Date and in the form of Schedule 7.2(b); (c) Seller's Closing Certificate; (d) Instruments of assignment or, to the extent set forth in Section 4.3, subleases for the Leased Real Property; (e) Mortgage satisfactions, UCC Form 3 Termination Statements and other instruments necessary to remove, release and terminate all security interests held by the Bondholders on the Purchased Property; (f) All of the documents and papers required of Seller as conditions to Closing pursuant to Section 6.1, including the Regulatory Approvals, Debtholder Consents and FCC Consents; 23 (g) A certificate substantially in the form of Schedule 7.2(g) certifying that Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC; (h) The License Agreement; and (i) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. 7.3 Buyer's Obligations at Closing. At the Closing, Buyer shall deliver to Seller the following: (a) The Closing Date Amount in the manner specified in Section 3.2.(b); (b) The Bill of Sale, Assignment and Assumption Agreement, executed by Buyer; (c) A legal opinion from L. Russell Mitten II, Vice President and General Counsel of Buyer dated as of the Closing Date and in the form of Schedule 7.3(c); (d) Buyer's Closing Certificate; (e) All other documents and papers required of Buyer as conditions of Closing pursuant to Section 6.2, including the Regulatory Approvals; and (f) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. ARTICLE 8 REPRESENTATIONS AND WARRANTIES 8.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: 8.1.1 Authorization and Effect of Agreement. Seller has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by Seller of this Agreement and the Ancillary Agreements and the fulfillment of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Seller. This Agreement and the Ancillary Agreements have been duly executed and delivered by Seller and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Buyer, constitute valid and binding obligations of Seller enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.1.2 No Restrictions Against Sale of the Purchased Property. The execution and delivery of this Agreement and the Ancillary Agreements by Seller does not, and the 24 fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws, (ii) subject to obtaining the approvals and or consents referred to in Section 2.5, Article 4 and Schedule 8.1.11(a-f), conflict with, violate or result in the breach of any provision of any Material Contract, or (iii) result in the creation of any Lien (other than Permitted Encumbrances) upon any of the Purchased Property under (a) any Material Contract or (b) any Law applicable to any of the Purchased Property, except in the case of clauses (ii) or (iii) for any such conflict, violation, breach or Lien that would not have a Material Adverse Effect. 8.1.3 Consents and Approvals of Governmental Authorities. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Seller or in connection with the execution and delivery of this Agreement by Seller or the fulfillment by Seller of its obligations under this Agreement, except (i) FCC Consents and HSR Act clearance, (ii) the Regulatory Approvals, and (iii) any consent approval, order or authorization or registration declaration or filing, which if not obtained or made would not have a Material Adverse Effect. 8.1.4 No Material Violations. Except as indicated in Schedule 8.1.4 or as would not reasonably be expected to have a Material Adverse Effect, (a) the execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not violate any applicable Law, and (b) Seller is not in violation of any Law relating to or affecting the operation, conduct or ownership of the Business or the Purchased Property. 8.1.5 Corporate Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, and is duly qualified to conduct business in Nebraska. Seller has full power and authority to own its properties and to carry on the Business as it is now being conducted and to own, or hold under lease the Purchased Property. Seller holds valid permits, licenses, franchises, approvals and authorizations issued or granted by any Governmental Authority and adequate for the operation of the Business as currently conducted, except to the extent absence of any such permit, license, franchise, approval or authorization would not have an Material Adverse Effect. 8.1.6 Brokers. Seller has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Buyer for any broker's or finder's fees or similar fees or expenses. 8.1.7 Title to Owned Real Property. Seller has good fee simple title to all of the Owned Real Property, free and clear of any Lien other than Permitted Encumbrances and Liens of the Bondholders identified on Schedule 8.1.7(b). As of the date hereof, the address and a general description of each item of Owned Real Property are set forth on Schedule 8.1.7(a). Seller represents that the only creditors that have a Lien (other than any Permitted Encumbrances) on any of the Owned Real Property are the Bondholders identified on Schedule 8.1.7(b). 25 8.1.8 Real Property Leases. As of the date hereof, set forth on Schedule 8.1.8 is a list of the Real Property Leases. Each of the leases for the Leased Real Property is enforceable in accordance with its terms, subject to bankruptcy, insolvency and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with the principles of equity, and except as otherwise disclosed in Schedule 8.1.8, there is not under any lease any material default or a material breach of covenant by Seller. 8.1.9 Tangible Assets. All of the tangible Purchased Property is in substantially good operating condition and repair, normal wear and tear excepted. Except as set forth on Schedule 8.1.9 or elsewhere in this Agreement, Seller has good title to each item of tangible Purchased Property (other than Real Property Interests or office equipment or vehicles subject to leases) with a fair market value in excess of $5,000, free and clear of any Lien (other than Permitted Encumbrances). Except as set forth on Schedule 8.1.9, Seller has not received any written notice within the past twelve (12) months of a violation of any ordinances, regulations or building, zoning and other similar laws with respect to such assets that would have a Material Adverse Effect. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 8.1.9, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE CONDITION OR FITNESS OF THE TANGIBLE PURCHASED PROPERTY AND HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY AGAINST INFRINGEMENT. 8.1.10 No Material Adverse Change. Except as disclosed in Schedule 8.1.10, between December 31, 1997 and the date of this Agreement there has not occurred (i) any event or condition that would have a Material Adverse Effect; (ii) any increase in compensation payable or to become payable by Seller to any of its Transferred Employees or agents, other than normal merit or promotional increases other than payment under the retention pay program announced in connection with the network business repositioning of Seller and its Affiliates; (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract; or (iv) any material change in any accounting method, practice or policy of Seller with respect to the Business. 8.1.11 Material Contracts. Except for the agreements set forth on Schedule 8.1.11 subparts (b) through (j), there is no Assigned Contract (other than the Assigned Contracts entered into after the date of this Agreement in the ordinary course of business) that is: (a) an agreement containing a non-compete agreement or other covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any material respect with respect to the Business with any third party; (b) an agreement granting a Lien (other than a Permitted Encumbrance); (c) an agreement for the sale of any material Purchased Property or grant of any preferential rights to purchase any material Purchased Property; (d) an agreement for the provision of telephone service at public pay telephone locations; 26 (e) an agreement made in the ordinary course of business other than as set forth above with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $100,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (f) an agreement not made in the ordinary course of business with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (g) an agreement with respect to 911 services or E911 services; (h) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (i) an agreement between Seller and a third party for the third party's co-location of equipment in facilities included in the Purchased Property pursuant to which Seller is currently providing facilities or a request to provide facilities is currently pending; or (j) an agreement with a third party in which the owner of utility poles has agreed to allow the other party to attach its telecommunications equipment or facilities to the utility poles (a "Pole Attachment Agreement"). Except as set forth on Schedule 8.1.11, to the knowledge of Seller, each Assigned Contract referred to in any of the clauses (a) to (j) above (collectively the "Material Contracts") is valid, binding and in full force and effect and is enforceable by Seller or Seller's Affiliate, as applicable, in accordance with its terms, except for any such failure to be valid, binding, in full force and effect or enforceable that is not reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 8.1.11, to the knowledge of Seller, Seller and Seller's Affiliates have performed all material obligations required to be performed by them to date under the Material Contracts, and they are not (with or without the lapse of time or the giving of notice, or both) in breach or default thereunder and, to the knowledge of Seller, no other party to any Material Contract is (with or without the lapse of time or the giving of notice, or both) in breach or default in any respect thereunder, in each case except for such noncompliance, breaches and defaults that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect. As of the date hereof, neither Seller nor any Seller's Affiliate has, except as disclosed on Schedule 8.1.11, received or given any written notice of the intention of any party to terminate any Material Contract. Complete and correct copies of all the Material Contracts, together with all modifications and amendments thereto to the date of this Agreement by Closing will, have been made available to Buyer or its representatives. 8.1.12 Insurance. The Purchased Property of an insurable nature and of a character usually insured by companies carrying on similar businesses is insured under insurance policies or self insured in such amounts and against such losses or casualties as is usual in 27 Seller's industry. On the Closing Date, the coverage under the insurance policies and programs applicable to the Purchased Property will be terminated, and Buyer will be responsible for providing all insurance coverage for the Purchased Property. 8.1.13 Taxes. Except as disclosed on Schedule 8.1.13, (i) all Tax Returns required to be filed by Seller on or before the Closing Date have or will have been filed, and all Taxes shown as due and payable on such Tax Returns have been or will be paid by Seller when required by law; (ii) no deficiencies or assessments for any Taxes have been asserted in writing or assessed against Seller that remain unpaid and that individually or in the aggregate are material to the Business; (iii) Seller has withheld all required federal, state and local payroll taxes relating to the Business and has remitted or will remit all amounts required to be remitted to the appropriate taxing authorities; (iv) there are no tax liens upon any of the Purchased Property except for statutory liens covering taxes not yet due and payable; (v) Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC and shall provide an appropriate certificate for purposes of Section 1445(b)(2) of the IRC and (vi) there are no material, current audits or material audits for which written notice has been received (in either case, specifically with respect to the Business). 8.1.14 No Material Claims or Suits. Except as disclosed in Schedule 8.1.14 or with respect to Taxes, there are no claims, actions, lawsuits or legal proceedings pending before any Governmental Authority, or, to the knowledge of Seller threatened against or affecting the Business or Purchased Property that in Seller's opinion, if determined adversely to Seller, would reasonably be expected to have a Material Adverse Effect on the Business or materially adversely affect ability of Seller to consummate the transactions contemplated hereby. 8.1.15 Tariffs; FCC Licenses. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material respect under any such tariff. Except as disclosed on Schedule 8.1.15(a), there are no applications by Seller or petitions by others or proceedings pending or threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. To the knowledge of Seller, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 8.1.15(b) are the FCC Licenses and other material Assigned Permits (the "Material Permits") held by Seller and used in the operation of the Business. Except as listed on Schedule 8.1.15(b), to Seller's knowledge, each such FCC License or Material Permit is in full force and effect on the date of this Agreement in accordance 28 with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such FCC Licenses or Material Permits subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC Licenses are free from all security interests, liens, claims, or encumbrances of any nature whatsoever. There are no applications by Seller or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC Licenses that, in Seller's opinion, would reasonably be expected to have a Material Adverse Effect on the Business, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. 8.1.16 Employee Matters. (a) Schedule 8.1.16(a) lists (and identifies the sponsor of) each "Employee Pension Benefit Plan," as that term is defined in Section 3(2) of ERISA, each "Employee Welfare Benefit Plan," as that term is defined in Section 3(1) of ERISA (such plans being hereinafter referred to collectively as the "ERISA Plans"), and each other retirement, pension, profit-sharing, money purchase, deferred compensation, incentive compensation, bonus, stock option, stock purchase, severance pay, unemployment benefit, vacation pay, savings, medical, dental, post-retirement medical, accident, disability, weekly income, salary continuation, health, life or other insurance, fringe benefit, or other employee benefit plan, program, agreement, or arrangement maintained or contributed to by Seller or its Affiliates in respect of or for the benefit of any Transferred Employee or former employee of Seller, excluding any such plan, program, agreement, or arrangement maintained or contributed to solely in respect of or for the benefit of Transferred Employees or former employees employed or formerly employed by Seller outside of the United States, as of the date hereof (collectively, together with the ERISA Plans, referred to hereinafter as the "Plans"). Schedule 8.1.16(a) also includes a list of each written employment, severance, termination or similar-type agreement between Seller and its Affiliates and any Transferred Employee (the "Employment Agreements"). Seller has delivered to Buyer accurate and complete copies of all Plans and Employment Agreements (or representative samples in the case of form agreements) and, if applicable, summary plan descriptions with respect to such Plans and Employment Agreements and summary descriptions of any such Plan or Employment Agreement that is not otherwise in writing. Except for retention bonuses paid in connection with the closing of the transactions contemplated by this Agreement and except as otherwise disclosed on Schedule 8.1.16(a), the execution and delivery of this Agreement by Seller and the performance of this Agreement by Seller will not directly result now or at any time in the future in the payment to any Transferred Employee of any severance, termination, or similar-type payments or benefits being paid to any Transferred Employee. (b) Except as set forth on Schedule 8.1.16(b): (i) Neither Seller nor any of its Affiliates, any of the ERISA Plans, any trust created thereunder, or any trustee or administrator thereof, has engaged in any transaction as a result of which Seller or any of its Affiliates could be subject to any material 29 liability pursuant to Section 409 of ERISA or to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed pursuant to Section 4975 of the IRC; and (ii) Since the effective date of ERISA, no material liability under Title IV of ERISA has been incurred or is reasonably expected to be incurred by Seller or any of its Affiliates (other than liability for premiums due to the PBGC), unless such liability has been, or prior to the Closing Date will be, satisfied in full. (c) Except as set forth on Schedule 8.1.16(c), with respect to the ERISA Plans other than those ERISA Plans identified on Schedule 8.1.16(a) as "multiemployer plans": (i) the PBGC has not instituted proceedings to terminate any Plan that is subject to Title IV of ERISA (the "Retirement Plans"); (ii) none of the ERISA Plans has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived, as of the last day of the most recent fiscal year of each of the ERISA Plans ended prior to the date of this Agreement; (iii) each of the ERISA Plans has been operated and administered in all material respects in accordance with its provisions and with all applicable laws; (iv) each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the IRC and, to the extent applicable, Section 401(k) of the IRC, has been determined by the IRS to be so qualified, and nothing has occurred since the date of the most recent such determination (other than the effective date of certain amendments to the IRC, the remedial amendment period for which has not yet expired) that would adversely affect the qualified status of any of such ERISA Plans; (v) there are no pending material claims by or on behalf of any of the ERISA Plans, by any employee or beneficiary covered under any such ERISA Plan, or otherwise involving any such ERISA Plan (other than routine claims for benefits and routine expenses); (vi) each ERISA Plan which is a group health plan has been operated and administered in compliance with the continuation coverage provisions of Section 498B of the IRC and Part 6 of Title I of ERISA; (vii) all contributions and premiums that would normally be made or paid with respect to any ERISA Plan or Employment Agreement on behalf of Transferred Employees as of the Closing Date will have been made by the Closing Date; and (viii) as of the Closing Date no Transferred Employee will be excluded from coverage under any employee welfare benefit plan (as defined in Section 3(1) of ERISA) maintained or contributed to by Seller. 30 (d) Except as set forth on Schedule 8.1.16(d), none of the ERISA Plans is a "multiemployer Plan," as that term is defined in Section 3(37) of ERISA, and with respect to any such multiemployer plans (as so defined) listed in Schedule 8.1.16(d), Seller has not made or incurred a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of ERISA that would result in the incurrence of a material liability by Seller. Except as set forth on Schedule 8.1.16(d), neither Seller nor any Affiliates of Seller has made or incurred a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in Sections 4203 and 4205, respectively, of ERISA) that would result in the incurrence of liability by Seller or its Affiliates, and the performance of this Agreement will not result in such withdrawal(s) or liability. (e) Except as set forth on Schedule 8.1.16(e), (i) none of the Transferred Employees are represented by a labor union or labor organization; (ii) Seller is not subject to any collective bargaining agreement covering any Transferred Employee; (iii) there are no current, or to the best knowledge of Seller, any pending or threatened strikes, slowdowns, picketing, or work stoppages affecting the Business or with respect to any Transferred Employee covered by collective bargaining; (iv) there is no pending lockout by Seller of any employees of the Business, and no such action is contemplated by Seller; (v) to the best knowledge of Seller, there is no pending or threatened organizing activity or petition for certification of a collective bargaining representative involving employees of the Business and there has been none within the twelve (12) months preceding the date of the Agreement; (vi) to the best knowledge of Seller, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state or federal labor or employment law or regulation in connection with the Business, including any charge or complaint filed by any employee or labor organization with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any other administrative governmental agency, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business; (viii) with respect to employees of the Business, Seller has complied in all respects with all laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupational safety and health, immigration, and plant closings; and (ix) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the Transferred Employees. (f) This Agreement shall not result in any Transferred Employee becoming entitled to separation pay or severance which could be or become an obligation of Buyer. 8.1.17 Schedules of Telephone Plant. Schedule 8.1.17 sets forth, as of June 30, 1999, a materially accurate summary of the book value of the Telephone Plant as reflected in Seller's continuing property records. Schedule 8.1.17 also sets forth a materially accurate list of the vehicles, trailers and other mobile tools and mobile equipment that are part of the Purchased Property as of September 3, 1999. 31 8.1.18 Schedule of Real Property Interests. To the knowledge of Seller and as of the date of this Agreement, Schedule 8.1.18 sets forth a true and accurate list of all its Real Property Interests. 8.1.19 Compliance with Existing Environmental Requirements. Except as set forth in Schedule 8.1.19 or as would not have a Material Adverse Effect, to the knowledge of Seller: (a) Seller's operation of the Business and the Purchased Property has been and is presently in substantial compliance with Existing Environmental Requirements; (b) No environmental remediation is occurring on any parcel of Owned Real Property or Leased Real Property nor has Seller or any Affiliate issued a request for proposal or otherwise requested an environmental remediation contractor to begin plans for such environmental remediation; (c) No underground storage tanks ("USTs") or aboveground storage tanks ("ASTs") are located on the Owned Real Property or Leased Real Property; (d) None of the Owned Real Property or Leased Real Property is situated in a state or federal "superfund" site or study area; and (e) Seller has delivered, or within 60 days after the date of this Agreement will deliver, to Buyer complete copies of all reports and studies relating to Seller's liability under or non-compliance with any Existing Environmental Requirements in connection with Seller's operation of the Business or use or ownership of the Purchased Property. 8.1.20 Environmental Permits. Except as set forth in Schedule 8.1.20, to the knowledge of Seller, it has obtained or filed for all necessary environmental permits, authorizations and licenses required to operate the Business or the Purchased Property, except where failure to obtain or file such permits, authorizations and licenses would not have a Material Adverse Effect on the Business. 8.1.21 Financial Statements. Seller has furnished to Buyer its audited balance sheets as of December 31, 1997 and December 31, 1998 and the related statements of income and cash flows for the years ended December 31, 1997 and December 31, 1998 (collectively, the "Financial Statements"). The Financial Statements have been prepared based on the books and records of Seller. Such books and records have been maintained in accordance with GAAP, and where required by law, the applicable regulations of the FCC and PSC. However, because the Business represents only a portion of a larger entity, the Financial Statements are based on the extensive use of estimates and allocations. Seller believes these estimates and allocations have been performed on a reasonable basis in accordance with GAAP. However, Buyer acknowledges that because Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and the Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. 32 8.1.22 Year 2000 Compliance. (a) As of the Closing Date, Seller shall have caused the modification or remediation of the Automated Assets in accordance with applicable manufacturer or vendor recommendations such that the Automated Assets are Year 2000 Compliant; provided that any and all Buyer or third-party supplied computer software, computer firmware and computer hardware that directly interfaces with the Automated Assets, co-exists with the Automated Assets, or indirectly influences the operation of the Automated Assets are also demonstrated to be Year 2000 Compliant. (b) Seller shall be deemed to be in satisfaction of the requirements of subsection (a) of this Section 8.1.22 to the extent that Seller has (i) performed on or before the Closing Date any modification or remediation in accordance with applicable manufacturer or vendor recommendations for achieving Year 2000 compliance or Year 2000 readiness, or (ii) received on or before the Closing Date reasonable assurances from the applicable manufacturer or vendor that an Automated Asset, without modification or remediation, is Year 2000 compliant or Year 2000 ready. (c) When used in this Section 8.1.22, the following term shall have the respective meanings given below: "Automated Assets" means the computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software system(s) that are provided by Seller to Buyer as part of the Purchased Exchanges pursuant to this Agreement. "Calendar-Related" refers to the date values based on the Gregorian calendar, as defined in Encyclopedia Britannica, 15th edition, 1982, page 602, and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons and presentations. "Date Data" means any Calendar-Related data in the inclusive range January 1, 1900 through December 31, 2050, which the Automated Assets use in any manner. "System Date" means any Calendar-Related data value in the inclusive range January 1, 1985 through December 31, 2035 (including the natural transition between such values) which the Automated Assets shall be able to use as their current date while operating. "Year 2000 Compliant" means: (i) As of the Closing Date, in connection with Calendar-Related data and Calendar-Related processing of Date Data or of any System Date, the Automated Assets will not malfunction, will not cease to function and will not produce incorrect results; and 33 (ii) As of the Closing Date, the Automated Assets will represent dates without ambiguity as to century when providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized and/or software systems and users by way of user interfaces, electronic interfaces and data storage. 8.1.23 Native American and Federal Consents. Except as set forth on Schedule 8.1.23 or as would not have a Material Adverse Effect, to the knowledge of the Seller: (a) Schedule 8.1.23 sets forth all material easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA") (collectively, the "Native American Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducted, on Native American reservations; (b) All such Native American Authorizations are in full force and effect and Seller is not in default thereunder; (c) There are no material claims, actions, lawsuits or other proceedings pending or threatened with respect to any of the Purchased Property located, or any operations of the Business conducted, on Native American reservations, and no tribal authority has given written notice of any cancellation, revocation, termination or material amendment or modification of any Native American Authorization; and (d) No material consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement. 8.1.24 Loss of Major Customer. Except as set forth on Schedule 8.1.24, since January 1, 1997, Seller has not suffered the loss of any customer of the Business for which Seller billed in excess of $50,000 annually during the years ended December 31, 1997 or 1998. 8.1.25 Records. The continuing property records and other records related to the Purchased Property maintained by Seller conform in all material respects with the applicable rules and regulations of the FCC and PSC. Seller has retained substantially all original cost documentation relating to the Purchased Property regarding the expenditures made by Seller for the Telephone Plant within the period required by applicable Law. 8.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: 8.2.1 Corporate Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and is or will be by Closing Date duly qualified to conduct business in Nebraska and has the requisite corporate power and authority to own, lease or otherwise hold the assets owned, leased or held by it. 34 8.2.2 Authorization and Effect of Agreement. Buyer has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, to carry on the Business as presently conducted and to fulfill all other obligations of Buyer under this Agreement and the Ancillary Agreements. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements, and the fulfillment by it of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Buyer. Buyer has the requisite legal capacity to purchase, own and hold the Purchased Property upon the consummation of the sale of the Purchased Property. This Agreement and the Ancillary Agreements have been duly executed and delivered by Buyer and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Seller, constitute valid and binding obligations of Buyer enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.2.3 No Restrictions Against Purchase of the Purchased Properties. The execution and delivery of this Agreement and the Ancillary Agreements by Buyer do not, and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not, conflict with, violate or result in the breach of any provision of the certificate of incorporation or bylaws of Buyer or, conflict with, violate or result in the breach of any contract to which Buyer is a party. No material consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Buyer in connection with the execution and delivery of this Agreement by Buyer or the fulfillment by Buyer of its obligations under this Agreement, except the filings and approvals described in Article 4. 8.2.4 No Violation of Law. The execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not violate any Law except to the extent any such violation would not have a material adverse effect on the ability of Buyer to fulfill its obligations hereunder and thereunder. 8.2.5 Financial Capacity. (a) Buyer has sufficient cash or other sources of funds to pay the Purchase Price in the manner specified in Section 3.1 and all related fees and expenses. (b) Buyer has sufficient financial resources to operate the Business after the Closing Date. Without limiting the generality of the foregoing, Buyer has sufficient financial resources to satisfy any applicable requirement relating to financial capacity or capital imposed by any Governmental Authority in any state in which the Business is conducted. Buyer is solvent, is able to pay its debts as they become due, and owns property that has both a fair value and a fair saleable value in excess of the amount required to pay its debts as they become due. 8.2.6 Brokers. Buyer has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with 35 the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Seller for any broker's or finder's fees or similar fees or expenses. 8.2.7 Consents and Approvals of Governmental Authority. Subject to Article 4 with respect to Regulatory Approvals and FCC Consents, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority or regulatory authority is required in connection with the execution, delivery and performance of this Agreement by Buyer or the consummation by Buyer of the transactions contemplated herein, except for filings with the Federal Trade Commission and Department of Justice pursuant to the HSR Act, if required. ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS 9.1 Transition Services Agreement. The parties agree to cooperate with each other to ensure that the transition of the ownership of the Purchased Property proceeds with minimal disruption to the services being provided to subscribers. The parties agree that it may be necessary for Seller to assist Buyer in converting Seller's systems and processes with respect to the Purchased Property to Buyer's systems and processes. Seller and Buyer agree to execute a separate "Transition Services Agreement" substantially in the form attached hereto as Schedule 9.1 for the provision of such services. 9.2 Optional Services Agreement. It is understood and agreed that Buyer may not have for a period of time after Closing Date, certain systems or processes necessary to provide some basic customer services. Attached hereto as Schedule 9.2 are Seller's standard form contracts for provision of several optional services (the "Optional Services"). Subject to negotiation of an agreement or agreements as described hereinafter, Seller will at Buyer's request provide any or all of the Optional Services at the fees indicated in Schedule 9.2. To the extent Buyer requests such services, the parties agree to negotiate in good faith separate agreements, on commercially reasonable terms similar to those in Schedule 9.2. 9.3 Directory Publishing. 9.3.1 Assumption of Certain Directory Publishing Agreement Rights and Obligations. Seller is party to a directories Master Publishing Agreement ("Master Publishing Agreement") with GTE Directories Service Corporation n/k/a GTE Directories Corporation herein "Publisher." Publisher is also party to a publishing agreement with US West Dex, Inc. These agreements are identified in Schedule 9.3.1 attached hereto ("Publishing Agreement"). Pursuant to the Master Publishing Agreement Publisher has the exclusive right and obligation to sell advertising, and to publish, print and distribute directories containing telephone numbers relating to the Purchased Exchanges. Buyer agrees to execute an agreement effective as of the Closing to assume and appropriately amend the Master Publishing Agreement as it relates to the Purchased Exchanges, so that such extension expires on December 31, 2001. If the directories for any of the Purchased Exchanges are published by a third party non-Affiliate of Seller, then to the extent requested by Buyer, Seller agrees to assist Buyer in obtaining such third party's consents to the continuation 36 of such publishing arrangements; provided that Seller shall have no obligation to pay compensation or other consideration in connection with such assistance. 9.3.2 Co-Bound Directories Acknowledgement. Buyer acknowledges that Publisher may have a pre-existing obligation (which Publisher may choose to continue) to sell advertising, publish, print and distribute the telephone numbers of third party local exchange telephone companies in the same directory as the Purchased Exchanges ("Co-Bound" directory). Co-Bound directory agreements of which Seller is aware, if any, are identified on Schedule 9.3.2. 9.3.3 Meeting to Discuss Directory Publication. Within ninety (90) days following the date of this Agreement, Buyer agrees to meet with Seller and Publisher for the purpose of having an initial discussion about the first directory publication after the Closing Date. This meeting will be held at Publisher's address unless otherwise agreed between the parties and Publisher. All parties shall employ their respective commercially reasonable efforts to ensure that directory publication is not interrupted following the Closing Date. 9.4 GTE Supply Relationship. Within 90 days of this Agreement, Buyer agrees to meet with representatives of GTE Supply for purposes of negotiating in good faith an agreement for GTE Supply to provide ongoing procurement and materials management functions for the Business on substantially the same terms as contained in the Buyer's existing agreement with GTE Supply; provided that Buyer may negotiate in good faith with respect to any volume discounts that may be available from GTE Supply. ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES 10.1 Intellectual Property. 10.1.1 No License. Buyer and Seller agree and understand that except as expressly set forth in writing in the License Agreement and Section 10.1.3, Seller has not granted any rights or licenses, express or implied, of, and nothing shall constitute or be construed as a license of Seller under any Intellectual Property now or hereafter owned, obtained or licensable by Seller or under any Third Party Intellectual Property. 10.1.2 Infringement. (a) Notwithstanding anything in this Agreement to the contrary, Seller shall have no obligation to defend, indemnify or hold harmless Buyer or any of its Affiliates, from any damages, costs or expenses resulting from any obligation, proceeding or suit based upon any claim that any activity subsequent to the Closing Date engaged in by Buyer, a customer of Buyer's or anyone claiming under Buyer, constitutes direct or contributory infringement, misuse of, or misappropriation of, or inducement to infringe, any Third Party Intellectual Property. (b) Buyer shall defend, indemnify and hold harmless Seller and its Affiliates from and against any and all Indemnifiable Losses resulting from any obligation, proceeding or suit based upon any claim alleging or asserting direct or contributory infringement, 37 or misuse or misappropriation of or inducement to infringe by Seller or any of its Affiliates of any Third Party Intellectual Property, to the extent that such claim is based on, or would not have arisen but for, activity conducted or engaged in subsequent to the Closing Date by Buyer, a customer of Buyer's, or anyone claiming under Buyer. 10.1.3 Trademark Phaseout. (a) Buyer acknowledges that Seller or its Affiliates are the owners of Excluded Marks that qualify as Excluded Property under Section 2.3. Buyer understands and agrees that the Excluded Marks, or any right to or license of the Excluded Marks, are not being transferred pursuant to this Agreement. Buyer acknowledges the exclusive and proprietary rights of Seller and its Affiliates in the use of the Excluded Marks, and Buyer agrees that it shall not use the Excluded Marks (or any names, domain names, marks or indicia confusingly similar to the Excluded Marks) except and to the extent expressly set forth in this Section 10.1.3 or assert any rights or claims in such Excluded Marks (or in any names, domain names, marks or when confusingly similar to the Excluded Marks). After the Closing, all Excluded Marks of Seller and its Affiliates shall be replaced by Buyer, at Buyer's expense, as soon as possible, but in no event later than one hundred twenty (120) days after the Closing Date for items with Excluded Marks affixed to them which Buyer has continued to use in Buyer's operation of the Business, including buildings, vehicles, heavy equipment, hard hats, tools, tool boxes, kits (safety and others), signs, public (pay) telephones, manual covers and notebooks. After the Closing, Buyer will not use, and will destroy or deliver to Seller, all such items with Excluded Marks affixed to them that have no valid continuing use in Buyer's operation of the Business, including items affecting customer or employee relations or items that do not reflect Buyer's true identity. Specific items to be destroyed or returned include items with Excluded Marks affixed to them including giveaways; order, purchase or materials forms; requisitions; invoices; statements; time sheets/labor reports; bill inserts; stationery; personalized note pads; maps; organization charts; bulletins/releases; sales/price literature; manuals or catalogs; report covers/folders; program materials; and materials such as media contact lists/cards. The one hundred twenty (120) day time period for replacement of Excluded Marks affixed to telephone directories that were already published or closed for publication at the Closing Date shall be extended to the expiration date of such directories. (b) Buyer recognizes the great value of the goodwill associated with the Excluded Marks, and acknowledges that the Excluded Marks and all rights therein and the goodwill pertaining thereto belong exclusively to Seller and that the Excluded Marks have a secondary meaning in the minds of the public. Buyer further agrees that any and all permitted use of the Excluded Marks pursuant to this Agreement shall inure to the sole and exclusive benefit of Seller. (c) Buyer agrees that any permitted use of the Excluded Marks in the operation of the Business after the Closing shall be provided in accordance with all applicable federal, state and local laws, and that the same shall not reflect adversely upon the good name of Seller or its Affiliates, and that the operation of the Business will be of a high standard and skill. (d) Buyer acknowledges that its failure to cease use of the Excluded Marks as provided in this Agreement, or its improper use of the Excluded Marks, will result in 38 immediate and irreparable harm to Seller and its Affiliates. Buyer acknowledges and admits that there is no adequate remedy at law for such failure to terminate use of the Excluded Marks, or for such improper use of the Excluded Marks. Buyer agrees that in the event of such failure or improper use, Seller and its Affiliates shall be entitled to equitable relief by way of temporary restraining order, or preliminary or permanent injunction, or any other relief available under this Agreement. (e) Buyer will not contest the ownership or validity of any rights of Seller or its Affiliates in the Excluded Marks. 10.1.4 Third Party Software. To the extent that the transfer of Purchased Property by Seller to Buyer under this Agreement results in the transfer of possession to Buyer of software that at the Closing Date is Third Party Intellectual Property, which software was located in and rightfully used by Seller in the geographical area of the Purchased Exchanges prior to the Closing Date in the normal and ordinary operation of the Business pursuant to Contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then subject to Section 2.5, effective as of the Closing and provided that no payments to any Person other than a Switch Software vendor (which, if any, shall be paid by Seller) are thereby required, at Closing Seller shall assign to Buyer, and Buyer shall accept all rights and licenses if any to posses and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. Buyer understands and agrees that except as provided above in this Section 10.1.4, or as expressly provided elsewhere in this Agreement or in another written agreement between Buyer and Seller, no rights or licenses to use or possess such software or any Third Party Intellectual Property are transferred to Buyer. Buyer shall properly dispose of, and shall not use, any software of which Buyer acquires possession in connection with Purchased Property and (i) which, after the Closing Date, Buyer knows, or reasonably should know, is not the subject of a Third Party Intellectual Property Contract that has been rightfully transferred to Buyer or for (ii) which Buyer does not have a separate license. Seller makes no warranty or representation that any Third Party Intellectual Property Contract or any right therein is assignable in whole or in part to Buyer. 10.2 Effect of Due Diligence and Related Matters. (a) Buyer represents that it is a sophisticated entity that was advised by knowledgeable counsel and financial advisors and, to the extent it deemed necessary, other advisors in connection with this Agreement and has conducted its own independent review and evaluation of the Purchased Property. Accordingly, Buyer covenants and agrees that (i) except for the representations and warranties set forth in this Agreement, Buyer has not relied and will not rely upon any document or written or oral information furnished to or discovered by it or its representatives, including any financial data, (ii) there are no representations or warranties by or on behalf of Seller or its Affiliates or representatives except for those expressly set forth in this Agreement, and (iii) to the fullest extent permitted by law, Buyer's rights and obligations with respect to all of the foregoing matters will be solely as set forth in this Agreement. 39 (b) Upon the Closing, Buyer shall be deemed to have waived any claim with respect to a breach of any representation, warranty, covenant or obligation of Seller, or any failure of a condition, hereunder of which Buyer had knowledge; provided that Buyer shall be deemed to have knowledge of the information made available to Buyer and/or its representatives during its review of the Purchased Property prior to the date of this Agreement, which information is contained in the Due Diligence Documents. (c) After the date of this Agreement and prior to the Closing Date, Buyer shall promptly notify Seller if Buyer obtains knowledge of any actual breach of any representation, warranty, covenant or obligation of Seller or any actual or prospective failure of a condition, hereunder of which Buyer obtains knowledge. Failure to provide timely notice shall be deemed to constitute a waiver of any claim with respect to such breach. 10.3 Confidentiality. Whether or not the Closing occurs, the parties hereto and their respective officers, directors, employees and representatives will comply with the Confidentiality Agreement, the provisions of which are expressly incorporated herein in their entirety by this reference. 10.4 Further Assurances. After the Closing, Seller will use its commercially reasonable efforts to furnish to Buyer such other instruments and information as Buyer may reasonably request in order to convey to Buyer title to the Purchased Property, to be delivered from time to time upon Buyer's reasonable request. 10.5 Prorations. The following liabilities shall be prorated between Seller and Buyer: (i) utility charges (which shall include water, sewer, electricity, gas and other utility charges) with respect to the Owned Real Property, the property subject to the Real Property Leases and customer owned equipment, (ii) rental charges (which shall include rental charges and other lease payments under the Real Property Leases), (iii) personal services (these services are charged for a period which includes the Closing Date; this shall include contract labor), and (iv) real and personal property taxes, ad valorem taxes, and franchise fees or taxes (collectively, "Periodic Taxes"). With respect to measurement periods during which the Closing Date occurs (all such periods of time being hereinafter called "Proration Periods"), the liabilities described in clauses (i), (ii) and (iii) of the preceding sentence shall be apportioned between Seller and Buyer as of the Closing Date, with Buyer bearing only the expense thereof in the proportion that the number of days remaining in the applicable Proration Period on and after the Closing Date bears to the total number of days covered by such Proration Period. Periodic Taxes attributable to Proration Periods shall be prorated between Buyer and Seller based on the relative periods the Purchased Property was owned by each respective party during the fiscal period of the taxing jurisdiction for which such taxes were imposed by such jurisdiction (as such fiscal period is or may be reflected on the bill rendered by such taxing jurisdiction). On the Closing Date, Buyer and Seller shall pay or be reimbursed, on this prorated basis, for Periodic Taxes that have been paid before the Closing Date. On the Closing Date, Buyer and Seller shall also be reimbursed, on this prorated basis, for Periodic Taxes that are to be paid on or after the Closing Date. The reimbursement of Periodic Taxes that are to be paid on or after the Closing Date shall be based on a reasonable estimate of the amount of such Periodic Taxes to be paid (based on past experience). To the extent that Buyer or Seller are not reimbursed on the Closing Date for Periodic Taxes that are paid after the Closing Date, or, in the event the estimated amount of the 40 preceding sentence proves to have been inaccurate, Buyer or Seller shall promptly forward an invoice to the other party for its reimbursable pro rata share, if any. If the other party does not pay the invoice within thirty (30) calendar days of receipt, the amount of such payment shall bear interest at the rate of eight percent (8%) per annum. Similarly, all prepayments made or received by Seller or Buyer with respect to service or maintenance agreements with third parties or license or other fees payable to or by third parties and relating to the Business shall be prorated on an appropriate basis between Seller and Buyer. 10.6 Cost Studies/NECA Matters. 10.6.1 Prior to Closing. Seller agrees that, with respect to all toll revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Purchased Property prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any matters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Long Term Support ("LTS"), and Telecommunications Relay Services funds. 10.6.2 From and After Closing. (a) Buyer shall receive any USF funds, from and after the Closing Date, as determined by USAC from data submitted by Seller prior to Closing Date pursuant to FCC Rules and Regulations as stated in Part 36.611 and Part 36.612 for rural carriers and Part 54 for non-rural carriers. After Closing Date Buyer shall make all submissions and filings for USF funds for all years for which Seller had not made a submission prior to Closing Date in accordance with FCC Rules and Regulations. Within a reasonable time after Buyer's written request, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Purchased Property during any year for which Buyer shall make a submission, and such reasonable assistance as required in connection with Buyer's preparation of necessary filings or submissions. (b) Notwithstanding the foregoing, Buyer's right to receive all USF revenue is conditioned upon Buyer's payment, from and after the Closing Date, of all universal service contribution liability assessed by USAC based on end-user retail revenues for the previous year generated by assets being sold. 10.7 Customer Deposits. Within thirty (30) days after Closing, Seller agrees to transfer to Buyer the customer deposits together with any interest accrued thereon (collectively "Customer Deposits"), together with all of Seller's obligations and rights to hold the Customer Deposits of the Business, up to the Closing Date, and Buyer agrees to hold, disburse and retain such deposits so delivered to it as if it were Seller. 10.8 Access to Books and Records. (a) After the Closing, Seller will retain all Retained Books and Records for a period of three (3) years. 41 (b) After the Closing, upon reasonable notice and subject to the Confidentiality Agreement, the parties will give to the representatives, employees, counsel and accountants of the other, access, during normal business hours, to books and records relating to the Business and the Purchased Property, and will permit such persons to examine and copy such records, in each case to the extent reasonably requested by the other party in connection with tax and financial reporting matters (including any Tax Returns and related information, but not attorney work product or similar work product prepared by accountants), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any Contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any Tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any Tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 10.8(b). 10.9 Purchase Price Allocation. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the IRC. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the IRC and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable Law. 10.10 Owned Real Property Transfers. Within sixty (60) days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies in Seller's possession covering the Owned Real Property. Thereafter, no later than thirty (30) days before the Closing Date, Seller shall deliver (at Seller's expense) to Buyer title commitments for owners' policies of title insurance prepared by a title insurance company reasonably acceptable to Buyer and a certified current survey, with respect to all Owned Real Property included in the Purchased Property and in which Seller purports to own fee title. Buyer acknowledges that such title commitments shall be for CLTA owners' policies of title insurance (or its equivalent) unless Buyer has requested in writing, prior to the date hereof, that such commitments be issued for other forms of title insurance (in which event, Buyer shall bear all costs and premiums for such title insurance to the extent attributable to such coverage being in excess of CLTA coverage or its equivalent). Such title commitments shall reflect that upon the consummation of the sale to Buyer contemplated by this Agreement and the payment of all premiums and charges due for such title insurance, Buyer will be vested with good, fee simple title to such Owned Real 42 Property, subject only to the exceptions show thereon, the title company's standard exceptions and exclusions, and such matters that arise after the date and time of such title commitment. Except as provided in the following sentence, in the event that Buyer requires endorsements to such title commitments or the applicable title insurance policies, such endorsements shall be obtained at Buyer's sole cost and expense and shall not be a condition to Closing. On the Closing Date, Seller shall convey the Owned Real Property to be transferred to Buyer subject only to Permitted Encumbrances, provided that Seller may transfer such property subject to one or more exceptions that are not Permitted Encumbrances if Seller commits in writing, in form and substance reasonably acceptable to Buyer, on or before the Closing Date, to cause any such exception that is not a Permitted Encumbrance to be removed, insured or bonded over to Buyer's reasonable satisfaction, or if Seller indemnifies Buyer with respect to such exceptions to Buyer's reasonable satisfaction on or before the Closing Date. With respect to each parcel of Owned Real Property covered by a title commitment referenced above, the amount of title insurance provided under the applicable title insurance policy shall be the fair market value of the applicable property, which shall be determined by Buyer at its sole cost and expense using commercially reasonable methods of valuation, provided that all such valuations shall be consistent with all allocations of the Purchase Price made hereunder or pursuant to this Agreement, and shall be acceptable to the title insurance company. The determination of fair market value shall be made in a timely manner such that the title commitments can be issued in a timely manner prior to the Closing Date. Seller agrees that prior to Closing it will provide the title company with such instructions, authorizations, affidavits, and indemnities as may be reasonably necessary for the title company to issue title policies to Buyer, dated as of the Closing Date, for all of the Owned Real Property with so-called non-imputation endorsements. By no later than forty-five (45) days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering each parcel of the Owned Real Property covered by the title commitments. Buyer will use its commercially reasonable efforts to work with the title company between the date hereof and fifty-five (45) days after Closing Date to resolve any issues with respect to such title commitments. Seller shall be responsible for the payment of all title insurance premiums attributable to the CLTA portion of the coverage afforded by each such policy obtained, and Buyer shall be responsible for the payment of all title insurance premiums in excess of such amount and for the payment of all endorsement charges and other fees and costs imposed by the title company. 10.11 Transaction Taxes. Buyer shall bear and be responsible for paying any sales, use, transfer, documentary, registration, business and occupation and other similar taxes (including related penalties (civil or criminal), additions to tax and interest) imposed by any Governmental Authorities with respect to the transfer of Purchased Property to Buyer (including the Owned Real Property) ("Transaction Taxes"), regardless of whether the tax authority seeks to collect the such taxes from Seller or Buyer. Seller shall prepare all tax filings related to any sales, use, transfer, documentary, registration, business and occupation and other similar taxes. Seller, fifteen (15) days prior to making such filings shall provide to the Buyer Seller's work papers for the Buyer's review and approval. Buyer shall provide to the Seller ten (10) days prior to the filing date approval of such work papers. Buyer shall also be responsible for (i) administering the payment of such Transaction Taxes, (ii) defending or pursuing any proceedings related thereto, and (iii) paying any expenses related thereto. Seller shall give prompt written notice to Buyer of any proposed adjustment or assessment of any Transaction Taxes with respect 43 to the transaction, or of any examination of said transaction in a sales, use, transfer or similar tax audit. In any proceedings, whether formal or informal, Seller shall permit Buyer to participate and control the defense of such proceeding, and shall take all actions and execute all documents required to allow such participation. Seller shall not negotiate a settlement or compromise of any Transaction Taxes without the written consent of Buyer, which consent shall not be unreasonably withheld. 10.12 Bulk Sales Laws. Seller and Buyer waive compliance with applicable laws under any version of Article 6 of the Uniform Commercial Code adopted by any state or any similar law relating to the sale of inventory, equipment or other assets in bulk in connection with the sale of the Purchased Property. 10.13 Prepaid Non-Regulated Maintenance Agreements. Within thirty (30) days following Closing, Seller shall pay to Buyer an amount equal to the pro rata portion of all prepaid but unearned revenues from Seller's customers for all non-regulated maintenance agreements as of the Closing Date. 10.14 Vehicle Registration. Buyer agrees to use its commercially reasonable efforts to file promptly the appropriate vehicle title applications and registrations to change the name of the titled owner on each vehicle title certificate and change the motor vehicle registration (with respect to license plate information) on each vehicle being transferred to Buyer from Seller pursuant to this Agreement. Buyer agrees that it shall remove and destroy Seller's existing license plates from all vehicles received upon the earlier of receipt of new license plates or sixty (60) days following Closing. 10.15 Carrier Access Billing and Accounts Receivable Transition. Seller shall render its own final carrier access bills to its interexchange carriers for minutes, messages and other applicable charges up to the Closing Date. Seller shall be responsible for collecting and settling any disputes associated with its final bills to the interexchange carriers. 10.16 End-User Billing and Accounts Receivable Transition. Buyer agrees to purchase Seller's Earned End-User Accounts Receivable and make payment to Seller for those accounts in the manner described below: (a) Seller shall transfer to Buyer, as soon as reasonably available after Closing, all open end-user customer account records to Buyer as of the end of business on the Closing Date. Following the Closing, Buyer shall be responsible for administering those records including the application of cash receipts to customer accounts, whether related to services rendered before or after the Closing. Seller shall promptly forward to Buyer all customer payments and related remittance documents received by Seller after the Closing for processing by Buyer. (b) Within twenty (20) days following the Closing, Seller shall provide an accounting to Buyer of the Earned End-User Accounts Receivable Amount and the Customer Advances as well as the most recent twelve (12) month history of Seller's uncollectible net writeoffs expressed as a percentage of billings for the Business (the "Uncollectible Factor"). This data and the resulting calculation of the Earned End-User Accounts Receivable Amount 44 shall be summarized in an accounts receivable settlement statement (the "Accounts Receivable Settlement Statement"). Within thirty (30) days following the Closing, Buyer shall remit to Seller an amount equal to 80% of the Earned End-User Accounts Receivable Amount less 100% of the Customer Advances. Within sixty (60) days following the Closing, Buyer shall remit an additional 15% of the Earned End-User Accounts Receivable Amount and within ninety (90) days will remit the final 5%. (c) Not later than ten (10) days prior to the due dates for the sixty (60) and ninety (90) day payments referred to in Section 10.16(b), Seller will provide Buyer with an updated Accounts Receivable Settlement Statement reflecting any adjustments based upon non-sufficient funds checks, billing adjustments or other facts that relate to pre-closing activity that became known after the preparation of the original statement. (d) If at any time during the ninety (90) day period following the Closing, Buyer or Seller discovers any material discrepancy in the Accounts Receivable Settlement Statement, both parties agree to use commercially reasonable efforts to resolve any discrepancy in a timely manner, and also agree to make payments related to any undisputed amounts as set forth above. (e) At any time between ninety (90) and two hundred seventy (270) days following the Closing, Buyer may, at its discretion, prepare an analysis of actual bad debt write-off experience related to the Earned End-User Accounts Receivable purchased from Seller. If such analysis reasonably demonstrates that write-offs have exceeded the estimated amount in the final Accounts Receivable Settlement Statement (as had been calculated using the Uncollectible Factor) by more than 10%, Seller will pay to Buyer the full amount of the difference within thirty (30) days of receipt of Buyer's request for payment, together with Buyer's write-off analysis, Buyer will provide Seller sufficient detail in its write-off analysis, and as reasonably necessary, access to billing and collection records, to allow Seller to validate the accuracy of Buyer's request. Any disputes regarding the amounts of such request shall be settled using the procedure described in Section 3.3(d). ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS 11.1 Employment of Transferred Employees. Subject to the other provisions of this Section 11.1, all Active Employees of Seller employed in the Business, and all Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date (hereinafter collectively referred to as "Transferred Employees") shall be employed by (or become the responsibility of, as applicable) Buyer as of the Closing Date in the same or comparable positions, and at the same or comparable total compensation (including base pay and bonus), as were in effect on the Closing Date, except as otherwise provided in this Agreement. For purposes of the preceding sentence, the term "Active Employees" shall include all full-time and part-time employees, employees on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights, and employees on other approved leaves of absence with a legal or contractual right to reinstatement. For a period of twelve (12) months following the Closing Date, Buyer shall not actively solicit either directly or indirectly through any agents, and Buyer shall not permit any of its Affiliates to 45 actively solicit either directly or indirectly through any agents, any person who retires or otherwise terminates from any employment at or in association with Seller during the six-month period beginning three (3) months before the Closing Date, and Buyer shall neither employ nor permit any of its Affiliates to employ any individuals who are identified to Buyer by Seller as individuals who terminated from any employment or association with Seller during such six-month period. On or before the execution date of this Agreement, Seller shall have delivered to Buyer a list of the persons who would have been Transferred Employees had the Closing Date occurred on August 31, 1999, showing the following information for each such person: (i) the name of each such person; (ii) the name of his or her current employer; (iii) his or her current base pay, 1998 bonus and projected 1999 bonus; (iv) his or her hire date, any rehire date (if available) and years of service; (v) his or her then-current position; (vi) whether such employee is (x) subject to a collective bargaining agreement or represented by a labor organization, if any, and including the name and date of each such bargaining agreement or (y) on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights or on other approved leave of absence with a legal or contractual right to reinstatement; and (vii) for any employee who is not employed exclusively in the Business, a description of the nature of his or her employment and the percentage of his or her time actually allocated to the Business in calendar year 1998. Seller shall update such list at such time or times requested by Buyer, but not more often than as of the end of each calendar quarter occurring between the execution date hereof and the Closing Date, commencing with the quarter ending September 30, 1999, and as of the month ending immediately prior to the Closing Date, in each case assuming the Closing Date had occurred on such date, and shall deliver such updated lists to Buyer within ten (10) days after the end of each such calendar quarter or month-end, as applicable. Any person who is not on such list as updated as of the end of the month immediately preceding the Closing Date shall not be a Transferred Employee, and for all purposes under this Agreement the Transferred Employees shall include only those persons on such list as updated as of such month-end who continue to be Active Employees of Seller employed in the Business or Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date. 11.1.1 Assumption of Collective Bargaining Agreement Obligations. On and after the Closing Date, Buyer, as successor employer to Seller, shall assume all of the employer's obligations under, and be bound by the provisions of, each collective bargaining agreement to the extent of provisions covering Transferred Employees. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. 11.1.2 Assumption of Employment and Other Agreements. On and after the Closing Date, except as otherwise provided in this Agreement or in Schedule 11.1.2, Buyer, as successor employer to Seller, shall assume all obligations of each employment agreement or any other agreement by Seller relating to conditions of employment, employment separation, severance, or employee benefits in connection with the Transferred Employees, but only to the extent that they have been disclosed to Buyer on Schedule 8.1.16(a) and copies have been furnished to Buyer as soon as administratively practicable prior to the execution of this Agreement. To the extent that Buyer assumes any obligations under this Article 11, Buyer may reduce or eliminate benefits under any agreement, plan, policy or program only to the extent required to comply with applicable law, or to the extent that Seller, its Affiliates, or any 46 successors or assigns, make amendments or changes to its benefit plans, policies or programs to eliminate or reduce benefits. Until the fifth anniversary of the Closing Date, Seller promptly shall deliver to Buyer a copy of each material amendment or change that Seller makes to its Plans and Employment Agreements to eliminate or reduce benefits thereunder and shall confirm to Buyer on an annual basis whether, and the extent to which, it has amended its Plans and Employment Agreements and provide sufficient detail to enable Buyer to determine whether Seller has reduced or eliminated benefits thereunder. After the fifth anniversary of the Closing Date, Buyer may amend such plans, policies, and programs in any manner it determines, consistent with applicable law and collective bargaining agreements. 11.1.3 Recognition of Transferred Employee Service. On and after the Closing Date, and subject to the provisions of any applicable collective bargaining agreement, and except as otherwise provided in this Article 11, Buyer shall recognize the service of each Transferred Employee for all employment-related purposes determined in accordance with the practices and procedures of Seller in effect on the Closing Date, as if such service had been rendered to Buyer. 11.1.4 Assumption of Obligation to Pay Bonuses. Transferred Employees shall not accrue benefits under any employee benefit policies, plans, arrangements, programs, practices, or agreements of Seller or any of its Affiliates after the Closing Date. Buyer shall assume the obligation to pay to Transferred Employees any bonuses that would have been payable to the Transferred Employees with respect to the calendar year in which the Closing Date occurs had the Transferred Employees remained employees of Seller or one of its Affiliates, in accordance with the provisions of the policy, plan, arrangement, program, practice or agreement under which the bonus would have been paid. 11.1.5 No Duplicate Benefits. Nothing in this Agreement shall cause duplicate benefits to be paid or provided to or with respect to a Transferred Employee under any employee benefit policies, plans, arrangements, programs, practices, or agreements. 11.1.6 Affiliate Employees. If any employee identified in the list provided pursuant to Section 11.1 is an employee of an Affiliate of Seller whose duties relate primarily to the Business, he or she shall be considered a Transferred Employee and shall be treated under this Agreement in a manner that is comparable to the treatment given to the Transferred Employees who are employed by Seller, except that his or her service as of the Closing Date shall be determined in accordance with the practices and procedures of his or her employer, as disclosed to Buyer in accordance with Section 11.1.2. 11.2 Transferred Employee Benefit Matters. 11.2.1 Defined Benefit Plans. (a) Seller Pension Plans. As of the date of this Agreement, Seller participates in the following single-employer defined benefit pension plans maintained in the United States: (i) the GTE Service Corporation Plan for Employees' Pensions (the "Seller Salaried Pension Plan"); and 47 (ii) the GTE Midwest Incorporated Plan for Hourly-Paid Employees' Pensions (the "Seller Hourly Pension Plan"). The plans identified in this Section 11.2.1(a) shall be referred to collectively in this Agreement as the "Seller Pension Plans," and each such plan shall be referred to individually as a "Seller Pension Plan." (b) Buyer Obligations. Buyer shall take all actions necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more pension plans (hereinafter referred to in the aggregate as the "Buyer Pension Plans" and individually as the "Buyer Pension Plan") effective as of the Closing Date and to ensure that each Buyer Pension Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Pension Plan is a qualified, single-employer defined benefit plan under Section 401(a) of the IRC; (ii) any Buyer Pension Plan that was in effect before the Closing Date shall not have any "accumulated funding deficiency," as defined in Section 302 of ERISA and Section 412 of the IRC, whether or not waived, immediately before the Closing Date; (iii) the Buyer Pension Plan is not the subject of termination proceedings or a notice of termination under Title IV of ERISA; (iv) the Buyer Pension Plan does not exclude Transferred Employees from eligibility to participate therein; (v) the Buyer Pension Plan does not violate the requirements of any applicable collective bargaining agreement; and (vi) with respect to Transferred Employees who were participants in the Seller Hourly Pension Plan by virtue of their coverage under a collective bargaining agreement on the Closing Date, the terms of the Buyer Pension Plan are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. For purposes of this Section 11.2.1, Transferred Employees who were participants in the Seller Hourly Pension Plan other than by virtue of their coverage under a collective bargaining agreement on the Closing Date shall be treated as Transferred Employees who, on the Closing Date, participate in the Seller Salaried Pension Plan. Within the 30-day period immediately preceding any transfer of assets and liabilities from a Seller Pension Plan to a Buyer Pension Plan pursuant to this Section 11.2.1(b), Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Pension Plan satisfies each of the requirements set forth in this Section 11.2.1(b). (c) Transfer of Liabilities. (i) In accordance with the provisions of this Section 11.2.1, Buyer shall cause the Buyer Pension Plans to accept all liabilities for benefits under the Seller Pension Plans, whether or not vested, that would have been paid or payable (but for the transfer of assets and liabilities pursuant to this Section 11.2.1) to or with respect to the Transferred Employees under the terms of the Seller Pension Plans and that are "Section 411(d)(6) protected benefits" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder) that have accrued under the Seller Pension Plan to or with respect to the Transferred Employees based on accredited service and compensation under the Seller Pension Plans as of the Closing Date. For a period of not less than five (5) years after the Closing Date, and unless otherwise required to comply with applicable law or permitted by Section 11.1.2, Buyer shall not amend the Buyer Pension Plans, or permit the Buyer Pension Plans to be amended, to eliminate any benefit, whether or not vested, with respect to which liabilities are transferred pursuant to the foregoing provisions of this subsection (i), to the extent any such benefit is a "Section 411(d)(6) protected 48 benefit" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder). On or before the Closing Date, Seller or an Affiliate thereof shall take action to fully vest Transferred Employees in their benefits (if any) under the Seller Pension Plans. (ii) (A) For purposes of eligibility and vesting under the Buyer Pension Plans, each Transferred Employee whose accrued benefit is transferred from a Seller Pension Plan to a Buyer Pension Plan shall be credited with service as of the Closing Date as determined under the terms of the Seller Pension Plan. The benefit under the Buyer Pension Plan for each Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be calculated under terms of the Buyer Pension Plan that are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. The benefit for each Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall not be less than the greater of (x) the sum of the Transferred Employee's "Seller Pension" and "Buyer Pension," or (y) the Transferred Employee's "Total Service Pension," each as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1. (B) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Salaried Pension Plan and who, under the terms of the Seller Salaried Pension Plan, has at least 15 years of accredited service and combined years of age and accredited service of at least 74 as of the Closing Date shall be eligible, after the Transferred Employee's employment with the Buyer and its Affiliates is terminated and after the Transferred Employee's combined years of age and years of accredited service equal or exceed 76, to receive his or her "Seller Pension" (as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1) as an immediate early retirement pension under the applicable Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Salaried Pension Plan as of the Closing Date. For a period of at least five (5) years following the Closing Date, the Buyer shall cause any agreement, pursuant to which the accrued benefit of any Transferred Employee under a Buyer Pension Plan is transferred to another pension plan, to incorporate a provision in substance identical to this subsection (ii)( B). (C) Except as provided in paragraph (E), below, the benefit under the Buyer Pension Plan of a GATT Grandfathered Participant, when expressed in the form of a lump sum, shall not be less than the benefit under the Buyer Pension Plan determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. The method used to convert a GATT Grandfathered Participant's accrued benefit into a lump-sum amount under the Buyer Pension Plan after 1999 shall be not less favorable to a GATT Grandfathered Participant than the method used for similar purposes by the Seller Pension Plan. For purposes of this paragraph (c)(ii)(C), "GATT Grandfathered Participant" shall mean a Transferred Employee (x) with respect to whom liabilities are transferred pursuant to this subsection (c) and (y) who, taking service from Buyer into account as service with Seller, would have been eligible under the Seller Pension Plan, but for the transfer of liabilities pursuant to this subsection (c), to have his benefit under the Seller Pension Plan (when 49 expressed in the form of a lump sum) determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. (D) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Hourly Pension Plan shall be eligible, after the Transferred Employee's employment with Buyer and its Affiliates is terminated, to receive an early retirement pension under the Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Hourly Pension Plan as of the Closing Date. (E) Notwithstanding paragraphs (B), (C), and (D), above, if the actuary for the Buyer Pension Plan certifies in writing (with a copy to Seller) that the Buyer Pension Plan will violate the requirements imposed by Treasury Regulation section 1.401(a)(4)-4 unless certain benefits otherwise called for by such paragraphs are not provided by the Buyer Pension Plan, Buyer shall cause such benefits to be provided under a nonqualified deferred compensation plan, rather than under the Buyer Pension Plan, at the same time and in the same form as they otherwise would have been provided under the Buyer Pension Plan; provided that (1) such benefits shall be provided by the Buyer Pension Plan to the maximum extent possible without causing the Buyer Pension Plan to violate Treasury Regulation section 1.401(a)(4)-4; and (2) to the extent that any benefit payable outside of the Buyer Pension Plan pursuant to this paragraph (E) is payable to an individual who is not a member of a "select group of management or highly compensated employees" within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, Buyer shall cause a cash payment or payments to be made to each such individual within 24 months of the termination of the individual's employment with Buyer, in addition to all other payments due or otherwise payable to such individual, in an amount that is reasonably calculated to be actuarially equivalent, on a pre-tax basis, to the value of such benefit. (iii) (A) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be calculated as set forth in paragraph (c)(ii)(A) of this Section 11.2.1. (B) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall be calculated by applying the benefit formula set forth in paragraph (c)(ii)(A) of this Section 11.2.1, in accordance with the rules described in the remainder of this paragraph (B). A Transferred Employee's "Seller Pension" shall be calculated by applying the benefit formula under the Seller Salaried Pension Plan (as in effect on the Closing Date) to the Transferred Employee's service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date. A Transferred Employee's "Buyer Pension" shall be not less than an amount calculated by applying the benefit formula under the Buyer Pension Plan to the Transferred Employee's total accredited service and compensation under the Buyer Pension Plan (including service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation had been earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan after the Closing Date), multiplied by the ratio of 50 accredited service earned after the Closing Date to such total accredited service; provided that for a period of at least five (5) years following the Closing Date, Buyer shall cause the benefit formula used in determining such "Buyer Pension" to provide "section 411(d)(6)" benefits at least as valuable as were provided under the benefit formula applicable to the Transferred Employee under the Seller Salaried Pension Plan on the Closing Date. A Transferred Employee's "Total Service Pension" shall be calculated by applying the benefit formula under the Buyer Pension Plan (before its amendment to reflect the five (5) year inclusion of Seller's formula) to the Transferred Employee's accredited service (including service and compensation credited with the Seller under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation was earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan on and after the Closing Date). For purposes of computing a Transferred Employee's "Total Service Pension," compensation received by such a Transferred Employee from the Seller shall be treated as compensation received from the Buyer. The Seller Pension, the Buyer Pension, and the Total Service Pension shall take into account the Transferred Employee's actual age and entire period of service (including service credited under the Seller Salaried Pension Plan as of the Closing Date and service credited under the Buyer Pension Plan on and after the Closing Date) for vesting and benefit eligibility purposes. (C) Each Transferred Employee who is eligible to receive a benefit under the Buyer Pension Plan may elect to receive the portion of said benefit that is equal to the Seller Pension in any form, and with any early retirement or other actuarial subsidy, that was available under the Seller Pension Plan on the Closing Date, without regard to whether the Transferred Employee is eligible to elect or receive, or does elect or receive, the same form of payment or early retirement or actuarial subsidy for the remainder of the pension under the Buyer Pension Plan. (iv) Within sixty (60) days after the Closing Date, Seller shall deliver to Buyer a list reflecting each Transferred Employee's service and compensation under each of the Seller Pension Plans and each Transferred Employee's accrued benefit thereunder as of the Closing Date. (d) Transfer of Assets. (i) In accordance with the provisions of subsection (d)(i) of this Section 11.2.1 and subject to the provisions of subsection (d)(vi) of this Section 11.2.1, Seller shall direct the trustee of the Seller Pension Plans to transfer to the trustee or funding agent of the Buyer Pension Plan the amount required to be transferred by Section 414(l) of the IRC and the regulations thereunder for all Transferred Employees whose accrued benefits are transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, determined using the following assumptions (the "Pension Assets"): Interest Rate: Rate used to value annuities under PBGC Regulation ss. 4044.52(a)(1) for the month in which the Closing Date occurs Annual Rate of Increase in Salaries: 0% 51 Annual Rate of Increase in Social Security Taxable Wage Base: 0% Annual Rate of Increase in Consumer Price Index: 0% Annual Rate of Increase in Limits on Benefits and Compensation: 0% Mortality: Rates specified under PBGC Regulationss.4044.53(c) Termination: None Disability: None Retirement: Expected retirement age as specified under PBGC Regulation ss. 4044.55 Lump Sums: None All other demographic assumptions to match those used by Seller in the preparation of financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. In no event shall the amount of Pension Assets transferred be less than the Projected Benefit Obligation associated with all the liabilities being assumed in the aggregate in Section 11.2.1(c) using the assumptions specified by Seller in the preparation of its financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. The Pension Assets shall be transferred in cash. Except in the case of an arithmetical error in the calculation of the amount of Pension Assets to be transferred, under no circumstances shall Seller or the Seller Pension Plans be liable to transfer any additional amount to Buyer or a Buyer Pension Plan or any other person in respect of the accrued benefits transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, including but not limited to any circumstance under which any person (including a governmental agency) states a claim to some portion or all of the Pension Assets. (ii) Seller shall appoint an actuary ("Seller's Actuary") to determine the amount to be transferred pursuant to subsection (d)(i) of this Section 11.2.1 and shall provide such determination to Buyer, together with a computer file containing all of the data used by Seller's actuary to calculate Pension Assets, within ninety (90) days after the Closing Date. Buyer shall appoint an actuary ("Buyer's Actuary") who shall have the right to audit and review the determination made by Seller's Actuary. If Buyer's Actuary is unable to agree with Seller's Actuary on the amount of the transfer within ninety (90) days after Seller informs Buyer of the amount to be transferred and provides Buyer with the computer file containing all of the data used by Seller's actuary to calculate Pension Assets, Seller and Buyer shall jointly select a third actuary, whose determination shall be binding on Seller and Buyer. Each of Seller and Buyer shall bear the fees, costs and expenses of their respective actuaries, and 52 the fees, costs, and expenses of the third actuary shall be borne one-half by Seller and one-half by Buyer. (iii) Interest on the Pension Assets shall accrue from the Closing Date to the actual date of transfer at the assumed discount rate used in accordance with paragraph (i) of this Section (d); provided that any Pension Assets that are distributed from the Seller Pension Plans before the date of transfer pursuant to subsection (d)(vi) of this Section 11.2.1 shall be credited with interest (such interest to be credited to the Buyer Pension Plans) only from the Closing Date to the date of distribution. (iv) Under the terms of each Buyer Pension Plan, the accrued benefit of each Transferred Employee immediately after the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not be less than the sum of each Transferred Employee's accrued benefits under the Seller Pension Plan and the Buyer Pension Plan immediately before the transfer of assets and liabilities. Neither Seller nor its Affiliates nor the Seller Pension Plans nor any trustee thereof shall retain any liability for benefits under the Seller Pension Plans for any Transferred Employee with respect to whom cash has been transferred to a Buyer Pension Plan pursuant to this Section 11.2.1 or distributed pursuant to subsection (d)(vi) of this Section 11.2.1. (v) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.1, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not take place until as soon as practicable after the latest of (i) the expiration of the 30-day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, or (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Pension Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Pension Plan is qualified under Section 401(a) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Pension Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired), and (yy) information enabling the enrolled actuary for the Buyer Pension Plan to issue the certification required by Section 6058(b) of the IRC. (vi) (A) If, after the Closing Date and before the date of transfer of assets and liabilities from the Seller Pension Plans pursuant to this Section 11.2.1, the accrued benefit as of the Closing Date becomes payable under a Seller Pension Plan to or with respect to a Transferred Employee, Buyer shall (xx) furnish GTE Service Corporation with a copy of a properly completed application for such benefits, and (yy) direct GTE Service Corporation to instruct the trustee of the Seller Pension Plan to make benefit payments in the form and amount determined by GTE Service Corporation in accordance with the properly completed application for benefits. Seller shall cause GTE Service Corporation to comply with any such direction. 53 (B) Notwithstanding anything herein to the contrary, the assets and liabilities to be transferred from the trustee of the Seller Pension Plans to the trustee or funding agent of the Buyer Pension Plan pursuant to this Section 11.2.1 shall be reduced, as provided in this subsection (vi), to reflect any benefit payments made pursuant to this subsection (vi) regardless of the form in which paid and any expenses described in paragraph (B) of this subsection (vi) that have not otherwise been paid pursuant to this subsection (vi). 11.2.2 Savings Plans. (a) As of the date of this Agreement, Seller participates in the GTE Savings Plan and the GTE Hourly Savings Plan (collectively referred to as the "Seller Savings Plans"). Except as provided in Section (g) of this Section 11.2.2, Transferred Employees shall not be entitled to make contributions to or to benefit from matching or other contributions under the Seller Savings Plans on and after the Closing Date. (b) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more savings plans (hereinafter referred to in the aggregate as the "Buyer Savings Plans" and individually as the "Buyer Savings Plan") effective as of the Closing Date and to ensure that each Buyer Savings Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Savings Plan is a qualified, single-employer individual account plan under Section 401(a) of the IRC; (ii) the Buyer Savings Plan does not exclude Transferred Employees from eligibility to participate therein; (iii) the Buyer Savings Plan permits Transferred Employees to make before-tax contributions (under Section 401(k) of the IRC) and provides for matching contributions by the Buyer; and (iv) the Buyer Savings Plan does not violate the requirements of any applicable collective bargaining agreement. Within the thirty (30) day period immediately preceding any transfer of assets and liabilities from a Seller Savings Plan to a Buyer Savings Plan pursuant to this Section 11.2.2, Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Savings Plan satisfies each of the requirements set forth in this Section (b). (c) (i) Seller shall fully vest the Transferred Employees in their account balances under the Seller Savings Plan as of the Closing Date and shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans an amount in cash equal in value to the account balances of the Transferred Employees covered by the Seller Savings Plans as of the date of the transfer; provided that to the extent the account balances to be transferred consist in whole or in part of outstanding loans, Seller shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans, in lieu of cash, the promissory notes and related documents evidencing such loans. Buyer and Seller shall take such actions as may be required to effect the assignment of such loans by the trustee of the Seller Savings Plan to the trustee or funding agent of the Buyer Savings Plan, and Buyer shall cause the trustee or funding agent of the Buyer Savings Plan to accept the assignment of such loans. (ii) After the date of the transfer of assets and liabilities pursuant to this Section 11.2.2, Buyer shall assume all liabilities for the benefits payable to or with respect to such Transferred Employees under the Seller Savings Plans, and Seller and the Seller Savings Plans and their implementing trust shall retain no liability for such benefits. 54 (d) For purposes of eligibility and vesting under the Buyer Savings Plans, each Transferred Employee shall be credited with service as of the Closing Date as determined under the terms of the Seller Savings Plans. As soon as practicable after the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees covered by the Seller Savings Plans, together with each Transferred Employee's service under each of the Seller Savings Plans as of the Closing Date. (e) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.2, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.2 shall not take place until as soon as practicable after the latest of (i) the expiration of the thirty (30) day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, and (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Savings Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Savings Plan is qualified under Sections 401(a) and 401(k) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Savings Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired). (f) As of the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees who have outstanding loans under the Seller Savings Plans, together with copies of said Transferred Employees' notes, disclosure statements, and security agreements under the Seller Savings Plans. Seller shall also notify Buyer within thirty (30) days after the Closing Date of any Transferred Employee who initiated a loan within thirty (30) days before the Closing Date. Subject to obtaining the consent of the applicable Transferred Employee if required by law, from the Closing Date until the earliest of (i) the actual date of transfer of assets and liabilities pursuant to this Section 11.2.2; (ii) the full amortization of the Transferred Employee's indebtedness; (iii) the distribution of the entire balance of the Transferred Employee's accounts; or (iv) the last date on which Buyer or one of its Affiliates pays remuneration to the Transferred Employee, Buyer or its Affiliate shall (x) continue the payroll deductions pursuant to which each such Transferred Employee is discharging indebtedness to a Seller Savings Plan and (y) remit the deducted funds to Fidelity Management Trust Company, the trustee of the Seller Savings Plans, as soon as practicable, but in no event more than thirty (30) days, after the date of deduction, together with an accounting that identifies the Transferred Employees with respect to whom the funds were deducted and the amount deducted for each Transferred Employee. All such remitted funds shall be transferred to the appropriate Seller Savings Plan and applied to reduce the appropriate Transferred Employee's outstanding indebtedness. Buyer's obligations under this Section (f) are limited to payroll deductions of loan repayments by the Transferred Employees and remittance of those funds, and nothing herein shall be construed to obligate Buyer to repay to Seller any portion of the outstanding indebtedness of the Transferred Employees that are not otherwise discharged by the Transferred Employees themselves. 55 (g) Seller shall make all required matching contributions with respect to the Transferred Employees' contributions made to the Seller Savings Plan by the Transferred Employees in respect of the period ending on or before the Closing Date in the year containing the Closing Date that would have been eligible for matching contributions without regard to any continued service (e.g., last day of the year employment or 1000 hours) requirements. Such matching contributions shall be made not later than the date on which all other matching contributions are made to the Seller Savings Plans with respect to contributions made at the same time as the Transferred Employees' contributions. For not less than five (5) calendar years following the Closing Date (including the year in which the Closing occurs), Buyer shall, subject to applicable plan qualification requirements, provide salaried Transferred Employees with a matching contribution in the Buyer's Savings Plan equal to $.75 for each $1 contributed by Transferred Employees up to six percent (6%) of compensation (as defined in Buyer's Savings Plan). 11.2.3 Welfare Plans. (a) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts, as of the Closing Date, one or more employee welfare benefit plans, including medical, health, dental, flexible spending account, accident, life, short-term disability, and long-term disability and other employee welfare benefit plans providing preretirement welfare benefits for the benefit of (i) the non-bargained Transferred Employees (the "Non-union Welfare Plans") and (ii) the union-represented Transferred Employees in accordance with the provisions of applicable collective bargaining agreements (the "Bargained Welfare Plans"). The Non-union Welfare Plans and the Bargained Welfare Plans are hereinafter referred to collectively as the "Buyer Welfare Plans." The Buyer Welfare Plans shall provide as of the Closing Date pre-retirement benefits to Transferred Employees (and their dependents and beneficiaries) that, in the aggregate, are comparable to the pre-retirement benefits to which they were entitled under the corresponding employee welfare benefit plans maintained by Seller on the Closing Date. For purposes of determining eligibility to participate in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions or requirements for evidence of insurability under the Buyer Welfare Plans shall be waived for Transferred Employees, and Transferred Employees shall receive credit under the Buyer Welfare Plans for co-payments and payments under a deductible limit made by them and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in accordance with the corresponding Seller Welfare Plans. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees who had credited service under a Seller Welfare Plan, together with each such Transferred Employee's service, co-payment amounts, and deductible and out-of-pocket limits under such plan. (b) (i) Except as otherwise provided in subsection (b)(ii) or (b)(iii) of this Section (b) or in an applicable collective bargaining agreement, Buyer shall provide or cause to be provided retiree medical, health, and life benefits to each Transferred Employee (or the dependents or beneficiaries of such Transferred Employee, as the case may be) under the 56 same terms and conditions as apply to comparable employees of Buyer, and Seller shall have no obligation to provide retiree medical, health, and life benefits in respect of any Transferred Employee on or after the Closing Date. (ii) Subject to Section 11.4, below, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is not subject to a collective bargaining agreement as of the Closing Date, who has combined age and years of accredited service (within the meaning of the Seller Pension Plan) as of the Closing Date equal to at least 66, and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Nonunion Transferred Employee"), Seller shall provide or cause to be provided to each such Retired Nonunion Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits under terms and conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated noncollectively bargained employees retiring as of the Closing Date; provided that nothing in this subsection (b)(ii) shall be construed to prevent any Retired Nonunion Transferred Employee (or his or her dependents or beneficiaries) from voluntarily relinquishing such benefits. For a period of five (5) years following the retirement of each Retired Nonunion Transferred Employee from Buyer and its Affiliates or any successor thereof, Buyer shall reimburse Seller, in accordance with this subsection (b)(ii), for the cost of the retiree medical, health, and life coverage for which Seller is responsible and that Seller actually provides pursuant to this subsection (b)(ii). The five (5) year time period for this reimbursement obligation shall be determined separately in respect of each Retired Nonunion Transferred Employee. For each year for which Buyer is required to reimburse Seller under this subsection (b)(ii), Buyer shall pay Seller annually in arrears, within 30 days after Seller provides a statement therefor to Buyer, (A) $4,000 with respect to each Retired Nonunion Transferred Employee who has not yet attained age 65 during the year for which the payment is made and $4,000 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has not yet attained age 65 during the year for which the payment is made, and (B) $1,800 with respect to each Retired Nonunion Transferred Employee who has attained at least age 65 during the year for which the payment is made and $1,800 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has attained at least age 65 during the year for which the payment is made. No reimbursement shall be due with respect to any dependent, other than a spouse, covered with respect to a Retired Nonunion Transferred Employee. The reimbursement obligation for partial years shall be prorated based on the portion of the year covered by the obligation. Each Retired Nonunion Transferred Employee (or his or her dependent or beneficiary, as the case may be) who is provided benefits by Seller under this subsection (b)(ii) shall be required to pay to Seller any premium, contribution or other payment required under, and shall be subject to any copayment or deductible required under, the terms of Seller's applicable retiree medical, health, or life benefit plan; to the extent that any amount constituting such a payment is deducted from any plan, program, or arrangement maintained by Buyer or one of its Affiliates or is otherwise paid to Buyer or one of its Affiliates by such person, Buyer shall cause such amount to be paid to Seller as soon as administratively practicable. 57 (iii) In addition to any other benefits to be provided pursuant to this Article XI, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is subject to a collective bargaining agreement as of the Closing Date and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Union Transferred Employee"), Buyer shall provide or cause to be provided to each such Retired Union Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits, for a period of at least five (5) years following the Closing Date, under terms and conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated collectively bargained employees retiring as of the Closing Date. (iv) Benefits provided pursuant to subsections (b)(ii) and (b)(iii) of this Section (b) (including for this purpose, the determination of who is eligible for such benefits) shall take into account service with Buyer or any of its Affiliates on and after the Closing Date in the same manner as if such post-Closing Date service was performed with Seller. Buyer shall provide Seller with such information as shall be reasonably required to implement the immediately preceding sentence with respect to subsection (b)(ii) of this Section (b). (c) Buyer shall refer to GTE Service Corporation and GTE Service Corporation shall assume responsibility for any valid claim under a Seller Welfare Plan for disability, medical, or dental benefits made by a Transferred Employee on or after the Closing Date arising from a disability or loss incurred on or before the Closing Date. Nothing in this Section 11.2.3 shall require Seller, any Affiliate of Seller, or the Seller Welfare Plans to make any payment or to provide any benefit not otherwise provided by the terms of the Seller Welfare Plans. (d) Seller, Buyer, their respective Affiliates, and the Seller Welfare Plans and the Buyer Welfare Plans shall assist and cooperate with each other in the disposition of claims made under the Seller Welfare Plans pursuant to subsection (c) of this Section 11.2.3, and in providing each other with any records, documents, or other information within its control or to which it has access that is reasonably requested by any other as necessary or appropriate to the disposition, settlement, or defense of such claims. (e) Except as otherwise provided in Section 11.2.3(f), nothing in this Agreement shall require Seller or its Affiliates to transfer assets or reserves with respect to the Seller Welfare Plans to Buyer or the Buyer Welfare Plans. (f) Seller will make available to Buyer, prior to the Closing Date, a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller under the GTE Flexible Reimbursement Plan (the "FRP"), together with the elections made prior to the Closing Date with respect to such accounts through the Closing Date, any balances standing to the credit of Transferred Employees, and the corresponding amounts being transferred to the corresponding Buyer's plan in accordance with the following sentence. As of the Closing Date, Seller shall cause the portion of the FRP 58 applicable to Transferred Employees to be segregated into a separate component and all account balances of the Transferred Employees in the FRP shall be transferred to a flexible reimbursement plan that Buyer shall cause to be maintained for the duration of the calendar year in which the Closing Date occurs. (g) On and for a period of at least three (3) years after the Closing Date, Transferred Employees not subject to a collective bargaining agreement shall be eligible for benefits under a Buyer severance or separation pay policy or plans that are the same as or comparable to the severance or separation pay policy benefits that are provided by Seller (or the applicable Affiliate, if the Transferred Employee is employed by an employer other than the Seller) or a Seller Pension Plan as of the Closing Date. Buyer shall recognize the service of each such Transferred Employee with Seller and its Affiliates for eligibility, vesting, and benefit determinations under the Buyer severance or separation pay policy or plan. Transferred Employees subject to a collective bargaining agreement shall be eligible for severance or separation pay benefits in accordance with the terms of the applicable collective bargaining agreement. 11.3 Miscellaneous Benefits. 11.3.1 Vacation. (a) On or after the Closing Date, Buyer shall allow Transferred Employees to receive paid time off in the calendar year of the Closing for any unused vacation time accrued prior to the Closing Date. Seller and its Affiliates shall have no liability to Transferred Employees for the vacation payments described in this Section 11.3.1. Seller shall pay Transferred Employees any banked vacation on or before the Closing Date. Schedule 11.3.1 to be prepared by Seller and submitted to Buyer on or before the Closing Date shall list the accrued but unused vacation pay, as of the Closing Date, of each Transferred Employee for the calendar year in which the Closing Date occurs. (b) For purposes of determining a Transferred Employee's eligibility for vacation under Buyer's vacation plan, a Transferred Employee shall be credited, as of the first day of the first calendar year that begins after the calendar year in which the Closing Date occurs, with service for the calendar year in which the Closing Date occurs in an amount equal to the aggregate of the Transferred Employee's service with both Seller and Buyer during the calendar year in which the Closing Date occurs. 11.3.2 Transferred Employee Statements. Within sixty (60) days after the Closing Date, Seller shall prepare and distribute to all Transferred Employees an accurate and complete statement of their accrued benefits under Seller's Pension Plans as of the Closing Date and shall provide Buyer with a true and complete copy of the same. Such statements shall be sufficiently detailed to readily permit Buyer and the Transferred Employees to determine the accuracy thereof. 59 11.4 Employee Rights. Nothing herein expressed or implied shall confer upon any employee of Seller or its Affiliates, or Buyer or its Affiliates, or upon any legal representative of such employee, or upon any collective bargaining agent, any rights or remedies, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement. Nothing in this Agreement shall be deemed to confer upon any person (nor any beneficiary thereof) any rights under or with respect to any plan, program, or arrangement described in or contemplated by this Agreement, and each person (and any beneficiary thereof) shall be entitled to look only to the express terms of any such plan, program, or arrangement for his or her rights thereunder. Nothing in this Agreement shall cause Buyer or its Affiliates, nor Seller or its Affiliates to have any obligation to provide employment or any employee benefits to any individual who is not a Transferred Employee or, except as otherwise provided in Section 11.1.2 with respect to employment agreements, to continue to employ any Transferred Employee for any period of time following the Closing Date. 11.5 WARN Act Requirements. On and after the Closing Date, Buyer shall be responsible with respect to Transferred Employees and their beneficiaries for compliance with the Worker Adjustment and Retraining Notification Act of 1988 and any other applicable law, including any requirement to provide for and discharge any and all notifications, benefits, and liabilities to Transferred Employees and government agencies that might be imposed as a result of the consummation of the transactions contemplated by this Agreement or otherwise. 11.6 Indemnification. 11.6.1 Indemnification of Seller. Notwithstanding anything to the contrary in Article 12 of this Agreement, Buyer shall indemnify and hold harmless Seller, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Buyer, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, except as otherwise expressly permitted under this Agreement, to change, reduce contributions to, terminate, fail to continue, fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) on or 60 after the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. 11.6.2 Indemnification of Buyer. Notwithstanding anything to the contrary in Article 12 of the Agreement, Seller shall indemnify and hold harmless Buyer, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Seller, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, to fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) before the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 Survival of Representations. Warranties and Covenants. (a) The representations and warranties contained in Sections 8.1.6 and 8.2.6 will survive the Closing and remain in full force and effect indefinitely. Each of the other representations and warranties contained in Article 8 will terminate, without further action, on the date which is fifteen (15) months following the Closing Date (the "Expiration Date"). (b) This Article 12 shall survive any termination of this Agreement and the Ancillary Agreements and the indemnification contained in this Article 12 shall survive the Closing and shall remain in effect (i) indefinitely, with respect to any Indemnifiable Claim related to the breach of any representation or warranty which pursuant to Section 12.1(a) survives indefinitely, (ii) indefinitely or for the applicable period of performance for such covenant (provided that in the case of covenants, the Indemnitee shall have 60 days after the end of such performance period to provide notice to the Indemnifying Party of a claim for indemnification arising during the performance period), with respect to any Indemnifiable Claim arising under Section 12.2(a)(ii)(B) (post closing covenants), (iii) indefinitely, with respect to any Indemnifiable Claim arising under Section 12.2(a)(iii) (Retained Liabilities) or 12.2(b)(iii) (Assumed Liabilities), and (iv) until the Expiration Date for any Indemnifiable Claims that are not specified in any of the preceding clauses. Unless a claim for indemnification with respect to any alleged breach of any representation or warranty is asserted by notice given as herein provided that specifically identifies a particular breach and the underlying facts relating thereto, which notice is given within the applicable period of survival for such representation or warranty, such claim may not be pursued and is irrevocably waived after such time. Without limiting the generality or effect of the foregoing, no claim for indemnification with respect to any representation or 61 warranty will be deemed to have been properly made except (i) to the extent it is based upon a Third Party Claim made or brought prior to the expiration of the survival period for such representation or warranty, or (ii) to the extent based on Indemnifiable Losses actually incurred by an Indemnitee prior to the expiration of the survival period for such representation or warranty. 12.2 Indemnification. (a) Following the Closing and subject to the other sections of this Article 12, Seller will indemnify, defend and hold harmless Buyer and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations and warranties made by Seller in Section 8.1 of this Agreement, (ii) a breach by Seller of any covenant of Seller contained in this Agreement, which covenant requires performance by Seller (A) prior to or at the Closing, or (B) after the Closing, and (iii) any of the Retained Liabilities. (b) Following the Closing and subject to the other sections of this Article 12, Buyer will indemnify, defend and hold harmless Seller and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations or warranties made by Buyer in Section 8.2 of this Agreement, (ii) a breach by Buyer of any covenant of Buyer contained in this Agreement, which covenant requires performance by Buyer prior to, at or after the Closing, and (iii) any of the Assumed Liabilities. (c) Payments made under this Section 12.2 shall be treated by Buyer and Seller as purchase price adjustments and Buyer and Seller shall file all Tax Returns consistent with such treatment. Notwithstanding anything to the contrary contained herein, neither party shall be indemnified or reimbursed for any Tax consequences arising from the receipt or accrual of an indemnity payment hereunder including any Tax consequences arising from adjustments to the basis of any asset resulting from an adjustment to the Purchase Price or any additional or reduced taxes resulting from any such basis adjustment. (d) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(ii), or under both Section 12.2(b)(i) and Section 12.2(b)(ii), then the Indemnitee's rights to pursue its claim under Section 12.2(a)(ii) or Section 12.2(b)(ii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). (e) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(iii), or under both Section 12.2(b)(i) and Section 12.2(b)(iii), then the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Sections 12.3(d). (f) In the event a claim against an Indemnifying Party arises under both Section 12.2(a)(ii) and 12.2(a)(iii), or under both Section 12.2(b)(ii) and 12.2(b)(iii), then 62 the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). 12.3 Limitations on Liability. (a) For purposes of this Agreement, (i) "Indemnification Payment" means any amount of Indemnifiable Losses required to be paid pursuant to this Agreement, (ii) "Indemnitee" means any person or entity entitled to indemnification under this Agreement, (iii) "Indemnifying Party" means any person or entity required to provide indemnification under this Agreement, and (iv) "Indemnifiable Losses" means any losses, liabilities, damages, costs and expenses (including reasonable attorneys' fees and expenses) actually incurred in connection with any actions, suits, demands, assessments, judgments and settlements, in any such case (x) reduced by the amount of insurance proceeds recovered from any person or entity with respect thereto, and (y) excluding any such losses, liabilities damages, costs and expenses to the extent that the underlying liability or obligation is the result of any action taken or omitted to be taken by any Indemnitee. (b) Notwithstanding anything to the contrary contained in this Agreement, if the Closing occurs, (i) no claim for indemnification may be asserted under Section 12.2(a) with respect to any matter discovered by or known to Buyer on or before the date of this Agreement, or after the date of this Agreement and on or before the Closing Date to the extent that Buyer has not provided timely notice to Seller of the existence of such claim in accordance with Section 10.2, and (ii) no claim for indemnification may be asserted under Section 12.2(b) with respect to any matter discovered by or known to Seller on or before the Closing Date. (c) As between Seller and any Affiliate of Seller, on the one hand, and Buyer and any Affiliate of Buyer, on the other hand, the remedies, rights and obligations set forth in this Article 12, Sections 10.1.2, 11.2.2, 11.6, 13.3 and the Ancillary Agreements will be the exclusive remedies, rights and obligations with respect to the liabilities and obligations referred to in Section 12.2 and any breach of the representations, warranties or covenants set forth in this Agreement. Without limiting the foregoing, as a material inducement to entering into this Agreement, to the fullest extent permitted by law, each of the parties waives any claim or cause of action that it otherwise might assert, and any breach of the representations, warranties or covenants set forth in this Agreement, except for claims or causes of action brought under and subject to the terms and conditions of this Article 12 and Sections 10.1.2, 11.6 and 13.3 or any Indemnifiable Losses arising out of actual fraud. (d) Notwithstanding any other provision of this Agreement or of any applicable Law, no Indemnitee will be entitled to make a claim against an Indemnifying Party under Sections 11.2.2, 11.6, 12.2(a)(i) or 12.2(b)(i) until: (i) the aggregate amount of Indemnifiable Losses incurred by the Indemnitee for any individual occurrence or related series of occurrences giving rise to such Indemnifiable Losses exceeds $25,000, and (ii) the aggregate amount of claims that may be asserted for such Indemnifiable Losses pursuant to Section 12.3(d)(i) exceeds an amount equal to 2% of the 63 Purchase Price, but only to the extent such amount, if any, (a) exceeds an amount equal to 2% of the Purchase Price and (b) is less than the amount set forth in Section 12.3(e). (e) Notwithstanding any other provision of this Agreement, the indemnification obligations of Seller under Section 12.2(a) (except with respect to indemnification for inaccuracies of the representations contained in Sections 8.1.1 through 8.1.6) or the indemnification obligation of Buyer under Section 12.2(b) will not exceed the amount of an amount equal to 6.5% of the Purchase Price respectively. (f) No Indemnifying Party shall be liable to or obligated to indemnify any Indemnitee hereunder for any consequential, special, multiple, punitive or exemplary damages including, but not limited to, damages arising from loss or interruption of business, profits, business opportunities or goodwill, loss of use of facilities, loss of capital, claims of customers, or any cost or expense related thereto, except to the extent such damages have been recovered by a third person and are the subject of a Third Party Claim for which indemnification is available under the express terms of this Section 12. (g) Seller and Buyer shall cooperate with each other with respect to resolving any claim or liability with respect to which one party is obligated to indemnify the other party hereunder, including by making commercially reasonable efforts to mitigate or resolve any such claim or liability. 12.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any action or proceeding by any entity that is not a party to this Agreement or an Affiliate of such a party (a "Third Party Claim") against such Indemnitee, with respect to which an Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnitee will give such Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) calendar days after receipt of notice of such Third Party Claim; provided, however, that the failure of the Indemnitee to notify the Indemnifying Party shall only relieve the Indemnifying Party from its obligation to indemnify the Indemnitee pursuant to this Article 12 to the extent that the Indemnifying Party is materially prejudiced by such failure (whether as a result of the forfeiture of substantive rights or defenses or otherwise). Upon receipt of notification of a Third Party Claim, the Indemnifying Party shall be entitled, upon written notice to the Indemnitee, to assume the investigation and defense thereof with counsel reasonably satisfactory to the Indemnitee. Whether or not the Indemnifying Party elects to assume the investigation and defense of any Third Party Claim, the Indemnitee shall have the right to employ separate counsel and to participate in the investigation and defense thereof; provided, however, that the Indemnitee shall pay the fees and disbursements of such separate counsel unless (i) the employment of such separate counsel has been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party has failed to assume the defense of such Third Party Claim within reasonable time after receipt of notice thereof with counsel reasonably satisfactory to such Indemnitee, or (iii) the named parties to the proceeding in which such claim, demand, action or cause of action has been asserted include both the Indemnifying Party and such Indemnitee and, in the reasonable judgment of counsel to such Indemnitee, there exists one or more defenses that may be available to the Indemnitee that are in conflict with those 64 available to the Indemnifying Party. Notwithstanding the foregoing, the Indemnifying Party shall not be liable for the fees and disbursements of more than one counsel for all Indemnified Parties in connection with any one proceeding or any similar or related proceedings arising from the same general allegations or circumstances. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim that would lead to liability or create any financial or other obligation on the part of the Indemnitee unless such settlement includes as an unconditional term thereof the release of the Indemnitee from all liability in respect of such Third Party Claim. If a settlement offer solely for money damages is made by the applicable third party claimant, and the Indemnifying Party notifies the Indemnitee in writing of the Indemnifying Party's willingness to accept the settlement offer and pay the amount called for by such offer without reservation of any rights or defenses against the Indemnitee, the Indemnitee may continue to contest such claim, free of any participation by the Indemnifying Party, and the amount of any ultimate liability with respect to such Third Party Claim that the Indemnifying Party has an obligation to pay hereunder shall be limited to the lesser of (A) the amount of the settlement offer that the Indemnitee declined to accept plus the Losses of the Indemnitee relating to such Third Party Claim through the date of its rejection of the settlement offer or (B) the aggregate Losses of the Indemnitee with respect to such claim. (b) Any claim by an Indemnitee on account of an Indemnifiable Loss that does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after an Executive Officer of the Indemnitee becomes actually aware of the incurrence thereof, and the Indemnifying Party will have a period of thirty (30) calendar days within which to respond in writing to such Direct Claim. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have rejected such claim, in which event the Indemnitee will be free to pursue such remedies as may be available to the Indemnitee on the terms and subject to the provisions of this Article 12. (c) If after the making of any Indemnification Payment the amount of the Indemnifiable Loss to which such payment relates is reduced by recovery, settlement or otherwise under any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction (less any costs, expenses, premiums or taxes incurred in connection therewith) will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any Indemnification Payment, the Indemnifying Party will, to the extent of such Indemnification Payment, be subrogated to all rights of the Indemnitee against any third party that is not an Affiliate of the Indemnitee in respect of the Indemnifiable Loss to which the Indemnification Payment relates; provided that (i) the Indemnifying Party shall then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss, and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, all claims of the Indemnifying Party against any such third party on account of said Indemnification Payment will be subrogated and subordinated in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision of this Article 12, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. 65 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action. Buyer has no indemnifiable or otherwise compensable claim that any of Seller's representations or warranties in Section 8.1 (other than Sections 8.1.4(b), 8.1.15 and 8.1.25) is inaccurate, or that any covenant has been breached, to the extent that such claim is predicated on any action by the FCC or PSC undertaken after Closing or any action the FCC or PSC requires Seller to undertake after Closing. Buyer may only bring such a claim to the extent that its basis is independent of any such FCC or PSC action. ARTICLE 13 TERMINATION 13.1 Termination Rights. This Agreement may be terminated at any time prior to the Closing Date: (a) at any time by mutual written consent of the parties; (b) by Buyer if any of the conditions provided in Section 6.1 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Buyer; (c) by Seller if any of the conditions provided in Section 6.2 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Seller; (d) by Seller if any obligations of Buyer provided in Article 3 become incapable of being fulfilled; or (e) by either party immediately upon written notice to the other party if any Governmental Authority issues an order forbidding or enjoining the consummation of the transaction contemplated hereby and such order has become final and non-appealable. 13.2 Goodfaith Performance. Neither party shall be entitled to exercise any right of termination pursuant to subsection 13.1(b), (c) or (d) above if such party shall not have performed diligently and in good faith the obligations required to be performed by such party hereunder prior to the date of termination. 13.3 Effect of Termination. (a) If this Agreement is terminated as a result of a Material Adverse Effect or Section 13.1(a), this Agreement shall be of no further force and effect and there shall be no further liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives. (b) If this Agreement is terminated by Buyer pursuant to Section 13.1(b), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective 66 Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that no such termination shall relieve Seller of liability for any claims, damages or losses suffered by Buyer as a result of the negligent or willful failure of Seller to perform any obligations required to be performed by it hereunder on or prior to the date of termination. Notwithstanding anything herein to the contrary, in no event shall the any act or omission of Seller in connection with the Merger be deemed to be a breach of the terms and conditions of this Agreement for purposes of this Section 13.3(b). (c) If this Agreement is terminated by Seller pursuant to Section 13.1(c) or (d), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that in the event such termination is the result of the breach by Buyer of any of its obligations required to be performed by it hereunder on or prior to the date of termination, and Buyer has failed to cure such non-performance within a reasonable period after notice from Seller, then Buyer shall pay to Seller liquidated damages in an amount equal to ten (10) percent of the Purchase Price. Such liquidated damages amount is designed to compensate Seller for its lost opportunity costs and reliance damages caused by such termination. Buyer shall promptly pay such amount to Seller in immediately available funds following such termination. (d) Upon any termination of the Agreement, each of the parties shall promptly comply with the obligations of the Confidentiality Agreement regarding return or destruction of Evaluation Material of the other party. (e) Notwithstanding anything to the contrary contained herein, the provisions of this Section 13.3 and of Sections 14.1, 14.2, 14.3, 14.8, 14.11, 14.13 and 14.14 shall survive any termination of this Agreement. ARTICLE 14 MISCELLANEOUS 14.1 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, will be deemed to have been given when delivered in person or dispatched by electronic facsimile transfer (confirmed in writing by certified mail, concurrently dispatched) or one business day after having been dispatched for next-day delivery by a nationally recognized overnight courier service to the appropriate party at the address specified below: (a) If to Buyer, to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: Donald P. Weinstein Facsimile No.: (203) 614-4625 67 With a copy to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: L. Russell Mitten, II, Esq. Facsimile No.: (203) 614-4625 Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin, Esq. Facsimile No.: (202) 387-3467 (b) If to Seller, to: William M. Edwards, III Vice President - Property Repositioning 600 Hidden Ridge, HQE02J27 Irving, TX 75038 Facsimile No. (972) 719-7062 With a copy to: Dale R. Chamberlain Legal Counsel - Property Repositioning 600 Hidden Ridge, HQE02J34 Irving, TX 75038 Facsimile No. (972) 719-7162 or to such other address or addresses as any such party may from time to time designate for itself by like notice. 14.2 Information Releases. The parties shall consult with each other (and allow the other party notice, and a reasonable time to comment) in preparing any employee announcement, press release, public announcement, news media response or other form of release of information concerning this Agreement or the transactions contemplated hereby that is intended to provide such information to the employees generally, news media or the public. Neither party shall issue or cause the publication of any press release, public announcement or media response without the prior written consent of the other party; provided, however, that, after allowing the other party notice and a reasonable time to comment prior to issuance, nothing herein will prohibit either party from making an employee announcement, or issuing or causing publication of any press release, public announcement or media response to the extent that such action is required by applicable Law or the rules of any national stock exchange applicable to such party or its Affiliates. 68 14.3 Expenses. Whether or not the transactions contemplated hereby are consummated and except as otherwise expressly provided herein, each party will pay any expenses (including attorneys' fees) incurred by it incidental to this Agreement and in consummating the transactions provided for herein. 14.4 Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but is not assignable or delegable by any party without the prior written consent of the other party; provided, that (a) Seller may assign this Agreement to an Affiliate of Seller without the consent of Buyer including, on and after the closing of the Merger, the ultimate parent entity of the successor corporation to such merger or any entity controlled thereby; and (b) Buyer may assign this Agreement, without the prior written consent of Seller, to any directly or indirectly wholly owned subsidiary of Buyer provided such subsidiary assumes in writing all the duties and obligations of Buyer hereunder. No such assignment by Buyer shall in any way operate to enlarge, alter or change any obligation due to Seller or relieve Buyer of its obligations hereunder if such subsidiary fails to perform such obligations, with the understanding that Buyer shall be jointly and severally liable with such subsidiary for any non-performance of Buyer's obligations hereunder. 14.5 Amendments. This Agreement may be amended or modified only by a subsequent writing signed by authorized representatives of both parties. 14.6 Captions. The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement, nor as in any way limiting or amplifying the terms and provisions hereof. 14.7 Entire Agreement. The term "Agreement" shall mean collectively this document, the Schedules hereto and any agreements expressly incorporated herein. This Agreement supersedes and revokes any prior discussions and representations, other agreements, commitments, arrangements or understandings of any sort whatsoever, whether oral or written, that may have been made or entered into by the parties relating to the matters contemplated hereby. This Agreement, the Confidentiality Agreement and the Ancillary Documents constitute the entire agreement by and among the parties with respect to the subject matter hereof, and there are no representations, warranties, agreements, commitments, arrangements or understandings except as expressly set forth herein. 14.8 Waiver. Except as otherwise expressly provided in this Agreement, neither the failure nor any delay on the part of any party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any such right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege available to each party at law or in equity. 14.9 Third Parties. Except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any Person, other than the parties hereto and their successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 69 14.10 Counterparts. This Agreement may be executed in two or more counterparts, any or all of which shall constitute one and the same instrument. 14.11 Governing Law. This Agreement and the Ancillary Agreements shall in all respects be governed by and construed in accordance with the laws of the State of New York (except that no effect shall be given to any conflicts of law principles of the State of New York that would require the application of the laws of any other jurisdiction). The parties irrevocably submit to the exclusive jurisdiction of any New York State Court or any Federal Court located in the borough of Manhattan in the City of New York for purposes of any suit, action or other proceeding arising out of this Agreement, the Ancillary Agreements or any transaction contemplated hereby or thereby. The parties agree that service of process, summons or notice or document by U.S. registered mail to such party's respective address set forth in Section 14.1 shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence. The parties hereto irrevocably and unconditionally waive trial by jury in any legal action or proceeding relating to this Agreement or any other agreement entered into in connection therewith and for any counterclaim with respect thereto. In the event of any breach of the provisions of this Agreement or any other agreement entered into in connection therewith, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. 14.12 Further Assurances. From time to time, as and when requested by one of the parties, the other party will use its commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary or appropriate, in the reasonable opinion of counsel for Seller and Buyer, to consummate and make effective the transactions contemplated by this Agreement. 14.13 Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any Governmental Authority, the remaining provisions of this Agreement to the extent permitted by Law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for both parties remain valid, binding and enforceable and provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In the event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by Law, the parties hereby to the same extent waive any provision of Law that renders any provision hereof prohibited or unenforceable in any respect. 70 14.14 Representation by Counsel; Interpretation. Seller and Buyer each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of Law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of Buyer and Seller. IN WITNESS WHEREOF, the parties, acting through their duly authorized agents, have caused this Agreement to be duly executed and delivered as of the date first above written. GTE MIDWEST INCORPORATED CITIZENS UTILITIES COMPANY By: ______________________________ By: ______________________________ Name: ____________________________ Name: ____________________________ Title: ___________________________ Title: ___________________________ 71 ================================================================================ ASSET PURCHASE AGREEMENT Between CONTEL OF MINNESOTA, INC. and CITIZENS UTILITIES COMPANY May 27, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Terms............................................................1 1.2 Interpretation..................................................10 ARTICLE 2 PURCHASE AND SALE OF ASSETS.....................................10 2.1 Purchase and Sale of Assets.....................................10 2.2 Purchased Property..............................................10 2.3 Excluded Property...............................................11 2.4 Assumption of Liabilities.......................................12 2.4.1 Assumed Liabilities.......................................12 2.4.2 Retained Liabilities......................................13 2.5 No Assignment Without Consent...................................14 ARTICLE 3 PURCHASE PRICE..................................................14 3.1 Purchase Price..................................................14 3.2 Closing Date Estimate...........................................15 3.3 Closing Date Statement..........................................15 3.4 Access Line Adjustment Amount...................................16 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS..................16 4.1 State Regulatory Approval.......................................16 4.2 Debtholder Consents.............................................17 4.3 Landlord and Other Consents.....................................17 4.4 FCC Consents....................................................17 4.5 HSR Act Review..................................................17 4.6 GTE/Bell Atlantic Merger.......................................18 ARTICLE 5 PRE-CLOSING COVENANTS...........................................18 5.1 Investigation by Buyer..........................................18 5.2 Operation of the Business in the Ordinary Course................18 5.2.1 Preservation of Business..................................18 5.2.2 No Material Changes.......................................19 5.3 Satisfaction of Conditions......................................20 -i- TABLE OF CONTENTS (continued) Page 5.4 Approvals.......................................................20 5.5 Audit or Review of Financial Statements.........................20 5.6 Cooperation with Respect to Like-Kind Exchange..................21 5.7 Interconnection Agreements......................................21 5.8 Leased Vehicles; Capital Leases.................................21 5.9 Delivery of Interim Information.................................21 ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING.............................22 6.1 Conditions Precedent to Obligations of Buyer....................22 6.1.1 No Misrepresentation or Breach of Covenants and Warranties ...........................................22 6.1.2 Documents.................................................22 6.1.3 HSR.......................................................22 6.1.4 No Legal Obstruction......................................22 6.1.5 No Material Adverse Effect................................22 6.2 Conditions Precedent to Obligations of Seller...................23 6.2.1 No Misrepresentation or Breach of Covenants and Warranties ...........................................23 6.2.2 Documents.................................................23 6.2.3 Purchase Price............................................23 6.2.4 HSR.......................................................23 6.2.5 No Legal Obstruction......................................23 ARTICLE 7 THE CLOSING.....................................................23 7.1 The Closing.....................................................23 7.2 Seller's Obligations at Closing.................................24 7.3 Buyer's Obligations at Closing..................................24 ARTICLE 8 REPRESENTATIONS AND WARRANTIES..................................25 8.1 Representations and Warranties of Seller........................25 8.1.1 Authorization and Effect of Agreement.....................25 8.1.2 No Restrictions Against Sale of the Purchased Property....25 8.1.3 Consents and Approvals of Governmental Authorities........25 8.1.4 No Material Violations....................................26 -ii- TABLE OF CONTENTS (continued) Page 8.1.5 Corporate Organization....................................26 8.1.6 Brokers...................................................26 8.1.7 Title to Owned Real Property..............................26 8.1.8 Real Property Leases......................................26 8.1.9 Tangible Assets...........................................26 8.1.10 No Material Adverse Change ..............................27 8.1.11 Material Contracts ......................................27 8.1.12 Insurance ...............................................28 8.1.13 Taxes ...................................................28 8.1.14 No Material Claims or Suits .............................29 8.1.15 Tariffs; FCC Licenses ...................................29 8.1.16 Employee Matters ........................................29 8.1.17 Schedules of Telephone Plant ............................32 8.1.18 Schedule of Real Property Interests .....................32 8.1.19 Compliance with Existing Environmental Requirements .....32 8.1.20 Environmental Permits ...................................33 8.1.21 Financial Statements ....................................33 8.1.22 Year 2000 Compliance ....................................33 8.1.23 Native American and Federal Consents ....................34 8.1.24 Loss of Major Customer ..................................35 8.1.25 Records .................................................35 8.2 Representations and Warranties of Buyer.........................35 8.2.1 Corporate Organization....................................35 8.2.2 Authorization and Effect of Agreement.....................35 8.2.3 No Restrictions Against Purchase of the Purchased Properties .....................................35 8.2.4 No Violation of Law.......................................36 8.2.5 Financial Capacity........................................36 8.2.6 Brokers...................................................36 8.2.7 Consents and Approvals of Governmental Authority..........36 -iii- TABLE OF CONTENTS (continued) Page ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS...............................36 9.1 Transition Services Agreement...................................36 9.2 Optional Services Agreement.....................................37 9.3 Directory Publishing............................................37 9.3.1 Assumption of Certain Directory Publishing Agreement Rights and Obligations..........................37 9.3.2 Co-Bound Directories Acknowledgement......................37 9.3.3 Meeting to Discuss Directory Publication..................37 9.4 GTE Supply Relationship.........................................37 ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES.............................38 10.1 Intellectual Property...........................................38 10.1.1 No License ..............................................38 10.1.2 Infringement ............................................38 10.1.3 Trademark Phaseout ......................................38 10.1.4 Third Party Software ....................................39 10.2 Effect of Due Diligence and Related Matters.....................40 10.3 Confidentiality.................................................40 10.4 Further Assurances..............................................41 10.5 Prorations......................................................41 10.6 Cost Studies/NECA Matters.......................................41 10.6.1 Prior to Closing ........................................41 10.6.2 From and After Closing ..................................42 10.7 Customer Deposits...............................................42 10.8 Access to Books and Records.....................................42 10.9 Purchase Price Allocation.......................................43 10.10 Owned Real Property Transfers...................................43 10.11 Transaction Taxes...............................................44 10.12 Bulk Sales Laws.................................................44 10.13 Prepaid Non-Regulated Maintenance Agreements....................44 -iv- TABLE OF CONTENTS (continued) Page 10.14 Vehicle Registration............................................45 10.15 Carrier Access Billing and Accounts Receivable Transition.......45 10.16 End-User Billing and Accounts Receivable Transition.............45 ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS..................................46 11.1 Employment of Transferred Employees.............................46 11.1.1 Assumption of Collective Bargaining Agreement Obligations ...................................47 11.1.2 Assumption of Employment and Other Agreements ...........47 11.1.3 Recognition of Transferred Employee Service .............47 11.1.4 Assumption of Obligation to Pay Bonuses .................48 11.1.5 No Duplicate Benefits ...................................48 11.1.6 Affiliate Employees .....................................48 11.2 Transferred Employee Benefit Matters............................48 11.2.1 Defined Benefit Plans ...................................48 11.2.2 Savings Plans ...........................................54 11.2.3 Welfare Plans ...........................................57 11.3 Miscellaneous Benefits..........................................60 11.3.1 Vacation ................................................60 11.3.2 Transferred Employee Statements..........................60 11.4 Employee Rights.................................................61 11.5 WARN Act Requirements...........................................61 11.6 Indemnification.................................................61 11.6.1 Indemnification of Seller ...............................61 11.6.2 Indemnification of Buyer ................................62 ARTICLE 12 INDEMNIFICATION.................................................62 12.1 Survival of Representations.....................................62 12.2 Indemnification.................................................63 12.3 Limitations on Liability........................................64 12.4 Defense of Claims...............................................65 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action ...............................................67 -v- TABLE OF CONTENTS (continued) Page ARTICLE 13 TERMINATION.....................................................67 13.1 Termination Rights..............................................67 13.2 Goodfaith Performance...........................................67 13.3 Effect of Termination...........................................67 ARTICLE 14 MISCELLANEOUS...................................................68 14.1 Notices.........................................................68 14.2 Information Releases............................................69 14.3 Expenses........................................................70 14.4 Successors and Assigns..........................................70 14.5 Amendments......................................................70 14.6 Captions........................................................70 14.7 Entire Agreement................................................70 14.8 Waiver..........................................................70 14.9 Third Parties...................................................70 14.10 Counterparts....................................................71 14.11 Governing Law...................................................71 14.12 Further Assurances..............................................71 14.13 Severability....................................................71 14.14 Representation by Counsel; Interpretation.......................71 14.15 Covenants of GTE Corporation....................................72 -vi- INDEX OF SCHEDULES Schedule* Title 1.1-A Assigned Contracts 1.1-B Excluded Contracts 1.1-C Purchased Exchanges 1.1-D License Agreement 2.3(g) Other Excluded Property 4.4 FCC Consents / Waivers 5.2.1 Operation of the Business 5.2.2(c) Material Increase to Transferred Employee Benefits 5.2.2(d) Dispositions 6.1.1 Seller's Closing Certificate 6.2.1 Buyer's Closing Certificate 7.2(a) Bill of Sale and Assignment and Assumption Agreement 7.2(b) Legal Opinion of Seller's Counsel 7.2(g) Affidavit as to Status of Foreign Person 7.3(c) Legal Opinion of Buyer's Counsel 8.1.4 Violation of Law 8.1.7(a) Owned Real Property 8.1.7(b) Bondholders 8.1.8 Real Property Leases 8.1.9 Notices of Violations of Building / Zoning Ordinances 8.1.10 Material Adverse Changes 8.1.11(a-j) Material Contracts 8.1.13 Exceptions to Tax Return Filings 8.1.14 State and Federal Claims/Suits 8.1.15(a) Tariff Proceedings 8.1.15(b) FCC Licenses 8.1.16(a) Employee Matters - Seller Employee Benefit Plans 8.1.16(b) Employee Matters - Seller Material Liabilities under ERISA 8.1.16(c) Employee Matters - Seller ERISA Plans - Compliance 8.1.16(d) Employee Matters - Seller Multiemployer Plans 8.1.16(e) Employee Matters - Seller Union Representation 8.1.17 Telephone Plant 8.1.18 Real Property Interests List 8.1.19 Exceptions to Compliance with Existing Environmental Requirements 8.1.20 Environmental Permits 8.1.21(a-c) Financial Statements 8.1.23 Native American Authorizations 8.1.24 Loss of Major Customer 9.1 Transition Services Agreement 9.2 Optional Services Agreement 9.3.1 Directory Publishing Agreements 9.3.2 Co-Bound Directory Agreements vii 11.1.2 Employees and Employee Matters - Employment Agreement Obligation Exceptions 11.3.1 Employees and Employee Matters - Vacation * The Schedule numbers refer to the appropriate Section within the Agreement. viii ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the 27th day of May, 1999, by and between Citizens Utilities Company, a Delaware corporation ("Buyer"), and Contel of Minnesota, Inc., a Minnesota corporation ("Seller") and for the limited purpose of Section 14.15 only, GTE Corporation, a New York corporation ("GTE Corporation"). RECITALS WHEREAS, Seller is in the business of providing regulated local exchange telephone service in certain areas of the state of Minnesota; and WHEREAS, Seller desires to sell, convey, assign, transfer and deliver to Buyer, and Buyer desires to purchase and accept from Seller, certain of its telephone properties and related assets used in the provision of such service, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS 1.1 Terms. For purposes of this Agreement and any amendment hereto, the following terms are defined as set out below or in the Section referenced below: "Access Line Adjustment Amount" is defined in Section 3.4. "Accounts Receivable Settlement Statement" is defined in Section 10.16(b). "Accounts Payable" means accounts payable owed by Seller arising primarily from the operation of the Business. "Active Employees" is defined in Section 11.1. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Allocation" is defined in Section 10.9. "Ancillary Documents" means the Transition Services Agreement, the Optional Services Agreement, the License Agreement, and the Bill of Sale and Assignment and Assumption Agreement. 1 "Assigned Contracts" means Contracts to which Seller or any of its Affiliates is a party (i) which relate primarily to the operation of the Business, other than the Excluded Contracts, Real Property Interests, Real Property Leases and Third Party Intellectual Property Contracts, and (ii) any other contract to which Seller is a party and is listed on Schedule 1.1-A. "Assigned Permits" means, to the extent assignable, all permits, licenses, franchises, approvals and authorizations of Seller or any of its Affiliates issued or granted by any Governmental Authority that relate primarily to the operation of the Business, other than the FCC Licenses and the Excluded Permits. "Assumed Liabilities" is defined in Section 2.4.1 "Automated Assets" is defined in Section 8.1.22(c). "Bargained Welfare Plans" is defined in Section 11.2.3(a). "BIA" is defined in Section 8.1.23. "Base Purchase Price" is defined in Section 3.1. "Bill of Sale and Assignment and Assumption Agreement" is defined in Section 7.2(a). "Bondholders" means the Persons listed on Schedule 8.1.7(b). "Business" means the business of providing in the geographic area comprising the Purchased Exchanges (i) local exchange, exchange access and intra-LATA toll telecommunications services to end users, (ii) exchange access telecommunications services to interexchange carriers and other local exchange carriers, (iii) retail sales of telephone equipment and products, and (iv) non-tariffed public communications (pay telephones), commercial telecommunications services facilities leasing and other non-regulated services and products. "Buyer Pension" is defined in Section 11.2.1(c)(iii)(b). "Buyer Pension Plan" and "Buyer Pension Plans" are defined in Section 11.2.1(b). "Buyer Savings Plan" and "Buyer Savings Plans" are defined in Section 11.2.2(b). "Buyer Welfare Plans" is defined in Section 11.2.3(a). "Buyer's Actuary" is defined in Section 11.2.1(d)(ii). "Buyer's Closing Certificate" is defined in Section 6.2.1. "Calendar-Related" is defined in Section 8.1.22(c). 2 "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Closing" is defined in Section 7.1. "Closing Date" is defined in Section 7.1. "Closing Date Access Line Count" is defined in Section 3.4. "Closing Date Amount" is defined in Section 3.2(b) "Closing Date Statement" is defined in Section 3.3 "Confidentiality Agreement" means the Confidentiality Agreement dated as of November 20, 1998, among Buyer, Seller and certain Affiliates of Seller. "Construction Advances" means advances collected by Seller or any Affiliate for the future performance of non-regulated construction in the Purchased Exchanges. "Contracts" means all contracts, leases, indentures, agreements, and other legally binding arrangements. "Customer Advances" means amounts arising from the operation of the Business that have been billed and collected by Seller as of the Closing Date but that are unearned because they relate to the provision of service after the Closing Date. "Customer Deposits" is defined in Section 10.7. "Date Data" is defined in Section 8.1.22(c). "December 1998 Access Line Count" is defined in Section 3.4 and shall be 127,962. "Direct Claim" is defined in Section 12.4(b). "Due Diligence Documents" means those documents contained in the eleven (11) volumes of information delivered to Buyer in connection with its review of the Purchased Property. "Earned End-User Accounts Receivable" means accounts receivable arising primarily from the operation of the Business that have been earned by Seller's provision of service on or before the Closing Date excluding amounts billed through the carrier access billing system to interexchange carriers. "Earned End-User Accounts Receivable Amount" means the aggregate amount of all Earned Unbilled Accounts Receivable as of the Closing Date, less a discount for anticipated uncollectible Earned End-User Accounts Receivable in an amount equal to the Uncollectible Factor multiplied by Earned End-User Accounts Receivable as of the Closing Date. 3 "Employment Agreements" is defined in Section 8.1.16(a). "Environmental Requirements" means all federal, state, interstate and local government or agency Laws relating to pollution or protection of human health and safety or the environment (including, without limitation, air, surface water, ground water, land surface and subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Regulated Materials; or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of Regulated Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Plans" is defined in Section 8.1.16(a). "Estimated Access Line Adjustment Amount" is defined in Section 3.2(a). "Estimated Non-Regulated Construction Work in Process Amount" is defined in Section 3.2(a). "Estimated Regulatory Obligation Amount" is defined in Section 3.2(a). "Evaluation Material" is defined in the first paragraph of the Confidentiality Agreement. "Excluded Contracts" means (i) all billing and collection agreements, interconnection agreements, national account agreements, billing media agreements, vehicle leasing agreements, capital leases, Contracts between Seller and Affiliates of Seller, except to the extent expressly listed on Schedule 1.1-A, and (ii) such other agreements as are listed on Schedule 1.1-B. "Excluded Marks" means all trademarks, applications for trademark registration, service marks, applications for service mark registration, trade names, domain names and related registrations owned by Seller or an Affiliate of Seller, or licensed to Seller or an Affiliate of Seller by any Person, and any derivations of the foregoing. "Excluded Permits" means the permits, licenses, franchises, approvals and authorizations of Seller or any Affiliates by Governmental Authorities that relate to the Excluded Property. "Excluded Property" is defined in Section 2.3. "Executive Officer" of an entity means (i) in the case of Seller, the regional president of the region that includes the Purchased Exchanges, the general manager of infrastructure provisioning for the Purchased Exchanges and the general manager of customer operations for the Purchased Exchanges, and (ii) the case of Buyer, the executive officer(s) in charge of the transactions contemplated by this Agreement. 4 "Existing Environmental Requirements" means those applicable provisions of any Environmental Requirements that are both in effect and required to be met by Seller prior to the Closing Date. "Expiration Date" is defined in Section 12.1(a). "FCC" means the Federal Communications Commission. "FCC Consents" is defined in Section 4.4. "FCC Licenses" means all licenses, certificates, permits or other authorizations granted to Seller or any Affiliates by the FCC that are used primarily in the operation of the Business. "Financial Statements" is defined in Section 8.1.21. "Final Order" shall mean action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority of the action is pending, no such stay is in effect, and if any deadline for any such request is designated by statute or regulation, such deadline is passed; (ii) no petition for rehearing or reconsideration of the action is pending before any Governmental Authority, and the time for filing any such petition has passed; (iii) the Governmental Authority does not have the action under reconsideration or its own motion and the time for such reconsideration has passed; and (iv) no appeal to a court, or request to stay by a court, of the Governmental Authority's action is pending or in effect and, if any deadline of filing any such appeal or request is designated by statute or rule, it has passed. "FRP" is defined in Section 11.2.3(f). "Future Capital Expenditure Obligations" is defined in Section 2.4.1(h). "Future Regulatory Obligations" is defined in Section 2.4.1(g). "GAAP" means United States generally accepted accounting principles. "GATT Grandfathered Participant" is defined in Section 11.2.1(c)(ii)(c). "Governmental Authority" means any court or any federal, state or foreign governmental, legislative or regulatory body, agency, department, authority or instrumentality. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnifiable Losses" is defined in Section 12.3(a). "Indemnification Payment" is defined in Section 12.3(a). "Indemnifying Party" is defined in Section 12.3(a). 5 "Indemnitee" is defined in Section 12.3(a). "Intellectual Property" means all inventions (whether patentable or not and whether or not such inventions are described or claimed in any patent or patent application), designs (useful or ornamental), and works subject to copyright protection, invention disclosures, specifications, manuals, drawings, functional or system block diagrams, flow charts, circuit diagrams, design or user documentation, engineering notebooks, schematics, test programs, documented procedures, documented processes, documented flows, devices, software (in any form), or firmware, and all intellectual property rights therein or based thereon, including patents, patent applications (including continuations, continuations-in-part, divisions, reissues), reexamined patents and extensions thereof, copyrights (whether registered or unregistered), and trade secrets. "Interim Capital Expenditure Obligations" is defined in Section 2.4.1(h). "IRC" means the Internal Revenue Code of 1986, as amended. "IRS" means the Internal Revenue Service. "Law" or "Laws" means any statute, rule, regulation, ordinance, judgment, order or decree of any Governmental Authority. "Leased Real Property" means the real property leased to Seller or its Affiliates under the Real Property Leases. "License Agreement" means the license agreement attached hereto as Schedule 1.1-D pursuant to which Seller grants to Buyer certain rights and licenses under Licensed Intellectual Property. "Licensed Intellectual Property" means Intellectual Property owned by Seller or its Affiliates, and Third Party Intellectual Property licensed to Seller or its Affiliates which Seller or its Affiliates can sublicense to Buyer without the payment of compensation or other consideration to any Person, and which Intellectual Property and Third Party Intellectual Property are required for the use or maintenance (to the extent not provided by the owner or licensor of the Third Party Intellectual Property) of or are included in or with the Purchased Property in the operation of the Business as of the Closing; provided that Licensed Intellectual Property shall at all times be Excluded Property. "Lien" means any lien, charge, pledge, option, mortgage, security interest or other encumbrance. "Material Adverse Effect" means a materially adverse effect on the Business or the Purchased Property, taken as a whole, other than effects relating to or arising from (i) the execution of this Agreement, (ii) the United States economy generally or the state of Minnesota in particular, or (iii) events or circumstances that affect the Business in the same manner and to the same extent as other businesses in the industry generally. 6 "Material and Supply Inventory" is defined in the FCC's Part 32 Uniform System of Accounts. "Material Contracts" is defined in Section 8.1.11. "Material Permits" is defined in Section 8.1.15(b). "Merger" means the proposed merger involving GTE Corporation and Bell Atlantic Corporation and their respective Subsidiaries. "Native American Authorizations" is defined in Section 8.1.23. "Non-Regulated Construction Work in Process Amount" means the total amount expended but not yet billed by Seller for non-regulated construction work not completed prior to the Closing Date, minus any Construction Advances outstanding as of the Closing Date. The Non-Regulated Construction Work in Process Amount shall be billable by Buyer to third parties after the Closing Date under open customer orders or other agreements. "Non-Union Welfare Plans" is defined in Section 11.2.3(a). "Optional Services Agreement" is defined in Section 9.2. "Owned Real Property" means the real property owned in fee by Seller or its Affiliates and used primarily in the operation of the Business, including all land, buildings, structures, appurtenances and improvements located thereon. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Assets" is defined in Section 11.2.1(d)(i). "Periodic Taxes" is defined in Section 10.5. "Permitted Encumbrances" means (i) liens for current taxes and assessments not yet delinquent, or the amount or validity of which is being contested in good faith by appropriate proceedings during which collection or enforcement against the relevant property is stayed, (ii) standard utility easements, and covenants, conditions and restrictions of record that do not individually or in the aggregate materially interfere with the operation of the present Business on, or materially detract from the value of, the Owned Real Property affected thereby, (iii) mechanics', carriers', workers', repairers' and other statutory liens, (iv) existing zoning or similar laws or ordinances that do not interfere with the operation of the Business, (v) leases otherwise disclosed herein, and (vi) any other Liens and, in the case of Owned Real Property, any title defects or exceptions, that do not materially interfere with the operations of the Purchased Property in a manner consistent with the current use by Seller or that do not materially detract from the value of, or materially impair the marketability of, the Purchased Property affected. "Person" means an individual, corporation, partnership, trust, association, limited liability company or similar entity or organization. 7 "Plans" is defined in Section 8.1.16(a). "Pole Attachment Agreement" is defined in Section 8.1.11(j). "Proration Periods" is defined in Section 10.5. "PSC" is defined in Section 4.1. "PSC Permits" is defined in Section 8.1.15(b). "Purchase Price" is defined in Section 3.3(c). "Purchased Exchanges" means the telephone exchanges listed in Schedule 1.1-C and any cross-border community served from any such exchange. "Purchased Property" is defined in Section 2.2. "Real Property Interests" means all easements, rights of way, licenses or other interests in real property of Seller or its Affiliates that are used primarily in the operation of the Business, other than Owned Real Property or Leased Real Property. "Real Property Leases" means the Leases set forth on Schedule 8.1.8. "Regulated Material" means (i) any "hazardous substance" as defined in CERCLA, (ii) any petroleum or petroleum substance, and (iii) any other pollutant, waste, contaminant, or other substance regulated under Environmental Requirements. "Regulatory Approvals" is defined in Section 4.1. "Regulatory Obligation Amount" is defined in Section 3.1. "Retained Books and Records" means, collectively, all corporate records and stock books of Seller and its Affiliates, the general ledger, all records required by Law to be retained by Seller and all books and records relating to (i) Tax Returns and Tax records, (ii) Excluded Property, (iii) attorney work product, and (iv) the Retained Liabilities. "Retained Future Regulatory Obligations" is defined in Section 2.4.1(g). "Retained Liabilities" is defined in Section 2.4.2. "SEC Financial Statements" is defined in Section 5.5. "Seller Hourly Pension Plan" is defined in Section 11.2.1(a)(ii). "Seller Pension" is defined in Section 11.2.1(c)(iii)(b). "Seller Pension Plan" and "Seller Pension Plans" are defined in Section 11.2.1(a)(ii). 8 "Seller Salaried Pension Plan" is defined in Section 11.2.1(a)(i). "Seller Savings Plans" are defined in Section 11.2.2(a). "Seller Welfare Plans" is defined in Section 11.2.3(a). "Seller's Actuary" is defined in Section 11.2.1(d)(ii). "Seller's Closing Certificate" is defined in Section 6.1.1. "Switch Software" shall mean software currently used by Seller to operate telecommunications switching equipment that is part of the Telephone Plant. "System Date" is defined in Section 8.1.22(c). "Tax Returns" means a report, return or other information statement required to be supplied to or filed with a Governmental Authority with respect to Taxes. "Tax(es)" means any foreign, federal, state, county or local income, sales, use, transfer, excise, franchise, stamp duty, custom duty, real and personal property, gross receipt, capital stock, business and occupation, disability, employment, payroll, recording, ad valorem, unemployment compensation, profits, registration, social security, estimated, add-on, minimum, or withholding tax relating to the Business or the Purchased Exchanges and any interest and penalties and additions to such taxes (civil or criminal) related thereto or to the nonpayment thereof and related notarial fees. "Telephone Plant" means (i) Owned Real Property, (ii) Real Property Interests, and (iii) the machinery, equipment, inventory, vehicles and all other assets and properties used primarily in the operation of the Business, including all plant, systems, structures, construction work in progress, telephone cable (whether in service or under construction), microwave facilities (including frequency spectrum assignment), telephone line facilities, machinery, furniture, fixtures, tools, implements, conduits, stations, substations, equipment (including central office equipment, subscriber station equipment and other equipment in general), instruments and house wiring connections. Without limiting the generality of the foregoing, Telephone Plant includes the assets used primarily in the operation of the Business that would be properly included in the fixed assets referenced in Part 32 of the FCC Rules and Regulations (47 CFR, Part 32), as such accounts are reflected in Schedule 8.1.17. "Third Party Claim" is defined in Section 12.4(a). "Third Party Intellectual Property" means Intellectual Property owned by any Person, other than Seller, without regard as to whether Seller has any rights therein or the right to assign such rights to Buyer. "Third Party Intellectual Property Contracts" is defined in Section 10.1.4. "Total Service Pension" is defined in Section 11.2.1(c)(iii)(B). 9 "Transaction Taxes" is defined in Section 10.11. "Transferred Books and Records" means all of Seller's or its Affiliates' customer or subscriber lists and records, accounts and billing records, plans, blueprints, specifications, drawings, surveys, engineering reports, personnel records of Transferred Employees (where applicable) and all other documents, computer data and records, in each case relating primarily to the operation of the Business, except for the Retained Books and Records. "Transferred Employees" is defined in Section 11.1. "Transition Services Agreement" is defined in Section 9.1. "Uncollectible Factor" is defined in Section 10.16(b). "Year 2000 Compliant" is defined in Section 8.1.22(c). 1.2 Interpretation. (a) Unless the context otherwise requires, (i) all references to Sections, Articles or Schedules are to Sections, Articles or Schedules of or to this Agreement, (ii) each accounting term not otherwise defined in this Agreement has the meaning assigned to it in accordance with GAAP, (iii) all references to the "knowledge" of Seller are deemed to refer to the actual knowledge of the Executive Officers of Seller, (iv) all references to the "knowledge" of Buyer or "knowledge" obtained by Buyer are deemed to refer to the actual knowledge of the Executive Officers of Buyer, except as otherwise provided herein, (v) the term "primarily" means primarily or exclusively, and (vi) the term "including" means including without limitation. (b) No provision of this Agreement will be interpreted in favor of or against either of the parties by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft of such provision or of this Agreement. ARTICLE 2 PURCHASE AND SALE OF ASSETS 2.1 Purchase and Sale of Assets. Upon the terms and subject to the conditions of this Agreement, Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer and Buyer hereby agrees to purchase, acquire and accept from Seller, in each case effective as of the Closing, all of Seller's and each of its Affiliates' right, title and interest in and to the Purchased Property. 2.2 Purchased Property. The term "Purchased Property" means all the following business, properties, assets and rights of Seller and its Affiliates on the Closing Date, other than the Excluded Property: (i) Telephone Plant; (ii) Earned End-User Accounts Receivable; (iii) Material and Supply Inventories; 10 (iv) Non-Regulated Construction Work in Process; (v) FCC Licenses and Assigned Permits; (vi) Assigned Contracts; (vii) Transferred Books and Records; (viii) Real Property Leases; and (ix) all other business, property, assets, work in process and rights of Seller on the Closing Date not described above that relate primarily to the Purchased Exchanges. 2.3 Excluded Property. For purposes of this Agreement, "Excluded Property" means the following: (a) Cash, cash equivalents and investments; (b) All rights of Seller and its Affiliates under this Agreement, the Ancillary Documents and the certificates and other documents delivered to Seller by Buyer in connection with this Agreement; (c) All records prepared in connection with the sale of the Business, including bids received from third parties and analysis relating to the Business; (d) All rights related to the Retained Liabilities; (e) The Retained Books and Records; (f) Seller's and its Affiliates' interests in any business other than the Business, including the provision of wireless service (cellular and PCS), long distance and internet service or internet related services, air-to-ground communications (air phone service), and any Excluded Permits related thereto, and all assets of Seller and its Affiliates used in connection with any such business or related thereto, and all assets used by Seller and its Affiliates in rendering corporate services to Seller or the Business that are located outside the geographic area comprising the Purchased Exchanges; (g) Such other assets (i.e., encryption decoder devices, AWAS terminals, SODA, etc.), if any, as set forth on Schedule 2.3(g); (h) The Excluded Contracts; (i) The Excluded Marks; (j) All Intellectual Property, including the Licensed Intellectual Property and Third Party Intellectual Property (except for such rights to possess and use Third Party Intellectual Property as may be assigned in accordance with Section 10.1.4); and (k) All of Seller's and its Affiliates' insurance proceeds arising in connection with the operation of the Business or the Purchased Property prior to the Closing. 11 2.4 Assumption of Liabilities. 2.4.1 Assumed Liabilities. Upon the terms and subject to the conditions of this Agreement, Buyer hereby agrees to assume, as of the Closing Date, and agrees to pay, perform and discharge when due, all liabilities, responsibilities and obligations, beginning on the day following the Closing Date, relating to the Purchased Property other than the Retained Liabilities (subject to any different allocation of liability set forth in clauses (b), (c), (g) and (h) below) (the "Assumed Liabilities"), including the following: (a) Ordinary Course. All liabilities, responsibilities and obligations (including Taxes), arising out of or accruing or resulting from the use or ownership of the Purchased Property in the ordinary course after the Closing Date; (b) Employment Matters. All liabilities, responsibilities and obligations of Buyer as provided in Article 11 with respect to Transferred Employees; (c) Assigned Contracts, Real Property Interests and Real Property Leases. All liabilities, responsibilities and obligations that arise in connection with the performance of the Assigned Contracts, Real Property Interests and the Real Property Leases, other than performance obligations of Seller that mature prior to the Closing Date; (d) Joint Construction Projects. All liabilities, responsibilities and obligations to third parties that relate to arrangements and commitments between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (e) Construction in Progress. All liabilities, responsibilities and obligations relating to post-Closing engineering and construction required to complete scheduled construction and other capital expenditure projects for the Purchased Exchanges; (f) Customer Deposits and Construction Advances. All liabilities, responsibilities and obligations relating to Customer Advances, Customer Deposits and Construction Advances; (g) Future Regulatory Obligations. All liabilities, responsibilities and obligations, other than Future Capital Expenditure Obligations, related to the Purchased Exchanges arising out of any rule, regulation, law, mandate, decision or order of the FCC or the PSC after the Closing Date regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct or actions that occurred at any time prior to the Closing Date ("Future Regulatory Obligations"); provided that Buyer shall not be liable for any such Future Regulatory Obligation arising directly out of any intentional misconduct or material misstatement to the PSC by Seller that occurred prior to the Closing Date, except for such statements as may be based on reasonable interpretations of existing PSC regulations and current industry practice ("Retained Future Regulatory Obligations"); (h) Future Capital Expenditure Obligations. All liabilities, responsibilities and obligations related to the Purchased Exchanges arising out of any rule, 12 regulation, law, mandate, decision or order of the FCC or the PSC (i) issued at any time and requiring any capital expenditure after the Closing Date, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the Closing Date ("Future Capital Expenditure Obligations"); and (ii) issued after the date of this Agreement and requiring any capital expenditure after the date of this Agreement, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the date of this Agreement ("Interim Capital Expenditure Obligations"); provided that (i) Seller shall retain liability for Interim Capital Expenditure Obligations incurred prior to Closing to the extent related to (A) FCC or PSC orders that impose capital expenditure obligations as a result of Seller's overearnings, (B) Seller's efforts to comply with FCC or PSC rules, regulations, laws, mandates, decisions or orders existing as of the date of this Agreement, or (C) capital expenditures already planned by Seller; and (ii) Seller shall retain liability for all other Interim Capital Expenditure Obligations to the extent Seller is fully reimbursed by Buyer at Closing for such obligations. Prior to the Closing Date, Seller shall notify Buyer of all potential Future or Interim Capital Expenditure Obligations within a reasonable time after publication of said obligations by a Governmental Authority; and (i) Litigation and Claims. All liabilities and obligations arising out of (i) litigation and claims that arise out of an occurrence after the Closing Date, (ii) litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations) regardless of when filed, and (iii) claims of a Governmental Authority arising from or related to a Future Regulatory Obligation (other than Retained Future Regulatory Obligations). Notwithstanding anything in this Section 2.4.1 to the contrary, "Assumed Liabilities" shall not include any liabilities, responsibilities or obligations expressly included in Retained Liabilities pursuant to Section 2.4.2. 2.4.2 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller (the "Retained Liabilities"): (a) Subject to Section 10.5, all trade payables and other accrued payment obligations of Seller as of the Closing Date; (b) All long-term debt of Seller (including indebtedness to the Bondholders) and debt of Seller owed to any one or more of its Affiliates; (c) Subject to Section 10.5, all Taxes relating to the operation of the Business on or before the Closing Date or the use, ownership or operation of the Purchased Property on or before the Closing Date; (d) Except to the extent otherwise provided in Article 11, all liabilities and obligations arising on or before the Closing Date with respect to the Transferred Employees, including (i) all liabilities responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (ii) any such liabilities 13 or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date, but excluding any Future Regulatory Obligations with respect to the Transferred Employees; (e) All liabilities, responsibilities and obligations arising out of litigation and claims that arise out of an occurrence prior to the Closing Date other than litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations); (f) Any Retained Future Regulatory Obligations; and (g) All liabilities, responsibilities and obligations with respect to the Excluded Property and the Excluded Contracts. 2.5 No Assignment Without Consent. Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, conveyance, transfer, assignment or delivery or attempted sale, conveyance, transfer, assignment or delivery to Buyer of any Purchased Property (including any Contract) is prohibited by any applicable Law or would require any governmental or third-party authorizations, approvals, consents or waivers and such authorizations, approvals, consents or waivers shall not have been obtained prior to the Closing, this Agreement shall not constitute a sale, conveyance, transfer, assignment or delivery, or an attempted sale, conveyance, transfer, assignment or delivery thereof, if any of the foregoing would constitute a breach of applicable Law or the rights of any third party; provided, however, that, except to the extent that a condition to Closing set forth in Article 6 relating to the foregoing shall not be satisfied, the Closing shall occur notwithstanding the foregoing without any adjustment to the Purchase Price on account of such required authorization. Following the Closing, the parties shall use their commercially reasonable efforts, and shall cooperate with each other, to obtain promptly such authorizations, approvals, consents or waivers; provided, however, that neither Seller nor Buyer nor any of their respective Affiliates shall be required to pay any consideration therefor, other than filing, recordation or similar fees payable to any Governmental Authority, which fees shall be shared equally by Seller and Buyer. Pending or in the absence of such authorization, approval, consent or waiver, the parties shall cooperate with each other in any reasonable and lawful arrangements to provide to Buyer the benefits and liabilities of use of such Purchased Property, including, if permitted by the terms of any Real Property Lease or applicable Material Contract, through a sublease or subcontract in accordance with Section 4.3. If such authorization, approval, consent or waiver for the sale, conveyance, transfer, assignment or delivery of any such Purchased Property is obtained, Seller shall promptly convey, transfer, assign and deliver, or cause to be conveyed, transferred, assigned and delivered, such Purchased Property to Buyer. ARTICLE 3 PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Purchased Property shall be the sum of (i) $Four Hundred Forty Million dollars ($440 million) (the "Base Purchase Price"), (ii) amounts expended by Seller to comply with Interim Capital Expenditure Obligations (the "Regulatory Obligation Amount"), and (iii) the Non-Regulated Construction Work in Process 14 Amount, minus (iv) any Access Line Adjustment Amount calculated in accordance with Section 3.4. Payments from Buyer to Seller for Earned End-User Accounts Receivable and from Seller to Buyer for Customer Advances and Customer Deposits will occur subsequent to Closing in accordance with Article 10. 3.2 Closing Date Estimate. (a) Not less than three (3) business days prior to the Closing Date, Seller will give to Buyer a notice, setting forth Seller's good faith estimate as of the Closing Date of (i) the Regulatory Obligation Amount (the "Estimated Regulatory Obligation Amount"), (ii) the Non-Regulated Construction Work in Process Amount (the "Estimated Non-Regulated Construction Work in Process Amount") and (iii) the Access Line Adjustment Amount (the "Estimated Access Line Adjustment Amount"). (b) On the Closing Date, Buyer shall pay to Seller the sum of (i) the Base Purchase Price, (ii) the Estimated Regulatory Obligation Amount, and (iii) the Estimated Non-Regulated Construction Work in Process Amount, minus (iv) any Estimated Access Line Adjustment Amount (the "Closing Date Amount"). The Closing Date Amount shall be paid by delivery on the Closing Date of immediately available funds in U.S. dollars by wire transfer to an account that Seller shall designate to Buyer at least two (2) business days prior to the Closing Date. 3.3 Closing Date Statement. (a) Within sixty (60) days after Closing Date, Seller shall prepare and deliver to Buyer a written statement of the Base Purchase Price, Regulatory Obligation Amount, Non-Regulated Construction Work in Process Amount and any Access Line Adjustment Amount ("Closing Date Statement"). (b) Within fifteen (15) days after receipt of the Closing Date Statement, Buyer shall, in a written notice to Seller, either accept the Closing Date Statement or describe in reasonable detail any proposed adjustments to the Closing Date Statement and the reasons therefore. If Seller shall not have received a notice of proposed adjustments within such fifteen (15) day period, Buyer will be deemed irrevocably to have accepted such Closing Date Statement. (c) Upon the acceptance of any Closing Date Statement by Buyer, the parties shall, based thereupon, calculate the amount equal to the sum of the Base Purchase Price, Regulatory Obligation Amount and Non-Regulated Construction Work in Process Amount, minus any Access Line Adjustment Amount (collectively, the "Purchase Price"). If the Purchase Price as finally determined above is greater than the Closing Date Amount, Buyer shall promptly, but no later than three (3) business days after such acceptance, pay to Seller the amount of such difference. If the Purchase Price as determined above is less than the Closing Date Amount, Seller shall promptly, but no later than three (3) business days after such acceptance, pay to Buyer the amount of such difference. 15 (d) Seller and Buyer shall negotiate in good faith to resolve any disputes over any proposed adjustments to the Closing Date Statement, provided that if any such dispute is not resolved within thirty (30) days following Seller's receipt of the proposed adjustments, Buyer and Seller jointly shall select an independent public accounting firm that is nationally recognized in the United States to resolve such disputes in accordance with the standards set forth in this Section 3.3, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. (e) If Buyer disputes any portion of the Closing Date Statement, the parties shall calculate the portion of the Closing Statement that is not the subject of any dispute or proposed adjustment. If the undisputed portion of the Closing Statement (A) is greater than the respective estimated amounts paid on the Closing Date, Buyer shall promptly pay Seller the amount of such difference, or (B) is less than the respective estimated amounts paid on the Closing Date, Seller shall promptly pay Buyer the amount of such difference. Payments with respect to any undisputed portions of these adjustments shall be made no later than three (3) business days after delivery of notice of the proposed adjustments. Upon resolution of any dispute over any proposed adjustments as described above in Section 3.3(d), a party which is determined to owe the other party an amount shall pay that amount promptly, but no later than three (3) business days after resolution. (f) Any amount paid pursuant to this Section 3.3 after the Closing Date shall bear interest from the Closing Date through but excluding the date of payment, at a rate of eight percent (8%) per annum. Such interest shall accrue daily on the basis of a year of three hundred sixty-five (365) days and the actual number of days for which due and shall be payable together with the amount payable pursuant to this Section 3.3. All amounts payable pursuant to this Section 3.3 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer to, in the case of amounts payable by Buyer, the account identified by Seller as described in 3.2 above or to an alternate account that Seller may designate on the Closing Date Statement and, in the case of amounts payable by Seller, to such account of Buyer as Buyer shall designate in writing to Seller. 3.4 Access Line Adjustment Amount. The Purchase Price shall be subject to reduction in accordance with Section 3.1 if the number of access lines (including wholesale access lines) billed by Seller during the most recent month ended prior to the Closing Date (the "Closing Date Access Line Count") has decreased by more than ten percent (10%) from the number of access lines (including wholesale access lines) billed by Seller for the month ended December 31, 1998 (the "December 1998 Access Line Count"). Such reduction, if any, shall equal (a) the December 1998 Access Line Count minus the Closing Date Access Line Count, multiplied by (b) the Base Purchase Price divided by the December 1998 Access Line Count (collectively, the "Access Line Adjustment Amount"). 16 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS 4.1 State Regulatory Approval. Promptly after the date of this Agreement, Buyer and Seller shall file the appropriate applications and notices with the Minnesota Public Service Commission (collectively, the "PSC"), seeking orders permitting the transfer of service in the Purchased Exchanges to Buyer (collectively, the "Regulatory Approvals"). Buyer will be responsible for establishing the tariff for its post-Closing operations in the Purchased Exchanges. Each party agrees to use its commercially reasonable efforts to obtain the Regulatory Approvals and the parties agree to cooperate fully with each other and with the applicable regulatory agency to obtain the Regulatory Approvals at the earliest practicable date. 4.2 Debtholder Consents. Seller shall use its commercially reasonable efforts to obtain from its Bondholders the termination or release, at Closing, of all security agreements, mortgages and financing statements relating to the Purchased Property (such termination or release being hereinafter referred to as the "Debtholder Consents"). 4.3 Landlord and Other Consents. Promptly after the date hereof, the parties shall use their commercially reasonable efforts to mutually seek the consent of (i) the lessor to any Leased Real Property that requires consent as a condition to an assignment of the lease (which consents are identified in Schedule 8.1.8) and (ii) the applicable third party with respect to certain Material Contracts that require consent as a condition to assignment of such Material Contract (which consents are identified on Schedule 8.1.11). If a lessor refuses to consent to such an assignment, and if the applicable lease or Material Contract permits a sublease or subcontract without the consent of the lessor or other third party, the parties hereto shall, effective as of the Closing, enter into a sublease or subcontract upon terms and conditions as similar and comparable to an assignment of the lease or Material Contract as is reasonably feasible. 4.4 FCC Consents. Promptly after the date of this Agreement, the parties shall use their commercially reasonable efforts to obtain (i) the FCC's consent to the transfer of the FCC Licenses from Seller to Buyer, and (ii) the FCC waivers set forth on Schedule 4.4 (all such consents or waivers are collectively referred to as the "FCC Consents"). 4.5 HSR Act Review. By June 30, 1999, or such later date as the parties may mutually agree, the parties will make such filings as may be required by the HSR Act with respect to the transactions contemplated by this Agreement. Thereafter, the parties will file as promptly as practicable all reports or other documents required or requested by the U.S. Federal Trade Commission or the U.S. Department of Justice pursuant to the HSR Act or otherwise and will comply promptly with any requests by the Federal Trade Commission or the U.S. Justice Department for additional information concerning such transactions, so that the waiting period specified in the HSR Act will expire as soon as reasonably possible after the execution and delivery of this Agreement. Without limiting the foregoing, Seller and Buyer agree to use their commercially reasonable efforts to cooperate and oppose any preliminary injunction sought by any Governmental Authority preventing the consummation of the transactions contemplated by this Agreement. Buyer agrees to pay all application fees required in connection with any filings under the HSR Act. 17 Seller and Buyer shall cause their respective counsel to furnish each other such necessary information and reasonable assistance as the other may reasonably request in connection with its preparation of necessary filings or submissions under the provisions of the HSR Act. Seller and Buyer will cause their respective counsel to supply to each other copies of all correspondence, filings or written communications by such party or its Affiliates with any Governmental Authority or staff members thereof, with respect to the transactions contemplated by this Agreement and any related or contemplated transactions, except for documents filed pursuant to Item 4(c) of the Hart-Scott-Rodino Notification and Report Form or communications regarding the same documents or information submitted in response to any request for additional information or documents pursuant to the HSR Act which reveal Seller's or Buyer's negotiating objectives or strategies or purchase price expectations. 4.6 GTE/Bell Atlantic Merger. Notwithstanding anything else contained in this Agreement, but without modification of the rights of Buyer under Sections 6.1, 11.6.2, 12.2(a) or 13.1, Seller shall not be obligated to take any action that would violate the terms of its agreements regarding the Merger, or that would interfere with, delay or prevent the consummation of the Merger. In the event that the Closing does not occur as a direct result of the Merger, and not through any fault of Buyer, Seller's liability to Buyer under this Agreement shall be limited to the amount of Buyer's reasonable out-of-pocket expenses incurred in connection with this Agreement. ARTICLE 5 PRE-CLOSING COVENANTS 5.1 Investigation by Buyer. Prior to the Closing, upon reasonable notice from Buyer to Seller given in accordance with this Agreement and subject to approval by Seller's appointed representative, Seller will afford to the authorized representatives of Buyer reasonable access during normal business hours to the Transferred Books and Records, the Owned Real Property the Leased Real Property and the other Purchased Property so as to afford Buyer the opportunity to make such review, examination and investigation of the Business and the Purchased Property as Buyer may reasonably request; provided, however, that no environmental sampling or other testing shall be performed without Seller's prior written consent, which consent may be given or withheld in Seller's sole discretion. Buyer will not contact any employee, customer or supplier of Seller with respect to this Agreement, the matters involved herein or the Purchased Property without the prior written consent of Seller. Nothing herein will obligate Seller to take actions that would unreasonably disrupt the normal course of the business of Seller or violate the terms of any applicable Law or any Contract to which Seller or any of its Affiliates is a party or to which any of its assets is subject. Any information or documentation provided to Buyer or acquired by Buyer during this investigation shall be deemed "Evaluation Material" as that term is defined in the Confidentiality Agreement and shall be subject in all cases to the terms of the Confidentiality Agreement. 5.2 Operation of the Business in the Ordinary Course. 5.2.1 Preservation of Business. Except as contemplated on Schedule 5.2.1 or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing Seller shall: 18 (a) Conduct the Business in the ordinary course consistent with past practice and shall keep available to the Business its services and the services of its Affiliates to the same extent generally available on the date hereof; (b) Operate the Business in substantially the same manner as it is presently being conducted, and, with respect to the Business, refrain from entering into any Contract that would be a Material Contract other than in the ordinary course of business; (c) Not institute any proceeding with respect to, or otherwise change, amend or supplement any of its tariffs or make any other filings with the PSC except in the ordinary course of business, and except as disclosed on Schedule 8.1.15(a); (d) Maintain the Purchased Property in good repair, order and condition, reasonable wear and use excepted, and maintain the Materials and Supply Inventory in the ordinary course of business consistent with past practice; (e) Maintain insurance with respect to the Purchased Property consistent with past practice; (f) Make capital expenditures sufficient to support normal maintenance and customer growth in the Purchased Exchanges in a manner consistent with established regulatory performance objectives, which expenditures in (a) calendar year 1999 shall not be less than $15,000,000, and (b) calendar year 2000 shall not be less than $1,250,000 per month; and (g) Maintain the books and records of the Business substantially in accordance with prior practice, except as changes are mandated by Governmental Authorities or required by GAAP. 5.2.2 No Material Changes. Except as contemplated by this Agreement or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing, Seller will not: (a) Make any material change in the general nature of the Business; (b) Sell, lease or dispose of, or make any Contract for the sale, lease or disposition of any Purchased Property, other than in the ordinary course of business; (c) Increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its Transferred Employees, except (i) as required by Law, (ii) pursuant to any Contract to which Seller is a party existing on the date hereof and listed on Schedule 5.2.2(c), (iii) increases in base pay in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (iv) as listed or described on Schedule 5.2.2(c); (d) (i) Materially amend, modify or terminate any Material Contract or permit any of the foregoing to occur other than in the ordinary course of business; or (ii) sell, transfer or otherwise dispose of any Purchased Property other than in the ordinary course of 19 business or as listed or described on Schedule 5.2.2(d), or encumber any Purchased Property, except for Permitted Encumbrances; or (e) Enter into any new written employment agreement, or union agreement with, or commitment to, the Transferred Employees (including any new commitment to pay retirement or other benefits or other amendments to Seller's retirement plans), provided that Seller may enter into new union agreements to the extent the new union agreements succeed any union agreement that expires prior to the Closing. Prior to finalizing any such new union agreement, Seller shall advise Buyer of its material terms and following the execution of any such agreement, Seller shall deliver a copy to Buyer. 5.3 Satisfaction of Conditions. Without limiting the generality or effect of any provision of Article 6, the parties will use their commercially reasonable efforts to satisfy promptly all the conditions required to be satisfied prior to the Closing. 5.4 Approvals. (a) Between the date of this Agreement and the Closing Date, Buyer and Seller will (i) cooperate with one another and take all reasonable steps to obtain, as promptly as practicable, all consents, approvals, authorizations, waivers and permits of any Governmental Authorities required of either party to consummate the transactions contemplated by this Agreement and (ii) provide such other information and communications to any Governmental Authority as may be reasonably requested. (b) To the extent that any consents, approvals, authorization or waiver of a third party with respect to any (i) Assigned Contract, (ii) Assigned Permit or (iii) any Pole Attachment Agreement, government grant or railroad crossing agreement listed on Schedule 8.1.18, is required in connection with the transactions contemplated by this Agreement, Seller shall use its commercially reasonable efforts to obtain such authorization, consent, approval or waiver prior to the Closing Date. 5.5 Audit or Review of Financial Statements. To the extent Buyer requires an additional audit or review of financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission under Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer to audit or review the Financial Statements delivered by Buyer in accordance with Section 8.1.21 and such other financial statements as may be required by Buyer to comply with Regulations S-K and S-X (collectively, the "SEC Financial Statements"). Seller's cooperation will include such access to workpapers and other supporting documents used in the preparation of the SEC Financial Statements and delivery of one or more representation letters from Seller to such auditors as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards or a review in accordance with AICPA standards and to render an opinion acceptable to the SEC with respect to the audit or review of the SEC Financial Statements, it being understood that such representation letters shall acknowledge (i) Seller's extensive use of estimates and allocations in the preparation of the SEC Financial Statements, and (ii) Seller's belief that the SEC Financial Statements represent the financial condition and results of operations of the Business, in accordance with GAAP, and that such estimates and 20 allocations were made on a reasonable basis and in accordance with GAAP. However, Buyer acknowledges that because the Business represents only a portion of Seller, Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. Seller will bear the cost of the preparation of its financial statements, including the SEC Financial Statements. Buyer will bear the cost of the preparation of any other financial statements that it will be required to file with the SEC, as well as the cost of the audit or review of the SEC Financial Statements. Buyer acknowledges that the SEC Financial Statements and any supporting documentation have been made available as an indication of the historical financial performance and condition of the Business. Except to the extent that the SEC Financial Statements reflect intentional misrepresentation or fraud, Buyer agrees not to make any claim related to the performance of the Business after the date of the SEC Financial Statements on the basis of a comparison to the SEC Financial Statements. 5.6 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller's transfer of the Purchased Property may, at Seller's election, be accomplished in a manner enabling such transfer to qualify as part of a like-kind exchange of property covered by Section 1031 of the IRC. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the IRC (including any actions required to facilitate the use of a "qualified intermediary" within the meaning of the United States Treasury Regulations), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Purchased Property as part of a like-kind exchange of property covered by Section 1031 of the IRC. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. 5.7 Interconnection Agreements. Seller shall furnish to Buyer such necessary information as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Purchased Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible. 5.8 Leased Vehicles; Capital Leases. Seller or its Affiliates, as applicable, will pay the remaining balances on any vehicle leases or any capital leases relating to assets included in the Purchased Property and at Closing will deliver to Buyer title to such vehicles and assets, free and clear of all Liens. 5.9 Delivery of Interim Information. From the date of this Agreement until the Closing, Seller shall furnish Buyer monthly reports concerning the operating performance of the Business. Such reports shall contain such data as are typically reported to GTE management with respect to the Purchased Exchanges, including access line counts and service measures. 21 Seller shall provide Buyer reasonable access to Seller's management in order to discuss such data. In the event of any significant deterioration in operating performance, Seller shall consult with Buyer concerning its response. All information provided in accordance with this Section 5.9 shall be subject to the Confidentiality Agreement and to compliance with applicable antitrust Laws. ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING 6.1 Conditions Precedent to Obligations of Buyer. The obligations of Buyer to consummate the Closing shall be subject to the satisfaction or waiver by Buyer, at or prior to the Closing, of each of the following conditions, any one or more of which may be waived at the option of Buyer: 6.1.1 No Misrepresentation or Breach of Covenants and Warranties. Seller shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Seller in Section 8.1 shall be true and correct as of the Closing, except for (i) such representations or warranties that are made expressly as of an earlier date, which shall have been true and correct as of such date except as would not have a Material Adverse Effect, and, (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Seller shall have delivered to Buyer a certificate ("Seller's Closing Certificate") in the form attached as Schedule 6.1.1, dated the Closing Date and signed by an Executive Officer of Seller, certifying each of the foregoing, or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.1.2 Documents. Seller shall have delivered to Buyer all documents required by Section 7.2. 6.1.3 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.1.4 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained, free of any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a Material Adverse Effect, and the FCC and PSC shall not otherwise have taken any action with respect to the Purchased Property that is reasonably likely to have a Material Adverse Effect. For purposes of this Section 6.1.4, any tariff that is substantially similar in all material respects to the existing tariff with respect to the applicable Purchased Exchange shall be deemed not to have a Material Adverse Effect. For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any competent jurisdiction, the effect of which prohibits the Closing. 6.1.5 No Material Adverse Effect. There shall not have occurred any event or condition which individually or in the aggregate has resulted in a Material Adverse Effect. 22 6.2 Conditions Precedent to Obligations of Seller. The obligations of Seller to consummate the Closing shall be subject to the satisfaction or waiver by Seller, at or prior to the Closing, of each of the following conditions: 6.2.1 No Misrepresentation or Breach of Covenants and Warranties. Buyer shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Buyer in Section 8.2 shall be true and correct in all material respects as of the Closing, except (i) for such representations or warranties made expressly as of and only as of an earlier date, which shall be true and correct as of such date except as would not have a Material Adverse Effect, and (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Buyer shall have delivered to Seller a certificate ("Buyer's Closing Certificate") in the form attached as Schedule 6.2.1, dated the Closing Date and signed by an Executive Officer of Buyer, certifying each of the foregoing or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.2.2 Documents. Buyer shall have delivered to Seller all documents required by Section 7.3. 6.2.3 Purchase Price. Buyer shall have delivered to Seller, in the manner specified in Section 3.1, the Closing Date Amount. 6.2.4 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.2.5 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained free of any special terms, conditions or restrictions that are materially adverse to Seller based upon good faith business concerns that are not commercially unreasonable (other than any such approvals or consents which, if not obtained, would not have a Material Adverse Effect). For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any jurisdiction, the effect of which prohibits the Closing. ARTICLE 7 THE CLOSING 7.1 The Closing. Subject to the terms and conditions of this Agreement, the closing of the purchase and sale of the Purchased Property and the assumption of the Assumed Liabilities (the "Closing") shall be held at 9 A.M. local time at the offices of GTE Network Services at 600 Hidden Ridge, Irving, Texas 75038, on the date agreed upon by the parties, provided such date shall be (i) the last business day of the month, and (ii) at least five (5) business days, but not more than ninety (90) days, after the date that all required Regulatory Approvals, Debtholder Consents and FCC Consents have been obtained, or at such other time and place as the parties 23 may agree (the "Closing Date"). Such Closing shall be deemed to have occurred as of 11:59 p.m., local time, on the Closing Date. 7.2 Seller's Obligations at Closing. At the Closing, Seller shall deliver to Buyer the following documents: (a) (i) Bill of Sale and Assignment and Assumption Agreement, (ii) subject to Permitted Encumbrances (except as provided in Section 10.10), special warranty deeds or their equivalent in respect of the Owned Real Property and assignments of Real Property Leases to the extent any required consents have been obtained pursuant to Section 4.3, and (iii) subject to Section 2.5, assignments of the Assigned Contracts, the Real Property Interests and the Assigned Permits. For purposes of this Agreement, the term "Bill of Sale and Assignment and Assumption Agreement" means the form attached hereto as Schedule 7.2(a) executed by Seller; (b) A legal opinion from William Mundy, general counsel for GTE Network Services, as counsel for Seller, dated as of the Closing Date and in the form of Schedule 7.2(b); (c) Seller's Closing Certificate; (d) Instruments of assignment or, to the extent set forth in Section 4.3, subleases for the Leased Real Property; (e) Mortgage satisfactions, UCC Form 3 Termination Statements and other instruments necessary to remove, release and terminate all security interests held by the Bondholders on the Purchased Property; (f) All of the documents and papers required of Seller as conditions to Closing pursuant to Section 6.1, including the Regulatory Approvals, Debtholder Consents and FCC Consents; (g) A certificate substantially in the form of Schedule 7.2(g) certifying that Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC; (h) The License Agreement; and (i) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. 7.3 Buyer's Obligations at Closing. At the Closing, Buyer shall deliver to Seller the following: (a) The Closing Date Amount in the manner specified in Section 3.1; (b) The Bill of Sale, Assignment and Assumption Agreement, executed by Buyer; 24 (c) A legal opinion from L. Russell Mitten II, Vice President and General Counsel of Buyer dated as of the Closing Date and in the form of Schedule 7.3(c); (d) Buyer's Closing Certificate; (e) All other documents and papers required of Buyer as conditions of Closing pursuant to Section 6.2, including the Regulatory Approvals; and (f) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. ARTICLE 8 REPRESENTATIONS AND WARRANTIES 8.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: 8.1.1 Authorization and Effect of Agreement. Seller has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by Seller of this Agreement and the Ancillary Agreements and the fulfillment of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Seller. This Agreement and the Ancillary Agreements have been duly executed and delivered by Seller and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Buyer, constitute valid and binding obligations of Seller enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.1.2 No Restrictions Against Sale of the Purchased Property. The execution and delivery of this Agreement and the Ancillary Agreements by Seller does not, and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws, (ii) subject to obtaining the approvals and or consents referred to in Section 2.5, Article 4 and Schedule 8.1.11(a-f), conflict with, violate or result in the breach of any provision of any Material Contract, or (iii) result in the creation of any Lien (other than Permitted Encumbrances) upon any of the Purchased Property under (a) any Material Contract or (b) any Law applicable to any of the Purchased Property, except in the case of clauses (ii) or (iii) for any such conflict, violation, breach or Lien that would not have a Material Adverse Effect. 8.1.3 Consents and Approvals of Governmental Authorities. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Seller or in connection with the execution and delivery of this Agreement by Seller or the fulfillment by Seller of its obligations under this Agreement, except (i) FCC Consents and HSR Act clearance, (ii) the Regulatory Approvals, and (iii) any consent approval, order or authorization or registration declaration or filing, which if not obtained or made would not have a Material Adverse Effect. 25 8.1.4 No Material Violations. Except as indicated in Schedule 8.1.4 or as would not reasonably be expected to have a Material Adverse Effect, (a) the execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not violate any applicable Law, and (b) Seller is not in violation of any Law relating to or affecting the operation, conduct or ownership of the Business or the Purchased Property. 8.1.5 Corporate Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of Minnesota, and is duly qualified to conduct business in Minnesota. Seller has full power and authority to own its properties and to carry on the Business as it is now being conducted and to own, or hold under lease the Purchased Property. Seller holds valid permits, licenses, franchises, approvals and authorizations issued or granted by any Governmental Authority and adequate for the operation of the Business as currently conducted, except to the extent absence of any such permit, license, franchise, approval or authorization would not have an Material Adverse Effect. 8.1.6 Brokers. Seller has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Buyer for any broker's or finder's fees or similar fees or expenses. 8.1.7 Title to Owned Real Property. Seller has good fee simple title to all of the Owned Real Property, free and clear of any Lien other than Permitted Encumbrances and Liens of the Bondholders identified on Schedule 8.1.7(b). As of the date hereof, the address and a general description of each item of Owned Real Property are set forth on Schedule 8.1.7(a). Seller represents that the only creditors that have a Lien (other than any Permitted Encumbrances) on any of the Owned Real Property are the Bondholders identified on Schedule 8.1.7(b). 8.1.8 Real Property Leases. As of the date hereof, set forth on Schedule 8.1.8 is a list of the Real Property Leases. Each of the leases for the Leased Real Property is enforceable in accordance with its terms, subject to bankruptcy, insolvency and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with the principles of equity, and except as otherwise disclosed in Schedule 8.1.8, there is not under any lease any material default or a material breach of covenant by Seller. 8.1.9 Tangible Assets. All of the tangible Purchased Property is in substantially good operating condition and repair, normal wear and tear excepted. Except as set forth on Schedule 8.1.9 or elsewhere in this Agreement, Seller has good title to each item of tangible Purchased Property (other than Real Property Interests or office equipment or vehicles subject to leases) with a fair market value in excess of $5,000, free and clear of any Lien (other than Permitted Encumbrances). Except as set forth on Schedule 8.1.9, Seller has not received any written notice within the past twelve (12) months of a violation of any ordinances, regulations or building, zoning and other similar laws with respect to such assets that would have a Material Adverse Effect. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 8.1.9, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE CONDITION OR FITNESS OF THE TANGIBLE PURCHASED PROPERTY AND 26 HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY AGAINST INFRINGEMENT. 8.1.10 No Material Adverse Change. Except as disclosed in Schedule 8.1.10, between December 31, 1997 and the date of this Agreement there has not occurred (i) any event or condition that would have a Material Adverse Effect; (ii) any increase in compensation payable or to become payable by Seller to any of its Transferred Employees or agents, other than normal merit or promotional increases other than payment under the retention pay program announced in connection with the network business repositioning of Seller and its Affiliates; (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract; or (iv) any material change in any accounting method, practice or policy of Seller with respect to the Business. 8.1.11 Material Contracts. Except for the agreements set forth on Schedule 8.1.11 subparts (b) through (j), there is no Assigned Contract (other than the Assigned Contracts entered into after the date of this Agreement in the ordinary course of business) that is: (a) an agreement containing a non-compete agreement or other covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any material respect with respect to the Business with any third party; (b) an agreement granting a Lien (other than a Permitted Encumbrance); (c) an agreement for the sale of any material Purchased Property or grant of any preferential rights to purchase any material Purchased Property; (d) an agreement for the provision of telephone service at public pay telephone locations; (e) an agreement made in the ordinary course of business other than as set forth above with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $100,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (f) an agreement not made in the ordinary course of business with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (g) an agreement with respect to 911 services or E911 services; (h) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; 27 (i) an agreement between Seller and a third party for the third party's co-location of equipment in facilities included in the Purchased Property pursuant to which Seller is currently providing facilities or a request to provide facilities is currently pending; or (j) an agreement with a third party in which the owner of utility poles has agreed to allow the other party to attach its telecommunications equipment or facilities to the utility poles (a "Pole Attachment Agreement"). Except as set forth on Schedule 8.1.11, to the knowledge of Seller, each Assigned Contract referred to in any of the clauses (a) to (j) above (collectively the "Material Contracts") is valid, binding and in full force and effect and is enforceable by Seller or Seller's Affiliate, as applicable, in accordance with its terms, except for any such failure to be valid, binding, in full force and effect or enforceable that is not reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 8.1.11, to the knowledge of Seller, Seller and Seller's Affiliates have performed all material obligations required to be performed by them to date under the Material Contracts, and they are not (with or without the lapse of time or the giving of notice, or both) in breach or default thereunder and, to the knowledge of Seller, no other party to any Material Contract is (with or without the lapse of time or the giving of notice, or both) in breach or default in any respect thereunder, in each case except for such noncompliance, breaches and defaults that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect. As of the date hereof, neither Seller nor any Seller's Affiliate has, except as disclosed on Schedule 8.1.11, received or given any written notice of the intention of any party to terminate any Material Contract. Complete and correct copies of all the Material Contracts, together with all modifications and amendments thereto to the date of this Agreement by Closing will, have been made available to Buyer or its representatives. 8.1.12 Insurance. The Purchased Property of an insurable nature and of a character usually insured by companies carrying on similar businesses is insured under insurance policies or self insured in such amounts and against such losses or casualties as is usual in Seller's industry. On the Closing Date, the coverage under the insurance policies and programs applicable to the Purchased Property will be terminated, and Buyer will be responsible for providing all insurance coverage for the Purchased Property. 8.1.13 Taxes. Except as disclosed on Schedule 8.1.13, (i) all Tax Returns required to be filed by Seller on or before the Closing Date have or will have been filed, and all Taxes shown as due and payable on such Tax Returns have been or will be paid by Seller when required by law; (ii) no deficiencies or assessments for any Taxes have been asserted in writing or assessed against Seller that remain unpaid and that individually or in the aggregate are material to the Business; (iii) Seller has withheld all required federal, state and local payroll taxes relating to the Business and has remitted or will remit all amounts required to be remitted to the appropriate taxing authorities; (iv) there are no tax liens upon any of the Purchased Property except for statutory liens covering taxes not yet due and payable; (v) Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC and shall provide an appropriate certificate for purposes of Section 1445(b)(2) of the IRC and (vi) there are no material, current audits or material audits for which written notice has been received (in either case, specifically with respect to the Business). 28 8.1.14 No Material Claims or Suits. Except as disclosed in Schedule 8.1.14 or with respect to Taxes, there are no claims, actions, lawsuits or legal proceedings pending before any Governmental Authority, or, to the knowledge of Seller threatened against or affecting the Business or Purchased Property that in Seller's opinion, if determined adversely to Seller, would reasonably be expected to have a Material Adverse Effect on the Business or materially adversely affect ability of Seller to consummate the transactions contemplated hereby. 8.1.15 Tariffs; FCC Licenses. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material respect under any such tariff. Except as disclosed on Schedule 8.1.15(a), there are no applications by Seller or petitions by others or proceedings pending or threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. To the knowledge of Seller, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 8.1.15(b) are the FCC Licenses and other material Assigned Permits (the "Material Permits") held by Seller and used in the operation of the Business. Except as listed on Schedule 8.1.15(b), to Seller's knowledge, each such FCC License or Material Permit is in full force and effect on the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such FCC Licenses or Material Permits subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC Licenses are free from all security interests, liens, claims, or encumbrances of any nature whatsoever. There are no applications by Seller or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC Licenses that, in Seller's opinion, would reasonably be expected to have a Material Adverse Effect on the Business, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. 8.1.16 Employee Matters. (a) Schedule 8.1.16(a) lists (and identifies the sponsor of) each "Employee Pension Benefit Plan," as that term is defined in Section 3(2) of ERISA, each "Employee Welfare Benefit Plan," as that term is defined in Section 3(1) of ERISA (such plans being hereinafter referred to collectively as the "ERISA Plans"), and each other retirement, 29 pension, profit-sharing, money purchase, deferred compensation, incentive compensation, bonus, stock option, stock purchase, severance pay, unemployment benefit, vacation pay, savings, medical, dental, post-retirement medical, accident, disability, weekly income, salary continuation, health, life or other insurance, fringe benefit, or other employee benefit plan, program, agreement, or arrangement maintained or contributed to by Seller or its Affiliates in respect of or for the benefit of any Transferred Employee or former employee of Seller, excluding any such plan, program, agreement, or arrangement maintained or contributed to solely in respect of or for the benefit of Transferred Employees or former employees employed or formerly employed by Seller outside of the United States, as of the date hereof (collectively, together with the ERISA Plans, referred to hereinafter as the "Plans"). Schedule 8.1.16(a) also includes a list of each written employment, severance, termination or similar-type agreement between Seller and its Affiliates and any Transferred Employee (the "Employment Agreements"). Seller has delivered to Buyer accurate and complete copies of all Plans and Employment Agreements (or representative samples in the case of form agreements) and, if applicable, summary plan descriptions with respect to such Plans and Employment Agreements and summary descriptions of any such Plan or Employment Agreement that is not otherwise in writing. Except for retention bonuses paid in connection with the closing of the transactions contemplated by this Agreement and except as otherwise disclosed on Schedule 8.1.16(a), the execution and delivery of this Agreement by Seller and the performance of this Agreement by Seller will not directly result now or at any time in the future in the payment to any Transferred Employee of any severance, termination, or similar-type payments or benefits being paid to any Transferred Employee. (b) Except as set forth on Schedule 8.1.16(b): (i) Neither Seller nor any of its Affiliates, any of the ERISA Plans, any trust created thereunder, or any trustee or administrator thereof, has engaged in any transaction as a result of which Seller or any of its Affiliates could be subject to any material liability pursuant to Section 409 of ERISA or to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed pursuant to Section 4975 of the IRC; and (ii) Since the effective date of ERISA, no material liability under Title IV of ERISA has been incurred or is reasonably expected to be incurred by Seller or any of its Affiliates (other than liability for premiums due to the PBGC), unless such liability has been, or prior to the Closing Date will be, satisfied in full. (c) Except as set forth on Schedule 8.1.16(c), with respect to the ERISA Plans other than those ERISA Plans identified on Schedule 8.1.16(a) as "multiemployer plans": (i) the PBGC has not instituted proceedings to terminate any Plan that is subject to Title IV of ERISA (the "Retirement Plans"); (ii) none of the ERISA Plans has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived, as of the last day of the most recent fiscal year of each of the ERISA Plans ended prior to the date of this Agreement; 30 (iii) each of the ERISA Plans has been operated and administered in all material respects in accordance with its provisions and with all applicable laws; (iv) each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the IRC and, to the extent applicable, Section 401(k) of the IRC, has been determined by the IRS to be so qualified, and nothing has occurred since the date of the most recent such determination (other than the effective date of certain amendments to the IRC, the remedial amendment period for which has not yet expired) that would adversely affect the qualified status of any of such ERISA Plans; (v) there are no pending material claims by or on behalf of any of the ERISA Plans, by any employee or beneficiary covered under any such ERISA Plan, or otherwise involving any such ERISA Plan (other than routine claims for benefits and routine expenses); (vi) each ERISA Plan which is a group health plan has been operated and administered in compliance with the continuation coverage provisions of Section 498B of the IRC and Part 6 of Title I of ERISA; (vii) all contributions and premiums that would normally be made or paid with respect to any ERISA Plan or Employment Agreement on behalf of Transferred Employees as of the Closing Date will have been made by the Closing Date; and (viii) as of the Closing Date no Transferred Employee will be excluded from coverage under any employee welfare benefit plan (as defined in Section 3(1) of ERISA) maintained or contributed to by Seller. (d) Except as set forth on Schedule 8.1.16(d), none of the ERISA Plans is a "multiemployer Plan," as that term is defined in Section 3(37) of ERISA, and with respect to any such multiemployer plans (as so defined) listed in Schedule 8.1.16(d), Seller has not made or incurred a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of ERISA that would result in the incurrence of a material liability by Seller. Except as set forth on Schedule 8.1.16(d), neither Seller nor any Affiliates of Seller has made or incurred a "complete withdrawal" or a "partial withdrawal" (as such terms are defined in Sections 4203 and 4205, respectively, of ERISA) that would result in the incurrence of liability by Seller or its Affiliates, and the performance of this Agreement will not result in such withdrawal(s) or liability. (e) Except as set forth on Schedule 8.1.16(e), (i) none of the Transferred Employees are represented by a labor union or labor organization; (ii) Seller is not subject to any collective bargaining agreement covering any Transferred Employee; (iii) there are no current, or to the best knowledge of Seller, any pending or threatened strikes, slowdowns, picketing, or work stoppages affecting the Business or with respect to any Transferred Employee covered by collective bargaining; (iv) there is no pending lockout by Seller of any employees of the Business, and no such action is contemplated by Seller; (v) to the best knowledge of Seller, there is no pending or threatened organizing activity or petition for certification of a collective 31 bargaining representative involving employees of the Business and there has been none within the twelve (12) months preceding the date of the Agreement; (vi) to the best knowledge of Seller, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state or federal labor or employment law or regulation in connection with the Business, including any charge or complaint filed by any employee or labor organization with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any other administrative governmental agency, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business; (viii) with respect to employees of the Business, Seller has complied in all respects with all laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupational safety and health, immigration, and plant closings; and (ix) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the Transferred Employees. (f) This Agreement shall not result in any Transferred Employee becoming entitled to separation pay or severance which could be or become an obligation of Buyer. 8.1.17 Schedules of Telephone Plant. Schedule 8.1.17 sets forth, as of December 31, 1998, a materially accurate summary of the book value of the Telephone Plant as reflected in Seller's continuing property records. Schedule 8.1.17 also sets forth a materially accurate list of the vehicles, trailers and other mobile tools and mobile equipment that are part of the Purchased Property as of May 14, 1999. 8.1.18 Schedule of Real Property Interests. To the knowledge of Seller and as of the date of this Agreement, Schedule 8.1.18 sets forth a true and accurate list of all its Real Property Interests. 8.1.19 Compliance with Existing Environmental Requirements. Except as set forth in Schedule 8.1.19 or as would not have a Material Adverse Effect, to the knowledge of Seller: (a) Seller's operation of the Business and the Purchased Property has been and is presently in substantial compliance with Existing Environmental Requirements;\ (b) No environmental remediation is occurring on any parcel of Owned Real Property or Leased Real Property nor has Seller or any Affiliate issued a request for proposal or otherwise requested an environmental remediation contractor to begin plans for such environmental remediation; (c) No underground storage tanks ("USTs") or aboveground storage tanks ("ASTs") are located on the Owned Real Property or Leased Real Property; 32 (d) None of the Owned Real Property or Leased Real Property is situated in a state or federal "superfund" site or study area; and (e) Seller has delivered, or within 60 days after the date of this Agreement will deliver, to Buyer complete copies of all reports and studies relating to Seller's liability under or non-compliance with any Existing Environmental Requirements in connection with Seller's operation of the Business or use or ownership of the Purchased Property. 8.1.20 Environmental Permits. Except as set forth in Schedule 8.1.20, to the knowledge of Seller, it has obtained or filed for all necessary environmental permits, authorizations and licenses required to operate the Business or the Purchased Property, except where failure to obtain or file such permits, authorizations and licenses would not have a Material Adverse Effect on the Business. 8.1.21 Financial Statements. Seller has furnished to Buyer its audited balance sheets as of December 31, 1997 and December 31, 1998 and the related statements of income and cash flows for the years ended December 31, 1997 and December 31, 1998 (collectively, the "Financial Statements"). The Financial Statements have been prepared based on the books and records of Seller. Such books and records have been maintained in accordance with GAAP, and where required by law, the applicable regulations of the FCC and PSC. However, because the Business represents only a portion of a larger entity, the Financial Statements are based on the extensive use of estimates and allocations. Seller believes these estimates and allocations have been performed on a reasonable basis in accordance with GAAP. However, Buyer acknowledges that because Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and the Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. 8.1.22 Year 2000 Compliance. (a) As of the Closing Date, Seller shall have caused the modification or remediation of the Automated Assets in accordance with applicable manufacturer or vendor recommendations such that the Automated Assets are Year 2000 Compliant; provided that any and all Buyer or third-party supplied computer software, computer firmware and computer hardware that directly interfaces with the Automated Assets, co-exists with the Automated Assets, or indirectly influences the operation of the Automated Assets are also demonstrated to be Year 2000 Compliant. (b) Seller shall be deemed to be in satisfaction of the requirements of subsection (a) of this Section 8.1.22 to the extent that Seller has (i) performed on or before the Closing Date any modification or remediation in accordance with applicable manufacturer or vendor recommendations for achieving Year 2000 compliance or Year 2000 readiness, or (ii) received on or before the Closing Date reasonable assurances from the applicable manufacturer or vendor that an Automated Asset, without modification or remediation, is Year 2000 compliant or Year 2000 ready. 33 (c) When used in this Section 8.1.22, the following term shall have the respective meanings given below: "Automated Assets" means the computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software system(s) that are provided by Seller to Buyer as part of the Purchased Exchanges pursuant to this Agreement. "Calendar-Related" refers to the date values based on the Gregorian calendar, as defined in Encyclopedia Britannica, 15th edition, 1982, page 602, and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons and presentations. "Date Data" means any Calendar-Related data in the inclusive range January 1, 1900 through December 31, 2050, which the Automated Assets use in any manner. "System Date" means any Calendar-Related data value in the inclusive range January 1, 1985 through December 31, 2035 (including the natural transition between such values) which the Automated Assets shall be able to use as their current date while operating. "Year 2000 Compliant" means: (i) As of the Closing Date, in connection with Calendar-Related data and Calendar-Related processing of Date Data or of any System Date, the Automated Assets will not malfunction, will not cease to function and will not produce incorrect results; and (ii) As of the Closing Date, the Automated Assets will represent dates without ambiguity as to century when providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized and/or software systems and users by way of user interfaces, electronic interfaces and data storage. 8.1.23 Native American and Federal Consents. Except as set forth on Schedule 8.1.23 or as would not have a Material Adverse Effect, to the knowledge of the Seller: (a) Schedule 8.1.23 sets forth all material easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA") (collectively, the "Native American Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducted, on Native American reservations; (b) All such Native American Authorizations are in full force and effect and Seller is not in default thereunder; (c) There are no material claims, actions, lawsuits or other proceedings pending or threatened with respect to any of the Purchased Property located, or any operations of 34 the Business conducted, on Native American reservations, and no tribal authority has given written notice of any cancellation, revocation, termination or material amendment or modification of any Native American Authorization; and (d) No material consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement. 8.1.24 Loss of Major Customer. Except as set forth on Schedule 8.1.24, since January 1, 1997, Seller has not suffered the loss of any customer of the Business for which Seller billed in excess of $50,000 annually during the years ended December 31, 1997 or 1998. 8.1.25 Records. The continuing property records and other records related to the Purchased Property maintained by Seller conform in all material respects with the applicable rules and regulations of the FCC and PSC. Seller has retained substantially all original cost documentation relating to the Purchased Property regarding the expenditures made by Seller for the Telephone Plant within the period required by applicable Law. 8.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: 8.2.1 Corporate Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and is duly qualified to conduct business in Minnesota and has the requisite corporate power and authority to own, lease or otherwise hold the assets owned, leased or held by it. 8.2.2 Authorization and Effect of Agreement. Buyer has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, to carry on the Business as presently conducted and to fulfill all other obligations of Buyer under this Agreement and the Ancillary Agreements. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements, and the fulfillment by it of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Buyer. Buyer has the requisite legal capacity to purchase, own and hold the Purchased Property upon the consummation of the sale of the Purchased Property. This Agreement and the Ancillary Agreements have been duly executed and delivered by Buyer and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Seller, constitute valid and binding obligations of Buyer enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.2.3 No Restrictions Against Purchase of the Purchased Properties. The execution and delivery of this Agreement and the Ancillary Agreements by Buyer do not, and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not, conflict with, violate or result in the breach of any provision of the certificate of incorporation or bylaws of Buyer or, conflict with, violate or result in the breach of any contract 35 to which Buyer is a party. No material consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Buyer in connection with the execution and delivery of this Agreement by Buyer or the fulfillment by Buyer of its obligations under this Agreement, except the filings and approvals described in Article 4. 8.2.4 No Violation of Law. The execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not violate any Law except to the extent any such violation would not have a material adverse effect on the ability of Buyer to fulfill its obligations hereunder and thereunder. 8.2.5 Financial Capacity. (a) Buyer has sufficient cash or other sources of funds to pay the Purchase Price in the manner specified in Section 3.1 and all related fees and expenses. (b) Buyer has sufficient financial resources to operate the Business after the Closing Date. Without limiting the generality of the foregoing, Buyer has sufficient financial resources to satisfy any applicable requirement relating to financial capacity or capital imposed by any Governmental Authority in any state in which the Business is conducted. Buyer is solvent, is able to pay its debts as they become due, and owns property that has both a fair value and a fair saleable value in excess of the amount required to pay its debts as they become due. 8.2.6 Brokers. Buyer has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Seller for any broker's or finder's fees or similar fees or expenses. 8.2.7 Consents and Approvals of Governmental Authority. Subject to Article 4 with respect to Regulatory Approvals and FCC Consents, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority or regulatory authority is required in connection with the execution, delivery and performance of this Agreement by Buyer or the consummation by Buyer of the transactions contemplated herein, except for filings with the Federal Trade Commission and Department of Justice pursuant to the HSR Act, if required. ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS 9.1 Transition Services Agreement. The parties agree to cooperate with each other to ensure that the transition of the ownership of the Purchased Property proceeds with minimal disruption to the services being provided to subscribers. The parties agree that it may be necessary for Seller to assist Buyer in converting Seller's systems and processes with respect to the Purchased Property to Buyer's systems and processes. Seller and Buyer agree to execute a 36 separate "Transition Services Agreement" substantially in the form attached hereto as Schedule 9.1 for the provision of such services. 9.2 Optional Services Agreement. It is understood and agreed that Buyer may not have for a period of time after Closing Date, certain systems or processes necessary to provide some basic customer services. Seller will at Buyer's request and for the fees described in Schedule 9.2 provide any or all of the services described in a separate "Optional Services Agreement" signed by the parties substantially in the form attached hereto as Schedule 9.2. 9.3 Directory Publishing. 9.3.1 Assumption of Certain Directory Publishing Agreement Rights and Obligations. Seller is party to a directories publishing agreement with [GTE Directories Service Corporation n/k/a GTE Directories Corporation or GTE Directories Corporation as purchaser of the rights and interests of Associated Directory Services, Inc. f/k/a Mast Advertising and Publishing, Inc.] herein "Publisher." This [These] agreement[s] is [are] identified in Schedule 9.3.1 attached hereto ("Publishing Agreement[s]"). Pursuant to this [these] agreement[s] Publisher has the exclusive right and obligation to sell advertising, and to publish, print and distribute directories containing telephone numbers relating to the Purchased Exchanges. Buyer agrees to execute an agreement effective as of the Closing to assume and appropriately amend the Publishing Agreement[s] as it[they] relate to the Purchased Exchanges, including the extension of the Contel Publishing Agreements expiring prior to the Seller's Master Publishing Agreement which expires December 31, 2001, so that such extensions expire on December 31, 2001. If the directories for any of the Purchased Exchanges are published by a third party non-Affiliate of Seller, then to the extent requested by Buyer, Seller agrees to assist Buyer in obtaining such third party's consents to the continuation of such publishing arrangements; provided that Seller shall have no obligation to pay compensation or other consideration in connection with such assistance. 9.3.2 Co-Bound Directories Acknowledgement. Buyer acknowledges that Publisher may have a pre-existing obligation (which Publisher may choose to continue) to sell advertising, publish, print and distribute the telephone numbers of third party local exchange telephone companies in the same directory as the Purchased Exchanges ("Co-Bound" directory). Co-Bound directory agreements of which Seller is aware, if any, are identified on Schedule 9.3.2. 9.3.3 Meeting to Discuss Directory Publication. Within ninety (90) days following the date of this Agreement, Buyer agrees to meet with Seller and Publisher for the purpose of having an initial discussion about the first directory publication after the Closing Date. This meeting will be held at Publisher's address unless otherwise agreed between the parties and Publisher. All parties shall employ their respective commercially reasonable efforts to ensure that directory publication is not interrupted following the Closing Date. 9.4 GTE Supply Relationship. Within 90 days of this Agreement, Buyer agrees to meet with representatives of GTE Supply for purposes of negotiating in good faith an agreement for GTE Supply to provide ongoing procurement and materials management functions for the 37 Business on substantially the same terms as contained in the Buyer's existing agreement with GTE Supply; provided that Buyer may negotiate in good faith with respect to any volume discounts that may be available from GTE Supply. ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES 10.1 Intellectual Property. 10.1.1 No License. Buyer and Seller agree and understand that except as expressly set forth in writing in the License Agreement and Section 10.1.3, Seller has not granted any rights or licenses, express or implied, of, and nothing shall constitute or be construed as a license of Seller under any Intellectual Property now or hereafter owned, obtained or licensable by Seller or under any Third Party Intellectual Property. 10.1.2 Infringement. (a) Notwithstanding anything in this Agreement to the contrary, Seller shall have no obligation to defend, indemnify or hold harmless Buyer or any of its Affiliates, from any damages, costs or expenses resulting from any obligation, proceeding or suit based upon any claim that any activity subsequent to the Closing Date engaged in by Buyer, a customer of Buyer's or anyone claiming under Buyer, constitutes direct or contributory infringement, misuse of, or misappropriation of, or inducement to infringe, any Third Party Intellectual Property. (b) Buyer shall defend, indemnify and hold harmless Seller and its Affiliates from and against any and all Indemnifiable Losses resulting from any obligation, proceeding or suit based upon any claim alleging or asserting direct or contributory infringement, or misuse or misappropriation of or inducement to infringe by Seller or any of its Affiliates of any Third Party Intellectual Property, to the extent that such claim is based on, or would not have arisen but for, activity conducted or engaged in subsequent to the Closing Date by Buyer, a customer of Buyer's, or anyone claiming under Buyer. 10.1.3 Trademark Phaseout. (a) Buyer acknowledges that Seller or its Affiliates are the owners of Excluded Marks that qualify as Excluded Property under Section 2.3. Buyer understands and agrees that the Excluded Marks, or any right to or license of the Excluded Marks, are not being transferred pursuant to this Agreement. Buyer acknowledges the exclusive and proprietary rights of Seller and its Affiliates in the use of the Excluded Marks, and Buyer agrees that it shall not use the Excluded Marks (or any names, domain names, marks or indicia confusingly similar to the Excluded Marks) except and to the extent expressly set forth in this Section 10.1.3 or assert any rights or claims in such Excluded Marks (or in any names, domain names, marks or when confusingly similar to the Excluded Marks). After the Closing, all Excluded Marks of Seller and its Affiliates shall be replaced by Buyer, at Buyer's expense, as soon as possible, but in no event later than one hundred twenty (120) days after the Closing Date for items with Excluded Marks affixed to them which Buyer has continued to use in Buyer's operation of the Business, including 38 buildings, vehicles, heavy equipment, hard hats, tools, tool boxes, kits (safety and others), signs, public (pay) telephones, manual covers and notebooks. After the Closing, Buyer will not use, and will destroy or deliver to Seller, all such items with Excluded Marks affixed to them that have no valid continuing use in Buyer's operation of the Business, including items affecting customer or employee relations or items that do not reflect Buyer's true identity. Specific items to be destroyed or returned include items with Excluded Marks affixed to them including giveaways; order, purchase or materials forms; requisitions; invoices; statements; time sheets/labor reports; bill inserts; stationery; personalized note pads; maps; organization charts; bulletins/releases; sales/price literature; manuals or catalogs; report covers/folders; program materials; and materials such as media contact lists/cards. The one hundred twenty (120) day time period for replacement of Excluded Marks affixed to telephone directories that were already published or closed for publication at the Closing Date shall be extended to the expiration date of such directories. (b) Buyer recognizes the great value of the goodwill associated with the Excluded Marks, and acknowledges that the Excluded Marks and all rights therein and the goodwill pertaining thereto belong exclusively to Seller and that the Excluded Marks have a secondary meaning in the minds of the public. Buyer further agrees that any and all permitted use of the Excluded Marks pursuant to this Agreement shall inure to the sole and exclusive benefit of Seller. (c) Buyer agrees that any permitted use of the Excluded Marks in the operation of the Business after the Closing shall be provided in accordance with all applicable federal, state and local laws, and that the same shall not reflect adversely upon the good name of Seller or its Affiliates, and that the operation of the Business will be of a high standard and skill. (d) Buyer acknowledges that its failure to cease use of the Excluded Marks as provided in this Agreement, or its improper use of the Excluded Marks, will result in immediate and irreparable harm to Seller and its Affiliates. Buyer acknowledges and admits that there is no adequate remedy at law for such failure to terminate use of the Excluded Marks, or for such improper use of the Excluded Marks. Buyer agrees that in the event of such failure or improper use, Seller and its Affiliates shall be entitled to equitable relief by way of temporary restraining order, or preliminary or permanent injunction, or any other relief available under this Agreement. (e) Buyer will not contest the ownership or validity of any rights of Seller or its Affiliates in the Excluded Marks. 10.1.4 Third Party Software. To the extent that the transfer of Purchased Property by Seller to Buyer under this Agreement results in the transfer of possession to Buyer of software that at the Closing Date is Third Party Intellectual Property, which software was located in and rightfully used by Seller in the geographical area of the Purchased Exchanges prior to the Closing Date in the normal and ordinary operation of the Business pursuant to Contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then subject to Section 2.5, effective as of the Closing and provided that no payments to any Person other than a Switch Software vendor (which, if any, shall be paid by Seller) are thereby required, at Closing Seller shall assign to Buyer, and Buyer shall accept all rights and licenses if any to 39 posses and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. Buyer understands and agrees that except as provided above in this Section 10.1.4, or as expressly provided elsewhere in this Agreement or in another written agreement between Buyer and Seller, no rights or licenses to use or possess such software or any Third Party Intellectual Property are transferred to Buyer. Buyer shall properly dispose of, and shall not use, any software of which Buyer acquires possession in connection with Purchased Property and (i) which, after the Closing Date, Buyer knows, or reasonably should know, is not the subject of a Third Party Intellectual Property Contract that has been rightfully transferred to Buyer or for (ii) which Buyer does not have a separate license. Seller makes no warranty or representation that any Third Party Intellectual Property Contract or any right therein is assignable in whole or in part to Buyer. 10.2 Effect of Due Diligence and Related Matters. (a) Buyer represents that it is a sophisticated entity that was advised by knowledgeable counsel and financial advisors and, to the extent it deemed necessary, other advisors in connection with this Agreement and has conducted its own independent review and evaluation of the Purchased Property. Accordingly, Buyer covenants and agrees that (i) except for the representations and warranties set forth in this Agreement, Buyer has not relied and will not rely upon any document or written or oral information furnished to or discovered by it or its representatives, including any financial data, (ii) there are no representations or warranties by or on behalf of Seller or its Affiliates or representatives except for those expressly set forth in this Agreement, and (iii) to the fullest extent permitted by law, Buyer's rights and obligations with respect to all of the foregoing matters will be solely as set forth in this Agreement. (b) Upon the Closing, Buyer shall be deemed to have waived any claim with respect to a breach of any representation, warranty, covenant or obligation of Seller, or any failure of a condition, hereunder of which Buyer had knowledge; provided that Buyer shall be deemed to have knowledge of the information made available to Buyer and/or its representatives during its review of the Purchased Property prior to the date of this Agreement, which information is contained in the Due Diligence Documents. (c) After the date of this Agreement and prior to the Closing Date, Buyer shall promptly notify Seller if Buyer obtains knowledge of any actual breach of any representation, warranty, covenant or obligation of Seller or any actual or prospective failure of a condition, hereunder of which Buyer obtains knowledge. Failure to provide timely notice shall be deemed to constitute a waiver of any claim with respect to such breach. 10.3 Confidentiality. Whether or not the Closing occurs, the parties hereto and their respective officers, directors, employees and representatives will comply with the Confidentiality Agreement, the provisions of which are expressly incorporated herein in their entirety by this reference. 40 10.4 Further Assurances. After the Closing, Seller will use its commercially reasonable efforts to furnish to Buyer such other instruments and information as Buyer may reasonably request in order to convey to Buyer title to the Purchased Property, to be delivered from time to time upon Buyer's reasonable request. 10.5 Prorations. The following liabilities shall be prorated between Seller and Buyer: (i) utility charges (which shall include water, sewer, electricity, gas and other utility charges) with respect to the Owned Real Property, the property subject to the Real Property Leases and customer owned equipment, (ii) rental charges (which shall include rental charges and other lease payments under the Real Property Leases), (iii) personal services (these services are charged for a period which includes the Closing Date; this shall include contract labor), and (iv) real and personal property taxes, ad valorem taxes, and franchise fees or taxes (collectively, "Periodic Taxes"). With respect to measurement periods during which the Closing Date occurs (all such periods of time being hereinafter called "Proration Periods"), the liabilities described in clauses (i), (ii) and (iii) of the preceding sentence shall be apportioned between Seller and Buyer as of the Closing Date, with Buyer bearing only the expense thereof in the proportion that the number of days remaining in the applicable Proration Period on and after the Closing Date bears to the total number of days covered by such Proration Period. Periodic Taxes attributable to Proration Periods shall be prorated between Buyer and Seller based on the relative periods the Purchased Property was owned by each respective party during the fiscal period of the taxing jurisdiction for which such taxes were imposed by such jurisdiction (as such fiscal period is or may be reflected on the bill rendered by such taxing jurisdiction). On the Closing Date, Buyer and Seller shall pay or be reimbursed, on this prorated basis, for Periodic Taxes that have been paid before the Closing Date. On the Closing Date, Buyer and Seller shall also be reimbursed, on this prorated basis, for Periodic Taxes that are to be paid on or after the Closing Date. The reimbursement of Periodic Taxes that are to be paid on or after the Closing Date shall be based on a reasonable estimate of the amount of such Periodic Taxes to be paid (based on past experience). To the extent that Buyer or Seller are not reimbursed on the Closing Date for Periodic Taxes that are paid after the Closing Date, or, in the event the estimated amount of the preceding sentence proves to have been inaccurate, Buyer or Seller shall promptly forward an invoice to the other party for its reimbursable pro rata share, if any. If the other party does not pay the invoice within thirty (30) calendar days of receipt, the amount of such payment shall bear interest at the rate of eight percent (8%) per annum. Similarly, all prepayments made or received by Seller or Buyer with respect to service or maintenance agreements with third parties or license or other fees payable to or by third parties and relating to the Business shall be prorated on an appropriate basis between Seller and Buyer. 10.6 Cost Studies/NECA Matters. 10.6.1 Prior to Closing. Seller agrees that, with respect to all toll revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Purchased Property prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any matters related to the National 41 Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Long Term Support ("LTS"), and Telecommunications Relay Services funds. 10.6.2 From and After Closing. (a) Buyer shall receive all USF funds, from and after the Closing Date, as determined by USAC from data submitted by Seller prior to Closing Date pursuant to FCC Rules and Regulations as stated in Part 36.611 and Part 36.612 for rural carriers and Part 54 for non-rural carriers. After Closing Date Buyer shall make all submissions and filings for USF funds for all years for which Seller had not made a submission prior to Closing Date in accordance with FCC Rules and Regulations. Within a reasonable time after Buyer's written request, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Purchased Property during any year for which Buyer shall make a submission, and such reasonable assistance as required in connection with Buyer's preparation of necessary filings or submissions. (b) Notwithstanding the foregoing, Buyer's right to receive all USF revenue is conditioned upon Buyer's payment, from and after the Closing Date, of all universal service contribution liability assessed by USAC based on end-user retail revenues for the previous year generated by assets being sold. 10.7 Customer Deposits. Within thirty (30) days after Closing, Seller agrees to transfer to Buyer the customer deposits together with any interest accrued thereon (collectively "Customer Deposits"), together with all of Seller's obligations and rights to hold the Customer Deposits of the Business, up to the Closing Date, and Buyer agrees to hold, disburse and retain such deposits so delivered to it as if it were Seller. 10.8 Access to Books and Records. (a) After the Closing, Seller will retain all Retained Books and Records for a period of three (3) years. (b) After the Closing, upon reasonable notice and subject to the Confidentiality Agreement, the parties will give to the representatives, employees, counsel and accountants of the other, access, during normal business hours, to books and records relating to the Business and the Purchased Property, and will permit such persons to examine and copy such records, in each case to the extent reasonably requested by the other party in connection with tax and financial reporting matters (including any Tax Returns and related information, but not attorney work product or similar work product prepared by accountants), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any Contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any Tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom 42 or assets thereof) with respect to any Tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 10.8(b). 10.9 Purchase Price Allocation. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the IRC. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the IRC and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable Law. 10.10 Owned Real Property Transfers. Within sixty (60) days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies in Seller's possession covering the Owned Real Property. Thereafter, no later than thirty (30) days before the Closing Date, Seller shall deliver (at Seller's expense) to Buyer title commitments for owners' policies of title insurance prepared by a title insurance company reasonably acceptable to Buyer and a certified current survey, with respect to all Owned Real Property included in the Purchased Property and in which Seller purports to own fee title. Buyer acknowledges that such title commitments shall be for CLTA owners' policies of title insurance (or its equivalent) unless Buyer has requested in writing, prior to the date hereof, that such commitments be issued for other forms of title insurance (in which event, Buyer shall bear all costs and premiums for such title insurance to the extent attributable to such coverage being in excess of CLTA coverage or its equivalent). Such title commitments shall reflect that upon the consummation of the sale to Buyer contemplated by this Agreement and the payment of all premiums and charges due for such title insurance, Buyer will be vested with good, fee simple title to such Owned Real Property, subject only to the exceptions show thereon, the title company's standard exceptions and exclusions, and such matters that arise after the date and time of such title commitment. Except as provided in the following sentence, in the event that Buyer requires endorsements to such title commitments or the applicable title insurance policies, such endorsements shall be obtained at Buyer's sole cost and expense and shall not be a condition to Closing. On the Closing Date, Seller shall convey the Owned Real Property to be transferred to Buyer subject only to Permitted Encumbrances, provided that Seller may transfer such property subject to one or more exceptions that are not Permitted Encumbrances if Seller commits in writing, in form and substance reasonably acceptable to Buyer, on or before the Closing Date, to cause any such exception that is not a Permitted Encumbrance to be removed, insured or bonded over to Buyer's reasonable satisfaction, or if Seller indemnifies Buyer with respect to such exceptions to Buyer's reasonable satisfaction on or before the Closing Date. With respect to each parcel of Owned Real Property covered by a title commitment referenced above, the amount of title insurance provided under the applicable title insurance policy shall be the fair market value of the 43 applicable property, which shall be determined by Buyer at its sole cost and expense using commercially reasonable methods of valuation, provided that all such valuations shall be consistent with all allocations of the Purchase Price made hereunder or pursuant to this Agreement, and shall be acceptable to the title insurance company. The determination of fair market value shall be made in a timely manner such that the title commitments can be issued in a timely manner prior to the Closing Date. Seller agrees that prior to Closing it will provide the title company with such instructions, authorizations, affidavits, and indemnities as may be reasonably necessary for the title company to issue title policies to Buyer, dated as of the Closing Date, for all of the Owned Real Property with so-called non-imputation endorsements. By no later than forty-five (45) days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering each parcel of the Owned Real Property covered by the title commitments. Buyer will use its commercially reasonable efforts to work with the title company between the date hereof and fifty-five (45) days after Closing Date to resolve any issues with respect to such title commitments. Seller shall be responsible for the payment of all title insurance premiums attributable to the CLTA portion of the coverage afforded by each such policy obtained, and Buyer shall be responsible for the payment of all title insurance premiums in excess of such amount and for the payment of all endorsement charges and other fees and costs imposed by the title company. 10.11 Transaction Taxes. Buyer shall bear and be responsible for paying any sales, use, transfer, documentary, registration, business and occupation and other similar taxes (including related penalties (civil or criminal), additions to tax and interest) imposed by any Governmental Authorities with respect to the transfer of Purchased Property to Buyer (including the Owned Real Property) ("Transaction Taxes"), regardless of whether the tax authority seeks to collect the such taxes from Seller or Buyer. Seller shall prepare all tax filings related to any sales, use, transfer, documentary, registration, business and occupation and other similar taxes. Seller, fifteen (15) days prior to making such filings shall provide to the Buyer Seller's work papers for the Buyer's review and approval. Buyer shall provide to the Seller ten (10) days prior to the filing date approval of such work papers. Buyer shall also be responsible for (i) administering the payment of such Transaction Taxes, (ii) defending or pursuing any proceedings related thereto, and (iii) paying any expenses related thereto. Seller shall give prompt written notice to Buyer of any proposed adjustment or assessment of any Transaction Taxes with respect to the transaction, or of any examination of said transaction in a sales, use, transfer or similar tax audit. In any proceedings, whether formal or informal, Seller shall permit Buyer to participate and control the defense of such proceeding, and shall take all actions and execute all documents required to allow such participation. Seller shall not negotiate a settlement or compromise of any Transaction Taxes without the written consent of Buyer, which consent shall not be unreasonably withheld. 10.12 Bulk Sales Laws. Seller and Buyer waive compliance with applicable laws under any version of Article 6 of the Uniform Commercial Code adopted by any state or any similar law relating to the sale of inventory, equipment or other assets in bulk in connection with the sale of the Purchased Property. 10.13 Prepaid Non-Regulated Maintenance Agreements. Within thirty (30) days following Closing, Seller shall pay to Buyer an amount equal to the pro rata portion of all 44 prepaid but unearned revenues from Seller's customers for all non-regulated maintenance agreements as of the Closing Date. 10.14 Vehicle Registration. Buyer agrees to use its commercially reasonable efforts to file promptly the appropriate vehicle title applications and registrations to change the name of the titled owner on each vehicle title certificate and change the motor vehicle registration (with respect to license plate information) on each vehicle being transferred to Buyer from Seller pursuant to this Agreement. Buyer agrees that it shall remove and destroy Seller's existing license plates from all vehicles received upon the earlier of receipt of new license plates or sixty (60) days following Closing. 10.15 Carrier Access Billing and Accounts Receivable Transition. Seller shall render its own final carrier access bills to its interexchange carriers for minutes, messages and other applicable charges up to the Closing Date. Seller shall be responsible for collecting and settling any disputes associated with its final bills to the interexchange carriers. 10.16 End-User Billing and Accounts Receivable Transition. Buyer agrees to purchase Seller's Earned End-User Accounts Receivable and make payment to Seller for those accounts in the manner described below: (a) Seller shall transfer to Buyer, as soon as reasonably available after Closing, all open end-user customer account records to Buyer as of the end of business on the Closing Date. Following the Closing, Buyer shall be responsible for administering those records including the application of cash receipts to customer accounts, whether related to services rendered before or after the Closing. Seller shall promptly forward to Buyer all customer payments and related remittance documents received by Seller after the Closing for processing by Buyer. (b) Within twenty (20) days following the Closing, Seller shall provide an accounting to Buyer of the Earned End-User Accounts Receivable Amount and the Customer Advances as well as the most recent twelve (12) month history of Seller's uncollectible net writeoffs expressed as a percentage of billings for the Business (the "Uncollectible Factor"). This data and the resulting calculation of the Earned End-User Accounts Receivable Amount shall be summarized in an accounts receivable settlement statement (the "Accounts Receivable Settlement Statement"). Within thirty (30) days following the Closing, Buyer shall remit to Seller an amount equal to 80% of the Earned End-User Accounts Receivable Amount less 100% of the Customer Advances. Within sixty (60) days following the Closing, Buyer shall remit an additional 15% of the Earned End-User Accounts Receivable Amount and within ninety (90) days will remit the final 5%. (c) Not later than ten (10) days prior to the due dates for the sixty (60) and ninety (90) day payments referred to in Section 10.16(b), Seller will provide Buyer with an updated Accounts Receivable Settlement Statement reflecting any adjustments based upon non-sufficient funds checks, billing adjustments or other facts that relate to pre-closing activity that became known after the preparation of the original statement. 45 (d) If at any time during the ninety (90) day period following the Closing, Buyer or Seller discovers any material discrepancy in the Accounts Receivable Settlement Statement, both parties agree to use commercially reasonable efforts to resolve any discrepancy in a timely manner, and also agree to make payments related to any undisputed amounts as set forth above. (e) At any time between ninety (90) and two hundred seventy (270) days following the Closing, Buyer may, at its discretion, prepare an analysis of actual bad debt write-off experience related to the Earned End-User Accounts Receivable purchased from Seller. If such analysis reasonably demonstrates that write-offs have exceeded the estimated amount in the final Accounts Receivable Settlement Statement (as had been calculated using the Uncollectible Factor) by more than 10%, Seller will pay to Buyer the full amount of the difference within thirty (30) days of receipt of Buyer's request for payment, together with Buyer's write-off analysis, Buyer will provide Seller sufficient detail in its write-off analysis, and as reasonably necessary, access to billing and collection records, to allow Seller to validate the accuracy of Buyer's request. Any disputes regarding the amounts of such request shall be settled using the procedure described in Section 3.3(d). ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS 11.1 Employment of Transferred Employees. Subject to the other provisions of this Section 11.1, all Active Employees of Seller employed in the Business, and all Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date (hereinafter collectively referred to as "Transferred Employees") shall be employed by (or become the responsibility of, as applicable) Buyer as of the Closing Date in the same or comparable positions, and at the same or comparable total compensation (including base pay and bonus), as were in effect on the Closing Date, except as otherwise provided in this Agreement. For purposes of the preceding sentence, the term "Active Employees" shall include all full-time and part-time employees, employees on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights, and employees on other approved leaves of absence with a legal or contractual right to reinstatement. For a period of twelve (12) months following the Closing Date, Buyer shall not actively solicit either directly or indirectly through any agents, and Buyer shall not permit any of its Affiliates to actively solicit either directly or indirectly through any agents, any person who retires or otherwise terminates from any employment at or in association with Seller during the six-month period beginning three (3) months before the Closing Date, and Buyer shall neither employ nor permit any of its Affiliates to employ any individuals who are identified to Buyer by Seller as individuals who terminated from any employment or association with Seller during such six-month period. On or before the execution date of this Agreement, Seller shall have delivered to Buyer a list of the persons who would have been Transferred Employees had the Closing Date occurred on March 31, 1999, showing the following information for each such person: (i) the name of each such person; (ii) the name of his or her current employer; (iii) his or her current base pay, 1998 bonus and projected 1999 bonus; (iv) his or her hire date, any rehire date (if available) and years of service; (v) his or her then-current position; (vi) whether such employee is (x) subject to a collective bargaining agreement or represented by a labor organization, if any, 46 and including the name and date of each such bargaining agreement or (y) on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights or on other approved leave of absence with a legal or contractual right to reinstatement; and (vii) for any employee who is not employed exclusively in the Business, a description of the nature of his or her employment and the percentage of his or her time actually allocated to the Business in calendar year 1998. Seller shall update such list at such time or times requested by Buyer, but not more often than as of the end of each calendar quarter occurring between the execution date hereof and the Closing Date, commencing with the quarter ending June 30, 1999, and as of the month ending immediately prior to the Closing Date, in each case assuming the Closing Date had occurred on such date, and shall deliver such updated lists to Buyer within ten (10) days after the end of each such calendar quarter or month-end, as applicable. Any person who is not on such list as updated as of the end of the month immediately preceding the Closing Date shall not be a Transferred Employee, and for all purposes under this Agreement the Transferred Employees shall include only those persons on such list as updated as of such month-end who continue to be Active Employees of Seller employed in the Business or Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date. 11.1.1 Assumption of Collective Bargaining Agreement Obligations. On and after the Closing Date, Buyer, as successor employer to Seller, shall assume all of the employer's obligations under, and be bound by the provisions of, each collective bargaining agreement to the extent of provisions covering Transferred Employees. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. 11.1.2 Assumption of Employment and Other Agreements. On and after the Closing Date, except as otherwise provided in this Agreement or in Schedule 11.1.2, Buyer, as successor employer to Seller, shall assume all obligations of each employment agreement or any other agreement by Seller relating to conditions of employment, employment separation, severance, or employee benefits in connection with the Transferred Employees, but only to the extent that they have been disclosed to Buyer on Schedule 8.1.16(a) and copies have been furnished to Buyer as soon as administratively practicable prior to the execution of this Agreement. To the extent that Buyer assumes any obligations under this Article 11, Buyer may reduce or eliminate benefits under any agreement, plan, policy or program only to the extent required to comply with applicable law, or to the extent that Seller, its Affiliates, or any successors or assigns, make amendments or changes to its benefit plans, policies or programs to eliminate or reduce benefits. Until the fifth anniversary of the Closing Date, Seller promptly shall deliver to Buyer a copy of each material amendment or change that Seller makes to its Plans and Employment Agreements to eliminate or reduce benefits thereunder and shall confirm to Buyer on an annual basis whether, and the extent to which, it has amended its Plans and Employment Agreements and provide sufficient detail to enable Buyer to determine whether Seller has reduced or eliminated benefits thereunder. After the fifth anniversary of the Closing Date, Buyer may amend such plans, policies, and programs in any manner it determines, consistent with applicable law and collective bargaining agreements. 11.1.3 Recognition of Transferred Employee Service. On and after the Closing Date, and subject to the provisions of any applicable collective bargaining agreement, and except 47 as otherwise provided in this Article 11, Buyer shall recognize the service of each Transferred Employee for all employment-related purposes determined in accordance with the practices and procedures of Seller in effect on the Closing Date, as if such service had been rendered to Buyer. 11.1.4 Assumption of Obligation to Pay Bonuses. Transferred Employees shall not accrue benefits under any employee benefit policies, plans, arrangements, programs, practices, or agreements of Seller or any of its Affiliates after the Closing Date. Buyer shall assume the obligation to pay to Transferred Employees any bonuses that would have been payable to the Transferred Employees with respect to the calendar year in which the Closing Date occurs had the Transferred Employees remained employees of Seller or one of its Affiliates, in accordance with the provisions of the policy, plan, arrangement, program, practice or agreement under which the bonus would have been paid. 11.1.5 No Duplicate Benefits. Nothing in this Agreement shall cause duplicate benefits to be paid or provided to or with respect to a Transferred Employee under any employee benefit policies, plans, arrangements, programs, practices, or agreements. 11.1.6 Affiliate Employees. If any employee identified in the list provided pursuant to Section 11.1 is an employee of an Affiliate of Seller whose duties relate primarily to the Business, he or she shall be considered a Transferred Employee and shall be treated under this Agreement in a manner that is comparable to the treatment given to the Transferred Employees who are employed by Seller, except that his or her service as of the Closing Date shall be determined in accordance with the practices and procedures of his or her employer, as disclosed to Buyer in accordance with Section 11.1.2. 11.2 Transferred Employee Benefit Matters. 11.2.1 Defined Benefit Plans. (a) Seller Pension Plans. As of the date of this Agreement, Seller participates in the following single-employer defined benefit pension plans maintained in the United States: (i) the GTE Service Corporation Plan for Employees' Pensions (the "Seller Salaried Pension Plan"); and (ii) the GTE Midwest Incorporated Plan for Hourly-Paid Employees' Pensions (the "Seller Hourly Pension Plan"). The plans identified in this Section 11.2.1(a) shall be referred to collectively in this Agreement as the "Seller Pension Plans," and each such plan shall be referred to individually as a "Seller Pension Plan." (b) Buyer Obligations. Buyer shall take all actions necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more pension plans (hereinafter referred to in the aggregate as the "Buyer Pension Plans" and individually as the "Buyer Pension Plan") effective as of the Closing Date and to 48 ensure that each Buyer Pension Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Pension Plan is a qualified, single-employer defined benefit plan under Section 401(a) of the IRC; (ii) any Buyer Pension Plan that was in effect before the Closing Date shall not have any "accumulated funding deficiency," as defined in Section 302 of ERISA and Section 412 of the IRC, whether or not waived, immediately before the Closing Date; (iii) the Buyer Pension Plan is not the subject of termination proceedings or a notice of termination under Title IV of ERISA; (iv) the Buyer Pension Plan does not exclude Transferred Employees from eligibility to participate therein; (v) the Buyer Pension Plan does not violate the requirements of any applicable collective bargaining agreement; and (vi) with respect to Transferred Employees who were participants in the Seller Hourly Pension Plan by virtue of their coverage under a collective bargaining agreement on the Closing Date, the terms of the Buyer Pension Plan are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. For purposes of this Section 11.2.1, Transferred Employees who were participants in the Seller Hourly Pension Plan other than by virtue of their coverage under a collective bargaining agreement on the Closing Date shall be treated as Transferred Employees who, on the Closing Date, participate in the Seller Salaried Pension Plan. Within the 30-day period immediately preceding any transfer of assets and liabilities from a Seller Pension Plan to a Buyer Pension Plan pursuant to this Section 11.2.1(b), Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Pension Plan satisfies each of the requirements set forth in this Section 11.2.1(b). (c) Transfer of Liabilities. (i) In accordance with the provisions of this Section 11.2.1, Buyer shall cause the Buyer Pension Plans to accept all liabilities for benefits under the Seller Pension Plans, whether or not vested, that would have been paid or payable (but for the transfer of assets and liabilities pursuant to this Section 11.2.1) to or with respect to the Transferred Employees under the terms of the Seller Pension Plans and that are "Section 411(d)(6) protected benefits" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder) that have accrued under the Seller Pension Plan to or with respect to the Transferred Employees based on accredited service and compensation under the Seller Pension Plans as of the Closing Date. For a period of not less than five (5) years after the Closing Date, and unless otherwise required to comply with applicable law or permitted by Section 11.1.2, Buyer shall not amend the Buyer Pension Plans, or permit the Buyer Pension Plans to be amended, to eliminate any benefit, whether or not vested, with respect to which liabilities are transferred pursuant to the foregoing provisions of this subsection (i), to the extent any such benefit is a "Section 411(d)(6) protected benefit" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder). On or before the Closing Date, Seller or an Affiliate thereof shall take action to fully vest Transferred Employees in their benefits (if any) under the Seller Pension Plans. (ii) (A) For purposes of eligibility and vesting under the Buyer Pension Plans, each Transferred Employee whose accrued benefit is transferred from a Seller Pension Plan to a Buyer Pension Plan shall be credited with service as of the Closing Date as determined under the terms of the Seller Pension Plan. The benefit under the Buyer Pension Plan for each Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be 49 calculated under terms of the Buyer Pension Plan that are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. The benefit for each Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall not be less than the greater of (x) the sum of the Transferred Employee's "Seller Pension" and "Buyer Pension," or (y) the Transferred Employee's "Total Service Pension," each as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1. (B) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Salaried Pension Plan and who, under the terms of the Seller Salaried Pension Plan, has at least 15 years of accredited service and combined years of age and accredited service of at least 74 as of the Closing Date shall be eligible, after the Transferred Employee's employment with the Buyer and its Affiliates is terminated and after the Transferred Employee's combined years of age and years of accredited service equal or exceed 76, to receive his or her "Seller Pension" (as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1) as an immediate early retirement pension under the applicable Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Salaried Pension Plan as of the Closing Date. For a period of at least five (5) years following the Closing Date, the Buyer shall cause any agreement, pursuant to which the accrued benefit of any Transferred Employee under a Buyer Pension Plan is transferred to another pension plan, to incorporate a provision in substance identical to this subsection (ii)( B). (C) Except as provided in paragraph (E), below, the benefit under the Buyer Pension Plan of a GATT Grandfathered Participant, when expressed in the form of a lump sum, shall not be less than the benefit under the Buyer Pension Plan determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. The method used to convert a GATT Grandfathered Participant's accrued benefit into a lump-sum amount under the Buyer Pension Plan after 1999 shall be not less favorable to a GATT Grandfathered Participant than the method used for similar purposes by the Seller Pension Plan. For purposes of this paragraph (c)(ii)(C), "GATT Grandfathered Participant" shall mean a Transferred Employee (x) with respect to whom liabilities are transferred pursuant to this subsection (c) and (y) who, taking service from Buyer into account as service with Seller, would have been eligible under the Seller Pension Plan, but for the transfer of liabilities pursuant to this subsection (c), to have his benefit under the Seller Pension Plan (when expressed in the form of a lump sum) determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. (D) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Hourly Pension Plan shall be eligible, after the Transferred Employee's employment with Buyer and its Affiliates is terminated, to receive an early retirement pension under the Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Hourly Pension Plan as of the Closing Date. 50 (E) Notwithstanding paragraphs (B), (C), and (D), above, if the actuary for the Buyer Pension Plan certifies in writing (with a copy to Seller) that the Buyer Pension Plan will violate the requirements imposed by Treasury Regulation section 1.401(a)(4)-4 unless certain benefits otherwise called for by such paragraphs are not provided by the Buyer Pension Plan, Buyer shall cause such benefits to be provided under a nonqualified deferred compensation plan, rather than under the Buyer Pension Plan, at the same time and in the same form as they otherwise would have been provided under the Buyer Pension Plan; provided that (1) such benefits shall be provided by the Buyer Pension Plan to the maximum extent possible without causing the Buyer Pension Plan to violate Treasury Regulation section 1.401(a)(4)-4; and (2) to the extent that any benefit payable outside of the Buyer Pension Plan pursuant to this paragraph (E) is payable to an individual who is not a member of a "select group of management or highly compensated employees" within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, Buyer shall cause a cash payment or payments to be made to each such individual within 24 months of the termination of the individual's employment with Buyer, in addition to all other payments due or otherwise payable to such individual, in an amount that is reasonably calculated to be actuarially equivalent, on a pre-tax basis, to the value of such benefit. (iii) (A) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be calculated as set forth in paragraph (c)(ii)(A) of this Section 11.2.1. (B) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall be calculated by applying the benefit formula set forth in paragraph (c)(ii)(A) of this Section 11.2.1, in accordance with the rules described in the remainder of this paragraph (B). A Transferred Employee's "Seller Pension" shall be calculated by applying the benefit formula under the Seller Salaried Pension Plan (as in effect on the Closing Date) to the Transferred Employee's service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date. A Transferred Employee's "Buyer Pension" shall be not less than an amount calculated by applying the benefit formula under the Buyer Pension Plan to the Transferred Employee's total accredited service and compensation under the Buyer Pension Plan (including service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation had been earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan after the Closing Date), multiplied by the ratio of accredited service earned after the Closing Date to such total accredited service; provided that for a period of at least five (5) years following the Closing Date, Buyer shall cause the benefit formula used in determining such "Buyer Pension" to provide "section 411(d)(6)" benefits at least as valuable as were provided under the benefit formula applicable to the Transferred Employee under the Seller Salaried Pension Plan on the Closing Date. A Transferred Employee's "Total Service Pension" shall be calculated by applying the benefit formula under the Buyer Pension Plan (before its amendment to reflect the five (5) year inclusion of Seller's formula) to the Transferred Employee's accredited service (including service and compensation credited with the Seller under the Seller Salaried Pension Plan as of the Closing Date as if such service and 51 compensation was earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan on and after the Closing Date). For purposes of computing a Transferred Employee's "Total Service Pension," compensation received by such a Transferred Employee from the Seller shall be treated as compensation received from the Buyer. The Seller Pension, the Buyer Pension, and the Total Service Pension shall take into account the Transferred Employee's actual age and entire period of service (including service credited under the Seller Salaried Pension Plan as of the Closing Date and service credited under the Buyer Pension Plan on and after the Closing Date) for vesting and benefit eligibility purposes. (C) Each Transferred Employee who is eligible to receive a benefit under the Buyer Pension Plan may elect to receive the portion of said benefit that is equal to the Seller Pension in any form, and with any early retirement or other actuarial subsidy, that was available under the Seller Pension Plan on the Closing Date, without regard to whether the Transferred Employee is eligible to elect or receive, or does elect or receive, the same form of payment or early retirement or actuarial subsidy for the remainder of the pension under the Buyer Pension Plan. (iv) Within sixty (60) days after the Closing Date, Seller shall deliver to Buyer a list reflecting each Transferred Employee's service and compensation under each of the Seller Pension Plans and each Transferred Employee's accrued benefit thereunder as of the Closing Date. (d) Transfer of Assets. (i) In accordance with the provisions of subsection (d)(i) of this Section 11.2.1 and subject to the provisions of subsection (d)(vi) of this Section 11.2.1, Seller shall direct the trustee of the Seller Pension Plans to transfer to the trustee or funding agent of the Buyer Pension Plan the amount required to be transferred by Section 414(l) of the IRC and the regulations thereunder for all Transferred Employees whose accrued benefits are transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, determined using the following assumptions (the "Pension Assets"): Interest Rate: Rate used to value annuities under PBGC Regulation ss. 4044.52(a)(1) for the month in which the Closing Date occurs Annual Rate of Increase in Salaries: 0% Annual Rate of Increase in Social Security Taxable Wage Base: 0% Annual Rate of Increase in Consumer Price Index: 0% Annual Rate of Increase in Limits on Benefits and Compensation: 0% Mortality: Rates specified under PBGC Regulationss.4044.53(c) Termination: None Disability: None 52 Retirement: Expected retirement age as specified under PBGC Regulation ss. 4044.55 Lump Sums: None All other demographic assumptions to match those used by Seller in the preparation of financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. In no event shall the amount of Pension Assets transferred be less than the Projected Benefit Obligation associated with all the liabilities being assumed in the aggregate in Section 11.2.1(c) using the assumptions specified by Seller in the preparation of its financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. The Pension Assets shall be transferred in cash. Except in the case of an arithmetical error in the calculation of the amount of Pension Assets to be transferred, under no circumstances shall Seller or the Seller Pension Plans be liable to transfer any additional amount to Buyer or a Buyer Pension Plan or any other person in respect of the accrued benefits transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, including but not limited to any circumstance under which any person (including a governmental agency) states a claim to some portion or all of the Pension Assets. (ii) Seller shall appoint an actuary ("Seller's Actuary") to determine the amount to be transferred pursuant to subsection (d)(i) of this Section 11.2.1 and shall provide such determination to Buyer, together with a computer file containing all of the data used by Seller's actuary to calculate Pension Assets, within ninety (90) days after the Closing Date. Buyer shall appoint an actuary ("Buyer's Actuary") who shall have the right to audit and review the determination made by Seller's Actuary. If Buyer's Actuary is unable to agree with Seller's Actuary on the amount of the transfer within ninety (90) days after Seller informs Buyer of the amount to be transferred and provides Buyer with the computer file containing all of the data used by Seller's actuary to calculate Pension Assets, Seller and Buyer shall jointly select a third actuary, whose determination shall be binding on Seller and Buyer. Each of Seller and Buyer shall bear the fees, costs and expenses of their respective actuaries, and the fees, costs, and expenses of the third actuary shall be borne one-half by Seller and one-half by Buyer. (iii) Interest on the Pension Assets shall accrue from the Closing Date to the actual date of transfer at the assumed discount rate used in accordance with paragraph (i) of this Section (d); provided that any Pension Assets that are distributed from the Seller Pension Plans before the date of transfer pursuant to subsection (d)(vi) of this Section 11.2.1 shall be credited with interest (such interest to be credited to the Buyer Pension Plans) only from the Closing Date to the date of distribution. (iv) Under the terms of each Buyer Pension Plan, the accrued benefit of each Transferred Employee immediately after the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not be less than the sum of each Transferred Employee's 53 accrued benefits under the Seller Pension Plan and the Buyer Pension Plan immediately before the transfer of assets and liabilities. Neither Seller nor its Affiliates nor the Seller Pension Plans nor any trustee thereof shall retain any liability for benefits under the Seller Pension Plans for any Transferred Employee with respect to whom cash has been transferred to a Buyer Pension Plan pursuant to this Section 11.2.1 or distributed pursuant to subsection (d)(vi) of this Section 11.2.1. (v) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.1, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not take place until as soon as practicable after the latest of (i) the expiration of the 30-day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, or (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Pension Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Pension Plan is qualified under Section 401(a) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Pension Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired), and (yy) information enabling the enrolled actuary for the Buyer Pension Plan to issue the certification required by Section 6058(b) of the IRC. (vi) (A) If, after the Closing Date and before the date of transfer of assets and liabilities from the Seller Pension Plans pursuant to this Section 11.2.1, the accrued benefit as of the Closing Date becomes payable under a Seller Pension Plan to or with respect to a Transferred Employee, Buyer shall (xx) furnish GTE Service Corporation with a copy of a properly completed application for such benefits, and (yy) direct GTE Service Corporation to instruct the trustee of the Seller Pension Plan to make benefit payments in the form and amount determined by GTE Service Corporation in accordance with the properly completed application for benefits. Seller shall cause GTE Service Corporation to comply with any such direction. (B) Notwithstanding anything herein to the contrary, the assets and liabilities to be transferred from the trustee of the Seller Pension Plans to the trustee or funding agent of the Buyer Pension Plan pursuant to this Section 11.2.1 shall be reduced, as provided in this subsection (vi), to reflect any benefit payments made pursuant to this subsection (vi) regardless of the form in which paid and any expenses described in paragraph (B) of this subsection (vi) that have not otherwise been paid pursuant to this subsection (vi). 11.2.2 Savings Plans. (a) As of the date of this Agreement, Seller participates in the GTE Savings Plan and the GTE Hourly Savings Plan (collectively referred to as the "Seller Savings Plans"). Except as provided in Section (g) of this Section 11.2.2, Transferred Employees shall not be entitled to make contributions to or to benefit from matching or other contributions under the Seller Savings Plans on and after the Closing Date. 54 (b) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more savings plans (hereinafter referred to in the aggregate as the "Buyer Savings Plans" and individually as the "Buyer Savings Plan") effective as of the Closing Date and to ensure that each Buyer Savings Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Savings Plan is a qualified, single-employer individual account plan under Section 401(a) of the IRC; (ii) the Buyer Savings Plan does not exclude Transferred Employees from eligibility to participate therein; (iii) the Buyer Savings Plan permits Transferred Employees to make before-tax contributions (under Section 401(k) of the IRC) and provides for matching contributions by the Buyer; and (iv) the Buyer Savings Plan does not violate the requirements of any applicable collective bargaining agreement. Within the thirty (30) day period immediately preceding any transfer of assets and liabilities from a Seller Savings Plan to a Buyer Savings Plan pursuant to this Section 11.2.2, Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Savings Plan satisfies each of the requirements set forth in this Section (b). (c) (i) Seller shall fully vest the Transferred Employees in their account balances under the Seller Savings Plan as of the Closing Date and shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans an amount in cash equal in value to the account balances of the Transferred Employees covered by the Seller Savings Plans as of the date of the transfer; provided that to the extent the account balances to be transferred consist in whole or in part of outstanding loans, Seller shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans, in lieu of cash, the promissory notes and related documents evidencing such loans. Buyer and Seller shall take such actions as may be required to effect the assignment of such loans by the trustee of the Seller Savings Plan to the trustee or funding agent of the Buyer Savings Plan, and Buyer shall cause the trustee or funding agent of the Buyer Savings Plan to accept the assignment of such loans. (ii) After the date of the transfer of assets and liabilities pursuant to this Section 11.2.2, Buyer shall assume all liabilities for the benefits payable to or with respect to such Transferred Employees under the Seller Savings Plans, and Seller and the Seller Savings Plans and their implementing trust shall retain no liability for such benefits. (d) For purposes of eligibility and vesting under the Buyer Savings Plans, each Transferred Employee shall be credited with service as of the Closing Date as determined under the terms of the Seller Savings Plans. As soon as practicable after the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees covered by the Seller Savings Plans, together with each Transferred Employee's service under each of the Seller Savings Plans as of the Closing Date. (e) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.2, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.2 shall not take place until as soon as practicable after the latest of (i) the expiration of the thirty (30) day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, and (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Savings Plan and a copy of the most recent 55 determination letter from the IRS to the effect that the Buyer Savings Plan is qualified under Sections 401(a) and 401(k) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Savings Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired). (f) As of the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees who have outstanding loans under the Seller Savings Plans, together with copies of said Transferred Employees' notes, disclosure statements, and security agreements under the Seller Savings Plans. Seller shall also notify Buyer within thirty (30) days after the Closing Date of any Transferred Employee who initiated a loan within thirty (30) days before the Closing Date. Subject to obtaining the consent of the applicable Transferred Employee if required by law, from the Closing Date until the earliest of (i) the actual date of transfer of assets and liabilities pursuant to this Section 11.2.2; (ii) the full amortization of the Transferred Employee's indebtedness; (iii) the distribution of the entire balance of the Transferred Employee's accounts; or (iv) the last date on which Buyer or one of its Affiliates pays remuneration to the Transferred Employee, Buyer or its Affiliate shall (x) continue the payroll deductions pursuant to which each such Transferred Employee is discharging indebtedness to a Seller Savings Plan and (y) remit the deducted funds to Fidelity Management Trust Company, the trustee of the Seller Savings Plans, as soon as practicable, but in no event more than thirty (30) days, after the date of deduction, together with an accounting that identifies the Transferred Employees with respect to whom the funds were deducted and the amount deducted for each Transferred Employee. All such remitted funds shall be transferred to the appropriate Seller Savings Plan and applied to reduce the appropriate Transferred Employee's outstanding indebtedness. Buyer's obligations under this Section (f) are limited to payroll deductions of loan repayments by the Transferred Employees and remittance of those funds, and nothing herein shall be construed to obligate Buyer to repay to Seller any portion of the outstanding indebtedness of the Transferred Employees that are not otherwise discharged by the Transferred Employees themselves. (g) Seller shall make all required matching contributions with respect to the Transferred Employees' contributions made to the Seller Savings Plan by the Transferred Employees in respect of the period ending on or before the Closing Date in the year containing the Closing Date that would have been eligible for matching contributions without regard to any continued service (e.g., last day of the year employment or 1000 hours) requirements. Such matching contributions shall be made not later than the date on which all other matching contributions are made to the Seller Savings Plans with respect to contributions made at the same time as the Transferred Employees' contributions. For not less than five (5) calendar years following the Closing Date (including the year in which the Closing occurs), Buyer shall, subject to applicable plan qualification requirements, provide salaried Transferred Employees with a matching contribution in the Buyer's Savings Plan equal to $.75 for each $1 contributed by Transferred Employees up to six percent (6%) of compensation (as defined in Buyer's Savings Plan). 56 11.2.3 Welfare Plans. (a) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts, as of the Closing Date, one or more employee welfare benefit plans, including medical, health, dental, flexible spending account, accident, life, short-term disability, and long-term disability and other employee welfare benefit plans providing preretirement welfare benefits for the benefit of (i) the non-bargained Transferred Employees (the "Non-union Welfare Plans") and (ii) the union-represented Transferred Employees in accordance with the provisions of applicable collective bargaining agreements (the "Bargained Welfare Plans"). The Non-union Welfare Plans and the Bargained Welfare Plans are hereinafter referred to collectively as the "Buyer Welfare Plans." The Buyer Welfare Plans shall provide as of the Closing Date pre-retirement benefits to Transferred Employees (and their dependents and beneficiaries) that, in the aggregate, are comparable to the pre-retirement benefits to which they were entitled under the corresponding employee welfare benefit plans maintained by Seller on the Closing Date. For purposes of determining eligibility to participate in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions or requirements for evidence of insurability under the Buyer Welfare Plans shall be waived for Transferred Employees, and Transferred Employees shall receive credit under the Buyer Welfare Plans for co-payments and payments under a deductible limit made by them and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in accordance with the corresponding Seller Welfare Plans. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees who had credited service under a Seller Welfare Plan, together with each such Transferred Employee's service, co-payment amounts, and deductible and out-of-pocket limits under such plan. (b) (i) Except as otherwise provided in subsection (b)(ii) or (b)(iii) of this Section (b) or in an applicable collective bargaining agreement, Buyer shall provide or cause to be provided retiree medical, health, and life benefits to each Transferred Employee (or the dependents or beneficiaries of such Transferred Employee, as the case may be) under the same terms and conditions as apply to comparable employees of Buyer, and Seller shall have no obligation to provide retiree medical, health, and life benefits in respect of any Transferred Employee on or after the Closing Date. (ii) Subject to Section 11.4, below, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is not subject to a collective bargaining agreement as of the Closing Date, who has combined age and years of accredited service (within the meaning of the Seller Pension Plan) as of the Closing Date equal to at least 66, and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Nonunion Transferred Employee"), Seller shall provide or cause to be provided to each such Retired Nonunion Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits under terms and conditions that are substantially identical to the terms 57 and conditions under the corresponding programs offered by Seller to its similarly situated noncollectively bargained employees retiring as of the Closing Date; provided that nothing in this subsection (b)(ii) shall be construed to prevent any Retired Nonunion Transferred Employee (or his or her dependents or beneficiaries) from voluntarily relinquishing such benefits. For a period of five (5) years following the retirement of each Retired Nonunion Transferred Employee from Buyer and its Affiliates or any successor thereof, Buyer shall reimburse Seller, in accordance with this subsection (b)(ii), for the cost of the retiree medical, health, and life coverage for which Seller is responsible and that Seller actually provides pursuant to this subsection (b)(ii). The five (5) year time period for this reimbursement obligation shall be determined separately in respect of each Retired Nonunion Transferred Employee. For each year for which Buyer is required to reimburse Seller under this subsection (b)(ii), Buyer shall pay Seller annually in arrears, within 30 days after Seller provides a statement therefor to Buyer, (A) $4,000 with respect to each Retired Nonunion Transferred Employee who has not yet attained age 65 during the year for which the payment is made and $4,000 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has not yet attained age 65 during the year for which the payment is made, and (B) $1,800 with respect to each Retired Nonunion Transferred Employee who has attained at least age 65 during the year for which the payment is made and $1,800 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has attained at least age 65 during the year for which the payment is made. No reimbursement shall be due with respect to any dependent, other than a spouse, covered with respect to a Retired Nonunion Transferred Employee. The reimbursement obligation for partial years shall be prorated based on the portion of the year covered by the obligation. Each Retired Nonunion Transferred Employee (or his or her dependent or beneficiary, as the case may be) who is provided benefits by Seller under this subsection (b)(ii) shall be required to pay to Seller any premium, contribution or other payment required under, and shall be subject to any copayment or deductible required under, the terms of Seller's applicable retiree medical, health, or life benefit plan; to the extent that any amount constituting such a payment is deducted from any plan, program, or arrangement maintained by Buyer or one of its Affiliates or is otherwise paid to Buyer or one of its Affiliates by such person, Buyer shall cause such amount to be paid to Seller as soon as administratively practicable. (iii) In addition to any other benefits to be provided pursuant to this Article XI, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is subject to a collective bargaining agreement as of the Closing Date and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Union Transferred Employee"), Buyer shall provide or cause to be provided to each such Retired Union Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits, for a period of at least five (5) years following the Closing Date, under terms and conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated collectively bargained employees retiring as of the Closing Date. As of the date of this Agreement, Seller maintains one or more voluntary employees' beneficiary associations (within the meaning of Section 501(c)(9) of the IRC) to fund retiree medical, health, and life benefits with respect to the Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date (the "Seller VEBA"). Within 58 90 days following the Closing Date, Seller shall direct the trustee of the Seller VEBA to transfer an amount in cash from the Seller VEBA to the trustee of one or more voluntary employees' beneficiary associations (within the meaning of Section 501(c)(9) of the IRC) that Buyer maintains or shall cause to be maintained to fund retiree medical, health, and life benefits with respect to the Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date. The amount to be transferred pursuant to the preceding sentence shall be equal, based on the actuarial assumptions set forth in Schedule 11.2.3(b)(iii), to the aggregate Accumulated Postretirement Benefit Obligation (as defined in Statement of Financial Accounting Standards No. 106) as of the Closing Date (which shall be the actuarial assumptions used by seller in developing the level of expense under Statement of Financial Accounting Standards No. 106 for the 1999 fiscal year) attributable to retiree medical, health, and life benefits for Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date. (iv) Benefits provided pursuant to subsections (b)(ii) and (b)(iii) of this Section (b) (including for this purpose, the determination of who is eligible for such benefits) shall take into account service with Buyer or any of its Affiliates on and after the Closing Date in the same manner as if such post-Closing Date service was performed with Seller. Buyer shall provide Seller with such information as shall be reasonably required to implement the immediately preceding sentence with respect to subsection (b)(ii) of this Section (b). (c) Buyer shall refer to GTE Service Corporation and GTE Service Corporation shall assume responsibility for any valid claim under a Seller Welfare Plan for disability, medical, or dental benefits made by a Transferred Employee on or after the Closing Date arising from a disability or loss incurred on or before the Closing Date. Nothing in this Section 11.2.3 shall require Seller, any Affiliate of Seller, or the Seller Welfare Plans to make any payment or to provide any benefit not otherwise provided by the terms of the Seller Welfare Plans. (d) Seller, Buyer, their respective Affiliates, and the Seller Welfare Plans and the Buyer Welfare Plans shall assist and cooperate with each other in the disposition of claims made under the Seller Welfare Plans pursuant to subsection (c) of this Section 11.2.3, and in providing each other with any records, documents, or other information within its control or to which it has access that is reasonably requested by any other as necessary or appropriate to the disposition, settlement, or defense of such claims. (e) Except as otherwise provided in Section 11.2.3(b)(iii) or in Section 11.2.3(f), nothing in this Agreement shall require Seller or its Affiliates to transfer assets or reserves with respect to the Seller Welfare Plans to Buyer or the Buyer Welfare Plans. (f) Seller will make available to Buyer, prior to the Closing Date, a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller under the GTE Flexible Reimbursement Plan (the "FRP"), together with the elections made prior to the Closing Date with respect to such accounts through the Closing Date, any balances standing to the credit of Transferred Employees, and the corresponding amounts being transferred to the corresponding Buyer's plan in accordance with the following sentence. As of the Closing Date, Seller shall cause the portion of the FRP 59 applicable to Transferred Employees to be segregated into a separate component and all account balances of the Transferred Employees in the FRP shall be transferred to a flexible reimbursement plan that Buyer shall cause to be maintained for the duration of the calendar year in which the Closing Date occurs. (g) On and for a period of at least three (3) years after the Closing Date, Transferred Employees not subject to a collective bargaining agreement shall be eligible for benefits under a Buyer severance or separation pay policy or plans that are the same as or comparable to the severance or separation pay policy benefits that are provided by Seller (or the applicable Affiliate, if the Transferred Employee is employed by an employer other than the Seller) or a Seller Pension Plan as of the Closing Date. Buyer shall recognize the service of each such Transferred Employee with Seller and its Affiliates for eligibility, vesting, and benefit determinations under the Buyer severance or separation pay policy or plan. Transferred Employees subject to a collective bargaining agreement shall be eligible for severance or separation pay benefits in accordance with the terms of the applicable collective bargaining agreement. 11.3 Miscellaneous Benefits. 11.3.1 Vacation. (a) On or after the Closing Date, Buyer shall allow Transferred Employees to receive paid time off in the calendar year of the Closing for any unused vacation time accrued prior to the Closing Date. Seller and its Affiliates shall have no liability to Transferred Employees for the vacation payments described in this Section 11.3.1. Seller shall pay Transferred Employees any banked vacation on or before the Closing Date. Schedule 11.3.1 to be prepared by Seller and submitted to Buyer on or before the Closing Date shall list the accrued but unused vacation pay, as of the Closing Date, of each Transferred Employee for the calendar year in which the Closing Date occurs. (b) For purposes of determining a Transferred Employee's eligibility for vacation under Buyer's vacation plan, a Transferred Employee shall be credited, as of the first day of the first calendar year that begins after the calendar year in which the Closing Date occurs, with service for the calendar year in which the Closing Date occurs in an amount equal to the aggregate of the Transferred Employee's service with both Seller and Buyer during the calendar year in which the Closing Date occurs. 11.3.2 Transferred Employee Statements. Within sixty (60) days after the Closing Date, Seller shall prepare and distribute to all Transferred Employees an accurate and complete statement of their accrued benefits under Seller's Pension Plans as of the Closing Date and shall provide Buyer with a true and complete copy of the same. Such statements shall be sufficiently detailed to readily permit Buyer and the Transferred Employees to determine the accuracy thereof. 60 11.4 Employee Rights. Nothing herein expressed or implied shall confer upon any employee of Seller or its Affiliates, or Buyer or its Affiliates, or upon any legal representative of such employee, or upon any collective bargaining agent, any rights or remedies, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement. Nothing in this Agreement shall be deemed to confer upon any person (nor any beneficiary thereof) any rights under or with respect to any plan, program, or arrangement described in or contemplated by this Agreement, and each person (and any beneficiary thereof) shall be entitled to look only to the express terms of any such plan, program, or arrangement for his or her rights thereunder. Nothing in this Agreement shall cause Buyer or its Affiliates, nor Seller or its Affiliates to have any obligation to provide employment or any employee benefits to any individual who is not a Transferred Employee or, except as otherwise provided in Section 11.1.2 with respect to employment agreements, to continue to employ any Transferred Employee for any period of time following the Closing Date. 11.5 WARN Act Requirements. On and after the Closing Date, Buyer shall be responsible with respect to Transferred Employees and their beneficiaries for compliance with the Worker Adjustment and Retraining Notification Act of 1988 and any other applicable law, including any requirement to provide for and discharge any and all notifications, benefits, and liabilities to Transferred Employees and government agencies that might be imposed as a result of the consummation of the transactions contemplated by this Agreement or otherwise. 11.6 Indemnification. 11.6.1 Indemnification of Seller. Notwithstanding anything to the contrary in Article 12 of this Agreement, Buyer shall indemnify and hold harmless Seller, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Buyer, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, except as otherwise expressly permitted under this Agreement, to change, reduce contributions to, terminate, fail to continue, fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) on or 61 after the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. 11.6.2 Indemnification of Buyer. Notwithstanding anything to the contrary in Article 12 of the Agreement, Seller shall indemnify and hold harmless Buyer, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Seller, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, to fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) before the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 Survival of Representations. Warranties and Covenants. (a) The representations and warranties contained in Sections 8.1.6 and 8.2.6 will survive the Closing and remain in full force and effect indefinitely. Each of the other representations and warranties contained in Article 8 will terminate, without further action, on the date which is fifteen (15) months following the Closing Date (the "Expiration Date"). (b) This Article 12 shall survive any termination of this Agreement and the Ancillary Agreements and the indemnification contained in this Article 12 shall survive the Closing and shall remain in effect (i) indefinitely, with respect to any Indemnifiable Claim related to the breach of any representation or warranty which pursuant to Section 12.1(a) survives indefinitely, (ii) indefinitely or for the applicable period of performance for such covenant (provided that in the case of covenants, the Indemnitee shall have 60 days after the end of such performance period to provide notice to the Indemnifying Party of a claim for indemnification arising during the performance period), with respect to any Indemnifiable Claim arising under Section 12.2(a)(ii)(B) (post closing covenants), (iii) indefinitely, with respect to any Indemnifiable Claim arising under Section 12.2(a)(iii) (Retained Liabilities) or 12.2(b)(iii) (Assumed Liabilities), and (iv) until the Expiration Date for any Indemnifiable Claims that are not specified in any of the preceding clauses. Unless a claim for indemnification with respect to any alleged breach of any representation or warranty is asserted by notice given as herein provided that specifically identifies a particular breach and the underlying facts relating thereto, which notice is given within the applicable period of survival for such representation or 62 warranty, such claim may not be pursued and is irrevocably waived after such time. Without limiting the generality or effect of the foregoing, no claim for indemnification with respect to any representation or warranty will be deemed to have been properly made except (i) to the extent it is based upon a Third Party Claim made or brought prior to the expiration of the survival period for such representation or warranty, or (ii) to the extent based on Indemnifiable Losses actually incurred by an Indemnitee prior to the expiration of the survival period for such representation or warranty. 12.2 Indemnification. (a) Following the Closing and subject to the other sections of this Article 12, Seller will indemnify, defend and hold harmless Buyer and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations and warranties made by Seller in Section 8.1 of this Agreement, (ii) a breach by Seller of any covenant of Seller contained in this Agreement, which covenant requires performance by Seller (A) prior to or at the Closing, or (B) after the Closing, and (iii) any of the Retained Liabilities. (b) Following the Closing and subject to the other sections of this Article 12, Buyer will indemnify, defend and hold harmless Seller and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations or warranties made by Buyer in Section 8.2 of this Agreement, (ii) a breach by Buyer of any covenant of Buyer contained in this Agreement, which covenant requires performance by Buyer prior to, at or after the Closing, and (iii) any of the Assumed Liabilities. (c) Payments made under this Section 12.2 shall be treated by Buyer and Seller as purchase price adjustments and Buyer and Seller shall file all Tax Returns consistent with such treatment. Notwithstanding anything to the contrary contained herein, neither party shall be indemnified or reimbursed for any Tax consequences arising from the receipt or accrual of an indemnity payment hereunder including any Tax consequences arising from adjustments to the basis of any asset resulting from an adjustment to the Purchase Price or any additional or reduced taxes resulting from any such basis adjustment. (d) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(ii), or under both Section 12.2(b)(i) and Section 12.2(b)(ii), then the Indemnitee's rights to pursue its claim under Section 12.2(a)(ii) or Section 12.29b)(ii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). (e) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(iii), or under both Section 12.2(b)(i) and Section 12.2(b)(iii), then the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Sections 12.3(d). (f) In the event a claim against an Indemnifying Party arisses under both Section 12.2(a)(ii) and 12.2(a)(iii), or under both Section 12.2(b)(ii) and 12.2(b)(iii), then 63 the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). 12.3 Limitations on Liability. (a) For purposes of this Agreement, (i) "Indemnification Payment" means any amount of Indemnifiable Losses required to be paid pursuant to this Agreement, (ii) "Indemnitee" means any person or entity entitled to indemnification under this Agreement, (iii) "Indemnifying Party" means any person or entity required to provide indemnification under this Agreement, and (iv) "Indemnifiable Losses" means any losses, liabilities, damages, costs and expenses (including reasonable attorneys' fees and expenses) actually incurred in connection with any actions, suits, demands, assessments, judgments and settlements, in any such case (x) reduced by the amount of insurance proceeds recovered from any person or entity with respect thereto, and (y) excluding any such losses, liabilities damages, costs and expenses to the extent that the underlying liability or obligation is the result of any action taken or omitted to be taken by any Indemnitee. (b) Notwithstanding anything to the contrary contained in this Agreement, if the Closing occurs, (i) no claim for indemnification may be asserted under Section 12.2(a) with respect to any matter discovered by or known to Buyer on or before the date of this Agreement, or after the date of this Agreement and on or before the Closing Date to the extent that Buyer has not provided timely notice to Seller of the existence of such claim in accordance with Section 10.2, and (ii) no claim for indemnification may be asserted under Section 12.2(b) with respect to any matter discovered by or known to Seller on or before the Closing Date. (c) As between Seller and any Affiliate of Seller, on the one hand, and Buyer and any Affiliate of Buyer, on the other hand, the remedies, rights and obligations set forth in this Article 12, Sections 10.1.2, 11.2.2, 11.6, 13.3 and the Ancillary Agreements will be the exclusive remedies, rights and obligations with respect to the liabilities and obligations referred to in Section 12.2 and any breach of the representations, warranties or covenants set forth in this Agreement. Without limiting the foregoing, as a material inducement to entering into this Agreement, to the fullest extent permitted by law, each of the parties waives any claim or cause of action that it otherwise might assert, and any breach of the representations, warranties or covenants set forth in this Agreement, except for claims or causes of action brought under and subject to the terms and conditions of this Article 12 and Sections 10.1.2, 11.6 and 13.3 or any Indemnifiable Losses arising out of actual fraud. (d) Notwithstanding any other provision of this Agreement or of any applicable Law, no Indemnitee will be entitled to make a claim against an Indemnifying Party under Sections 11.2.2, 11.6, 12.2(a)(i) or 12.2(b)(i) until: (i) the aggregate amount of Indemnifiable Losses incurred by the Indemnitee for any individual occurrence or related series of occurrences giving rise to such Indemnifiable Losses exceeds $25,000, and (ii) the aggregate amount of claims that may be asserted for such Indemnifiable Losses pursuant to Section 12.3(d)(i) exceeds an amount equal to 2% of the 64 Purchase Price, but only to the extent such amount, if any, (a) exceeds an amount equal to 2% of the Purchase Price and (b) is less than the amount set forth in Section 12.3(e). (e) Notwithstanding any other provision of this Agreement, the indemnification obligations of Seller under Section 12.2(a) (except with respect to indemnification for inaccuracies of the representations contained in Sections 8.1.1 through 8.1.6) or the indemnification obligation of Buyer under Section 12.2(b) will not exceed the amount of an amount equal to 6.5% of the Purchase Price respectively. (f) No Indemnifying Party shall be liable to or obligated to indemnify any Indemnitee hereunder for any consequential, special, multiple, punitive or exemplary damages including, but not limited to, damages arising from loss or interruption of business, profits, business opportunities or goodwill, loss of use of facilities, loss of capital, claims of customers, or any cost or expense related thereto, except to the extent such damages have been recovered by a third person and are the subject of a Third Party Claim for which indemnification is available under the express terms of this Section 12. (g) Seller and Buyer shall cooperate with each other with respect to resolving any claim or liability with respect to which one party is obligated to indemnify the other party hereunder, including by making commercially reasonable efforts to mitigate or resolve any such claim or liability. 12.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any action or proceeding by any entity that is not a party to this Agreement or an Affiliate of such a party (a "Third Party Claim") against such Indemnitee, with respect to which an Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnitee will give such Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) calendar days after receipt of notice of such Third Party Claim; provided, however, that the failure of the Indemnitee to notify the Indemnifying Party shall only relieve the Indemnifying Party from its obligation to indemnify the Indemnitee pursuant to this Article 12 to the extent that the Indemnifying Party is materially prejudiced by such failure (whether as a result of the forfeiture of substantive rights or defenses or otherwise). Upon receipt of notification of a Third Party Claim, the Indemnifying Party shall be entitled, upon written notice to the Indemnitee, to assume the investigation and defense thereof with counsel reasonably satisfactory to the Indemnitee. Whether or not the Indemnifying Party elects to assume the investigation and defense of any Third Party Claim, the Indemnitee shall have the right to employ separate counsel and to participate in the investigation and defense thereof; provided, however, that the Indemnitee shall pay the fees and disbursements of such separate counsel unless (i) the employment of such separate counsel has been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party has failed to assume the defense of such Third Party Claim within reasonable time after receipt of notice thereof with counsel reasonably satisfactory to such Indemnitee, or (iii) the named parties to the proceeding in which such claim, demand, action or cause of action has been asserted include both the Indemnifying Party and such Indemnitee and, in the reasonable judgment of counsel to such Indemnitee, there exists one or more defenses that may be available to the Indemnitee that are in conflict with those 65 available to the Indemnifying Party. Notwithstanding the foregoing, the Indemnifying Party shall not be liable for the fees and disbursements of more than one counsel for all Indemnified Parties in connection with any one proceeding or any similar or related proceedings arising from the same general allegations or circumstances. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim that would lead to liability or create any financial or other obligation on the part of the Indemnitee unless such settlement includes as an unconditional term thereof the release of the Indemnitee from all liability in respect of such Third Party Claim. If a settlement offer solely for money damages is made by the applicable third party claimant, and the Indemnifying Party notifies the Indemnitee in writing of the Indemnifying Party's willingness to accept the settlement offer and pay the amount called for by such offer without reservation of any rights or defenses against the Indemnitee, the Indemnitee may continue to contest such claim, free of any participation by the Indemnifying Party, and the amount of any ultimate liability with respect to such Third Party Claim that the Indemnifying Party has an obligation to pay hereunder shall be limited to the lesser of (A) the amount of the settlement offer that the Indemnitee declined to accept plus the Losses of the Indemnitee relating to such Third Party Claim through the date of its rejection of the settlement offer or (B) the aggregate Losses of the Indemnitee with respect to such claim. (b) Any claim by an Indemnitee on account of an Indemnifiable Loss that does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after an Executive Officer of the Indemnitee becomes actually aware of the incurrence thereof, and the Indemnifying Party will have a period of thirty (30) calendar days within which to respond in writing to such Direct Claim. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have rejected such claim, in which event the Indemnitee will be free to pursue such remedies as may be available to the Indemnitee on the terms and subject to the provisions of this Article 12. (c) If after the making of any Indemnification Payment the amount of the Indemnifiable Loss to which such payment relates is reduced by recovery, settlement or otherwise under any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction (less any costs, expenses, premiums or taxes incurred in connection therewith) will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any Indemnification Payment, the Indemnifying Party will, to the extent of such Indemnification Payment, be subrogated to all rights of the Indemnitee against any third party that is not an Affiliate of the Indemnitee in respect of the Indemnifiable Loss to which the Indemnification Payment relates; provided that (i) the Indemnifying Party shall then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss, and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, all claims of the Indemnifying Party against any such third party on account of said Indemnification Payment will be subrogated and subordinated in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision of this Article 12, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. 66 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action. Buyer has no indemnifiable or otherwise compensable claim that any of Seller's representations or warranties in Section 8.1 (other than Sections 8.1.4(b), 8.1.15 and 8.1.25) is inaccurate, or that any covenant has been breached, to the extent that such claim is predicated on any action by the FCC or PSC undertaken after Closing or any action the FCC or PSC requires Seller to undertake after Closing. Buyer may only bring such a claim to the extent that its basis is independent of any such FCC or PSC action. ARTICLE 13 TERMINATION 13.1 Termination Rights. This Agreement may be terminated at any time prior to the Closing Date: (a) at any time by mutual written consent of the parties; (b) by Buyer if any of the conditions provided in Section 6.1 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Buyer; (c) by Seller if any of the conditions provided in Section 6.2 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Seller; (d) by Seller if any obligations of Buyer provided in Article 3 become incapable of being fulfilled; or (e) by either party immediately upon written notice to the other party if any Governmental Authority issues an order forbidding or enjoining the consummation of the transaction contemplated hereby and such order has become final and non-appealable. 13.2 Goodfaith Performance. Neither party shall be entitled to exercise any right of termination pursuant to subsection 13.1(b), (c) or (d) above if such party shall not have performed diligently and in good faith the obligations required to be performed by such party hereunder prior to the date of termination. 13.3 Effect of Termination. (a) If this Agreement is terminated as a result of a Material Adverse Effect or Section 13.1(a), this Agreement shall be of no further force and effect and there shall be no further liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives. (b) If this Agreement is terminated by Buyer pursuant to Section 13.1(b), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective 67 Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that no such termination shall relieve Seller of liability for any claims, damages or losses suffered by Buyer as a result of the negligent or willful failure of Seller to perform any obligations required to be performed by it hereunder on or prior to the date of termination. Notwithstanding anything herein to the contrary, in no event shall the any act or omission of Seller in connection with the Merger be deemed to be a breach of the terms and conditions of this Agreement for purposes of this Section 13.3(b). (c) If this Agreement is terminated by Seller pursuant to Section 13.1(c) or (d), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that in the event such termination is the result of the breach by Buyer of any of its obligations required to be performed by it hereunder on or prior to the date of termination, and Buyer has failed to cure such non-performance within a reasonable period after notice from Seller, then Buyer shall pay to Seller liquidated damages in an amount equal to ten (10) percent of the Purchase Price. Such liquidated damages amount is designed to compensate Seller for its lost opportunity costs and reliance damages caused by such termination. Buyer shall promptly pay such amount to Seller in immediately available funds following such termination. (d) Upon any termination of the Agreement, each of the parties shall promptly comply with the obligations of the Confidentiality Agreement regarding return or destruction of Evaluation Material of the other party. (e) Notwithstanding anything to the contrary contained herein, the provisions of this Section 13.3 and of Sections 14.1, 14.2, 14.3, 14.8, 14.11, 14.13 and 14.14, shall survive any termination of this Agreement. ARTICLE 14 MISCELLANEOUS 14.1 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, will be deemed to have been given when delivered in person or dispatched by electronic facsimile transfer (confirmed in writing by certified mail, concurrently dispatched) or one business day after having been dispatched for next-day delivery by a nationally recognized overnight courier service to the appropriate party at the address specified below: (a) If to Buyer, to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: Donald P. Weinstein Facsimile No.: (203) 614-4625 68 With a copy to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: L. Russell Mitten, II, Esq. Facsimile No.: (203) 614-4625 Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin, Esq. Facsimile No.: (202) 387-3467 (b) If to Seller, to: William M. Edwards, III Vice President - Property Repositioning 600 Hidden Ridge, HQE02J27 Irving, TX 75038 Facsimile No. (972) 719-7062 With a copy to: Dale R. Chamberlain Legal Counsel - Property Repositioning 600 Hidden Ridge, HQE02J34 Irving, TX 75038 Facsimile No. (972) 719-7162 or to such other address or addresses as any such party may from time to time designate for itself by like notice. 14.2 Information Releases. The parties shall consult with each other (and allow the other party notice, and a reasonable time to comment) in preparing any employee announcement, press release, public announcement, news media response or other form of release of information concerning this Agreement or the transactions contemplated hereby that is intended to provide such information to the employees generally, news media or the public. Neither party shall issue or cause the publication of any press release, public announcement or media response without the prior written consent of the other party; provided, however, that, after allowing the other party notice and a reasonable time to comment prior to issuance, nothing herein will prohibit either party from making an employee announcement, or issuing or causing publication of any press release, public announcement or media response to the extent that such action is required by applicable Law or the rules of any national stock exchange applicable to such party or its Affiliates. 69 14.3 Expenses. Whether or not the transactions contemplated hereby are consummated and except as otherwise expressly provided herein, each party will pay any expenses (including attorneys' fees) incurred by it incidental to this Agreement and in consummating the transactions provided for herein. 14.4 Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but is not assignable or delegable by any party without the prior written consent of the other party; provided, that (a) Seller may assign this Agreement to an Affiliate of Seller without the consent of Buyer including, on and after the closing of the Merger, the ultimate parent entity of the successor corporation to such merger or any entity controlled thereby; and (b) Buyer may assign this Agreement, without the prior written consent of Seller, to any directly or indirectly wholly owned subsidiary of Buyer provided such subsidiary assumes in writing all the duties and obligations of Buyer hereunder. No such assignment by Buyer shall in any way operate to enlarge, alter or change any obligation due to Seller or relieve Buyer of its obligations hereunder if such subsidiary fails to perform such obligations, with the understanding that Buyer shall be jointly and severally liable with such subsidiary for any non-performance of Buyer's obligations hereunder. 14.5 Amendments. This Agreement may be amended or modified only by a subsequent writing signed by authorized representatives of both parties. 14.6 Captions. The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement, nor as in any way limiting or amplifying the terms and provisions hereof. 14.7 Entire Agreement. The term " Agreement" shall mean collectively this document, the Schedules hereto and any agreements expressly incorporated herein. This Agreement supersedes and revokes any prior discussions and representations, other agreements, commitments, arrangements or understandings of any sort whatsoever, whether oral or written, that may have been made or entered into by the parties relating to the matters contemplated hereby. This Agreement, the Confidentiality Agreement and the Ancillary Documents constitute the entire agreement by and among the parties with respect to the subject matter hereof, and there are no representations, warranties, agreements, commitments, arrangements or understandings except as expressly set forth herein. 14.8 Waiver. Except as otherwise expressly provided in this Agreement, neither the failure nor any delay on the part of any party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any such right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege available to each party at law or in equity. 14.9 Third Parties. Except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any Person, other than the parties hereto and their successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 70 14.10 Counterparts. This Agreement may be executed in two or more counterparts, any or all of which shall constitute one and the same instrument. 14.11 Governing Law. This Agreement and the Ancillary Agreements shall in all respects be governed by and construed in accordance with the laws of the State of New York (except that no effect shall be given to any conflicts of law principles of the State of New York that would require the application of the laws of any other jurisdiction). The parties irrevocably submit to the exclusive jurisdiction of any New York State Court or any Federal Court located in the borough of Manhattan in the City of New York for purposes of any suit, action or other proceeding arising out of this Agreement, the Ancillary Agreements or any transaction contemplated hereby or thereby. The parties agree that service of process, summons or notice or document by U.S. registered mail to such party's respective address set forth in Section 14.1 shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence. The parties hereto irrevocably and unconditionally waive trial by jury in any legal action or proceeding relating to this Agreement or any other agreement entered into in connection therewith and for any counterclaim with respect thereto. In the event of any breach of the provisions of this Agreement or any other agreement entered into in connection therewith, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. 14.12 Further Assurances. From time to time, as and when requested by one of the parties, the other party will use its commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary or appropriate, in the reasonable opinion of counsel for Seller and Buyer, to consummate and make effective the transactions contemplated by this Agreement. 14.13 Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any Governmental Authority, the remaining provisions of this Agreement to the extent permitted by Law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for both parties remain valid, binding and enforceable and provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In the event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by Law, the parties hereby to the same extent waive any provision of Law that renders any provision hereof prohibited or unenforceable in any respect. 14.14 Representation by Counsel; Interpretation. Seller and Buyer each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of Law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of Buyer and Seller. 71 14.15 Covenants of GTE Corporation. GTE Corporation agrees to cause Seller to perform each of Seller's agreements and covenants contained in this Agreement. GTE Corporation further agrees that to the extent Seller shall sell or otherwise dispose of all or substantially all of its assets, GTE Corporation shall be liable to the same extent as Seller (but only to that extent) for any non-performance of Seller's agreements and covenants contained in this Agreement. 72 IN WITNESS WHEREOF, the parties, acting through their duly authorized agents, have caused this Agreement to be duly executed and delivered as of the date first above written. CONTEL OF MINNESOTA, INC. CITIZENS UTILITIES COMPANY By:___________________________ By: _____________________________ Name:_________________________ Name: ___________________________ Title:________________________ Title: __________________________ By:___________________________ For the limited purpose of Section 14.15 only: Name:_________________________ Title:________________________ GTE CORPORATION By: _____________________________ Name: ___________________________ Title: __________________________ ================================================================================ ASSET PURCHASE AGREEMENT Between GTE WEST COAST INCORPORATED and CITIZENS UTILITIES COMPANY May 27, 1999 - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- ARTICLE 1 DEFINITIONS......................................................1 1.1 Terms............................................................1 1.2 Interpretation..................................................10 ARTICLE 2 PURCHASE AND SALE OF ASSETS...................................10 2.1 Purchase and Sale of Assets.....................................10 2.2 Purchased Property..............................................10 2.3 Excluded Property...............................................11 2.4 Assumption of Liabilities.......................................12 2.5 No Assignment Without Consent...................................14 ARTICLE 3 PURCHASE PRICE................................................14 3.1 Purchase Price..................................................14 3.2 Closing Date Estimate...........................................15 3.3 Closing Date Statement..........................................15 3.4 Access Line Adjustment Amount...................................16 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS................16 4.1 State Regulatory Approval.......................................16 4.2 Debtholder Consents.............................................17 4.3 Landlord and Other Consents.....................................17 4.4 FCC Consents....................................................17 4.5 HSR Act Review..................................................17 4.6 GTE/Bell Atlantic Merger.......................................18 ARTICLE 5 PRE-CLOSING COVENANTS.........................................18 5.1 Investigation by Buyer..........................................18 5.2 Operation of the Business in the Ordinary Course................18 5.3 Satisfaction of Conditions......................................20 5.4 Approvals.......................................................20 5.5 Audit or Review of Financial Statements........................20 5.6 Cooperation with Respect to Like-Kind Exchange..................21 5.7 Interconnection Agreements......................................21 -i- 5.8 Leased Vehicles; Capital Leases.................................21 5.9 Delivery of Interim Information.................................21 ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING...........................22 6.1 Conditions Precedent to Obligations of Buyer....................22 6.2 Conditions Precedent to Obligations of Seller...................23 ARTICLE 7 THE CLOSING...................................................24 7.1 The Closing.....................................................24 7.2 Seller's Obligations at Closing.................................24 7.3 Buyer's Obligations at Closing..................................25 ARTICLE 8 REPRESENTATIONS AND WARRANTIES................................25 8.1 Representations and Warranties of Seller........................25 8.2 Representations and Warranties of Buyer.........................35 ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS.............................37 9.1 Transition Services Agreement...................................37 9.2 Optional Services Agreement.....................................37 9.3 Directory Publishing............................................37 9.4 GTE Supply Relationship.........................................38 ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES...........................38 10.1 Intellectual Property...........................................38 10.2 Effect of Due Diligence and Related Matters.....................40 10.3 Confidentiality.................................................41 10.4 Further Assurances..............................................41 10.5 Prorations......................................................41 10.6 Cost Studies/NECA Matters.......................................42 10.7 Customer Deposits...............................................42 10.8 Access to Books and Records.....................................42 10.9 Purchase Price Allocation.......................................43 10.10 Owned Real Property Transfers...................................43 10.11 Transaction Taxes...............................................44 -ii- 10.12 Bulk Sales Laws.................................................45 10.13 Prepaid Non-Regulated Maintenance Agreements....................45 10.14 Vehicle Registration............................................45 10.15 Carrier Access Billing and Accounts Receivable Transition.......45 10.16 End-User Billing and Accounts Receivable Transition.............45 ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS................................46 11.1 Employment of Transferred Employees.............................46 11.2 Transferred Employee Benefit Matters............................48 11.3 Miscellaneous Benefits..........................................60 11.4 Employee Rights.................................................61 11.5 WARN Act Requirements...........................................61 11.6 Indemnification.................................................61 ARTICLE 12 INDEMNIFICATION...............................................62 12.1 Survival of Representations.....................................62 12.2 Indemnification.................................................63 12.3 Limitations on Liability........................................64 12.4 Defense of Claims...............................................65 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action..........................................................67 ARTICLE 13 TERMINATION...................................................67 13.1 Termination Rights..............................................67 13.2 Goodfaith Performance...........................................67 13.3 Effect of Termination...........................................67 ARTICLE 14 MISCELLANEOUS.................................................68 14.1 Notices.........................................................68 14.2 Information Releases............................................69 14.3 Expenses........................................................70 14.4 Successors and Assigns..........................................70 14.5 Amendments......................................................70 14.6 Captions........................................................70 -iii- 14.7 Entire Agreement................................................70 14.8 Waiver..........................................................70 14.9 Third Parties...................................................71 14.10 Counterparts....................................................71 14.11 Governing Law...................................................71 14.12 Further Assurances..............................................71 14.13 Severability....................................................71 14.14 Representation by Counsel; Interpretation.......................72 14.15 Covenants of GTE Northwest......................................72 -iv- INDEX OF SCHEDULES Schedule* Title 1.1-A Assigned Contracts 1.1-B Excluded Contracts 1.1-C Purchased Exchanges 1.1-D License Agreement 2.3(g) Other Excluded Property 4.4 FCC Consents / Waivers 5.2.1 Operation of the Business 5.2.2(c) Material Increase to Transferred Employee Benefits 5.2.2(d) Dispositions 6.1.1 Seller's Closing Certificate 6.2.1 Buyer's Closing Certificate 7.2(a) Bill of Sale and Assignment and Assumption Agreement 7.2(b) Legal Opinion of Seller's Counsel 7.2(g) Affidavit as to Status of Foreign Person 7.3(c) Legal Opinion of Buyer's Counsel 8.1.4 Violation of Law 8.1.7(a) Owned Real Property 8.1.7(b) Bondholders 8.1.8 Real Property Leases 8.1.9 Notices of Violations of Building / Zoning Ordinances 8.1.10 Material Adverse Changes 8.1.11(a-j) Material Contracts 8.1.13 Exceptions to Tax Return Filings 8.1.14 State and Federal Claims/Suits 8.1.15(a) Tariff Proceedings 8.1.15(b) FCC Licenses 8.1.16(a) Employee Matters - Seller Employee Benefit Plans 8.1.16(b) Employee Matters - Seller Material Liabilities under ERISA 8.1.16(c) Employee Matters - Seller ERISA Plans - Compliance 8.1.16(d) Employee Matters - Seller Multiemployer Plans 8.1.16(e) Employee Matters - Seller Union Representation 8.1.17 Telephone Plant 8.1.18 Real Property Interests List 8.1.19 Exceptions to Compliance with Existing Environmental Requirements 8.1.20 Environmental Permits 8.1.21(a-c) Financial Statements 8.1.23 Native American Authorizations 8.1.24 Loss of Major Customer 9.1 Transition Services Agreement 9.2 Optional Services Agreement 9.3.1 Directory Publishing Agreements 9.3.2 Co-Bound Directory Agreements -v- 11.1.2 Employees and Employee Matters - Employment Agreement Obligation Exceptions 11.3.1 Employees and Employee Matters - Vacation * The Schedule numbers refer to the appropriate Section within the Agreement. -vi- ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as of the 27th day of May, 1999, by and between Citizens Utilities Company, a Delaware corporation ("Buyer"), and GTE West Coast Incorporated, a California corporation ("Seller") and for the limited purpose of Section 14.15 only, GTE Northwest Incorporated, a Washington corporation ("GTE Northwest"). RECITALS WHEREAS, Seller is in the business of providing regulated local exchange telephone service in certain areas of the state of California; and WHEREAS, Seller desires to sell, convey, assign, transfer and deliver to Buyer, and Buyer desires to purchase and accept from Seller, certain of its telephone properties and related assets used in the provision of such service, upon the terms and conditions set forth in this Agreement. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS 1.1 Terms. For purposes of this Agreement and any amendment hereto, the following terms are defined as set out below or in the Section referenced below: "Access Line Adjustment Amount" is defined in Section 3.4. "Accounts Receivable Settlement Statement" is defined in Section 10.16(b). "Accounts Payable" means accounts payable owed by Seller arising primarily from the operation of the Business. "Active Employees" is defined in Section 11.1. "Affiliate" means, with respect to any Person, any other Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Allocation" is defined in Section 10.9. "Ancillary Documents" means the Transition Services Agreement, the Optional Services Agreement, the License Agreement, and the Bill of Sale and Assignment and Assumption Agreement. 1 "Assigned Contracts" means Contracts to which Seller or any of its Affiliates is a party (i) which relate primarily to the operation of the Business, other than the Excluded Contracts, Real Property Interests, Real Property Leases and Third Party Intellectual Property Contracts, and (ii) any other contract to which Seller is a party and is listed on Schedule 1.1-A. "Assigned Permits" means, to the extent assignable, all permits, licenses, franchises, approvals and authorizations of Seller or any of its Affiliates issued or granted by any Governmental Authority that relate primarily to the operation of the Business, other than the FCC Licenses and the Excluded Permits. "Assumed Liabilities" is defined in Section 2.4.1 "Automated Assets" is defined in Section 8.1.22(c). "Bargained Welfare Plans" is defined in Section 11.2.3(a). "BIA" is defined in Section 8.1.23. "Base Purchase Price" is defined in Section 3.1. "Bill of Sale and Assignment and Assumption Agreement" is defined in Section 7.2(a). "Bondholders" means the Persons listed on Schedule 8.1.7(b). "Business" means the business of providing in the geographic area comprising the Purchased Exchanges (i) local exchange, exchange access and intra-LATA toll telecommunications services to end users, (ii) exchange access telecommunications services to interexchange carriers and other local exchange carriers, (iii) retail sales of telephone equipment and products, and (iv) non-tariffed public communications (pay telephones), commercial telecommunications services facilities leasing and other non-regulated services and products. "Buyer Pension" is defined in Section 11.2.1(c)(iii)(b). "Buyer Pension Plan" and "Buyer Pension Plans" are defined in Section 11.2.1(b). "Buyer Savings Plan" and "Buyer Savings Plans" are defined in Section 11.2.2(b). "Buyer Welfare Plans" is defined in Section 11.2.3(a). "Buyer's Actuary" is defined in Section 11.2.1(d)(ii). "Buyer's Closing Certificate" is defined in Section 6.2.1. "Calendar-Related" is defined in Section 8.1.22(c). 2 "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Closing" is defined in Section 7.1. "Closing Date" is defined in Section 7.1. "Closing Date Access Line Count" is defined in Section 3.4. "Closing Date Amount" is defined in Section 3.2(b) "Closing Date Statement" is defined in Section 3.3 "Confidentiality Agreement" means the Confidentiality Agreement dated as of November 20, 1998, among Buyer, Seller and certain Affiliates of Seller. "Construction Advances" means advances collected by Seller or any Affiliate for the future performance of non-regulated construction in the Purchased Exchanges. "Contracts" means all contracts, leases, indentures, agreements, and other legally binding arrangements. "Customer Advances" means amounts arising from the operation of the Business that have been billed and collected by Seller as of the Closing Date but that are unearned because they relate to the provision of service after the Closing Date. "Customer Deposits" is defined in Section 10.7. "Date Data" is defined in Section 8.1.22(c). "December 1998 Access Line Count" is defined in Section 3.4 and shall be 13,309. "Direct Claim" is defined in Section 12.4(b). "Due Diligence Documents" means those documents contained in the ten (10) volumes of information delivered to Buyer in connection with its review of the Purchased Property. "Earned End-User Accounts Receivable" means accounts receivable arising primarily from the operation of the Business that have been earned by Seller's provision of service on or before the Closing Date excluding amounts billed through the carrier access billing system to interexchange carriers. "Earned End-User Accounts Receivable Amount" means the aggregate amount of all Earned Unbilled Accounts Receivable as of the Closing Date, less a discount for anticipated uncollectible Earned End-User Accounts Receivable in an amount equal to the Uncollectible Factor multiplied by Earned End-User Accounts Receivable as of the Closing Date. "Employment Agreements" is defined in Section 8.1.16(a). 3 "Environmental Requirements" means all federal, state, interstate and local government or agency Laws relating to pollution or protection of human health and safety or the environment (including, without limitation, air, surface water, ground water, land surface and subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of Regulated Materials; or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation or handling of Regulated Materials. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Plans" is defined in Section 8.1.16(a). "Estimated Access Line Adjustment Amount" is defined in Section 3.2(a). "Estimated Non-Regulated Construction Work in Process Amount" is defined in Section 3.2(a). "Estimated Regulatory Obligation Amount" is defined in Section 3.2(a). "Evaluation Material" is defined in the first paragraph of the Confidentiality Agreement. "Excluded Contracts" means (i) all billing and collection agreements, interconnection agreements, national account agreements, billing media agreements, vehicle leasing agreements, capital leases, Contracts between Seller and Affiliates of Seller, except to the extent expressly listed on Schedule 1.1-A, and (ii) such other agreements as are listed on Schedule 1.1-B. "Excluded Marks" means all trademarks, applications for trademark registration, service marks, applications for service mark registration, trade names, domain names and related registrations owned by Seller or an Affiliate of Seller, or licensed to Seller or an Affiliate of Seller by any Person, and any derivations of the foregoing. "Excluded Permits" means the permits, licenses, franchises, approvals and authorizations of Seller or any Affiliates by Governmental Authorities that relate to the Excluded Property. "Excluded Property" is defined in Section 2.3. "Executive Officer" of an entity means (i) in the case of Seller, the regional president of the region that includes the Purchased Exchanges, the general manager of infrastructure provisioning for the Purchased Exchanges and the general manager of customer operations for the Purchased Exchanges, and (ii) the case of Buyer, the executive officer(s) in charge of the transactions contemplated by this Agreement. 4 "Existing Environmental Requirements" means those applicable provisions of any Environmental Requirements that are both in effect and required to be met by Seller prior to the Closing Date. "Expiration Date" is defined in Section 12.1(a). "FCC" means the Federal Communications Commission. "FCC Consents" is defined in Section 4.4. "FCC Licenses" means all licenses, certificates, permits or other authorizations granted to Seller or any Affiliates by the FCC that are used primarily in the operation of the Business. "Financial Statements" is defined in Section 8.1.21. "Final Order" shall mean action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority of the action is pending, no such stay is in effect, and if any deadline for any such request is designated by statute or regulation, such deadline is passed; (ii) no petition for rehearing or reconsideration of the action is pending before any Governmental Authority, and the time for filing any such petition has passed; (iii) the Governmental Authority does not have the action under reconsideration or its own motion and the time for such reconsideration has passed; and (iv) no appeal to a court, or request to stay by a court, of the Governmental Authority's action is pending or in effect and, if any deadline of filing any such appeal or request is designated by statute or rule, it has passed. "FRP" is defined in Section 11.2.3(f). "Future Capital Expenditure Obligations" is defined in Section 2.4.1(h). "Future Regulatory Obligations" is defined in Section 2.4.1(g). "GAAP" means United States generally accepted accounting principles. "GATT Grandfathered Participant" is defined in Section 11.2.1(c)(ii)(c). "GTE California Agreement" is defined in Section 6.2.6. "Governmental Authority" means any court or any federal, state or foreign governmental, legislative or regulatory body, agency, department, authority or instrumentality. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnifiable Losses" is defined in Section 12.3(a). "Indemnification Payment" is defined in Section 12.3(a). 5 "Indemnifying Party" is defined in Section 12.3(a). "Indemnitee" is defined in Section 12.3(a). "Intellectual Property" means all inventions (whether patentable or not and whether or not such inventions are described or claimed in any patent or patent application), designs (useful or ornamental), and works subject to copyright protection, invention disclosures, specifications, manuals, drawings, functional or system block diagrams, flow charts, circuit diagrams, design or user documentation, engineering notebooks, schematics, test programs, documented procedures, documented processes, documented flows, devices, software (in any form), or firmware, and all intellectual property rights therein or based thereon, including patents, patent applications (including continuations, continuations-in-part, divisions, reissues), reexamined patents and extensions thereof, copyrights (whether registered or unregistered), and trade secrets. "Interim Capital Expenditure Obligations" is defined in Section 2.4.1(h). "IRC" means the Internal Revenue Code of 1986, as amended. "IRS" means the Internal Revenue Service. "Law" or "Laws" means any statute, rule, regulation, ordinance, judgment, order or decree of any Governmental Authority. "Leased Real Property" means the real property leased to Seller or its Affiliates under the Real Property Leases. "License Agreement" means the license agreement attached hereto as Schedule 1.1-D pursuant to which Seller grants to Buyer certain rights and licenses under Licensed Intellectual Property. "Licensed Intellectual Property" means Intellectual Property owned by Seller or its Affiliates, and Third Party Intellectual Property licensed to Seller or its Affiliates which Seller or its Affiliates can sublicense to Buyer without the payment of compensation or other consideration to any Person, and which Intellectual Property and Third Party Intellectual Property are required for the use or maintenance (to the extent not provided by the owner or licensor of the Third Party Intellectual Property) of or are included in or with the Purchased Property in the operation of the Business as of the Closing; provided that Licensed Intellectual Property shall at all times be Excluded Property. "Lien" means any lien, charge, pledge, option, mortgage, security interest or other encumbrance. "Material Adverse Effect" means a materially adverse effect on the Business or the Purchased Property, taken as a whole, other than effects relating to or arising from (i) the execution of this Agreement, (ii) the United States economy generally or the state of California in particular, or (iii) events or circumstances that affect the Business in the same manner and to the same extent as other businesses in the industry generally. 6 "Material and Supply Inventory" is defined in the FCC's Part 32 Uniform System of Accounts. "Material Contracts" is defined in Section 8.1.11. "Material Permits" is defined in Section 8.1.15(b). "Merger" means the proposed merger involving GTE Corporation and Bell Atlantic Corporation and their respective Subsidiaries. "Native American Authorizations" is defined in Section 8.1.23. "Non-Regulated Construction Work in Process Amount" means the total amount expended but not yet billed by Seller for non-regulated construction work not completed prior to the Closing Date, minus any Construction Advances outstanding as of the Closing Date. The Non-Regulated Construction Work in Process Amount shall be billable by Buyer to third parties after the Closing Date under open customer orders or other agreements. "Non-Union Welfare Plans" is defined in Section 11.2.3(a). "Optional Services Agreement" is defined in Section 9.2. "Owned Real Property" means the real property owned in fee by Seller or its Affiliates and used primarily in the operation of the Business, including all land, buildings, structures, appurtenances and improvements located thereon. "PBGC" means the Pension Benefit Guaranty Corporation. "Pension Assets" is defined in Section 11.2.1(d)(i). "Periodic Taxes" is defined in Section 10.5. "Permitted Encumbrances" means (i) liens for current taxes and assessments not yet delinquent, or the amount or validity of which is being contested in good faith by appropriate proceedings during which collection or enforcement against the relevant property is stayed, (ii) standard utility easements, and covenants, conditions and restrictions of record that do not individually or in the aggregate materially interfere with the operation of the present Business on, or materially detract from the value of, the Owned Real Property affected thereby, (iii) mechanics', carriers', workers', repairers' and other statutory liens, (iv) existing zoning or similar laws or ordinances that do not interfere with the operation of the Business, (v) leases otherwise disclosed herein, and (vi) any other Liens and, in the case of Owned Real Property, any title defects or exceptions, that do not materially interfere with the operations of the Purchased Property in a manner consistent with the current use by Seller or that do not materially detract from the value of, or materially impair the marketability of, the Purchased Property affected. "Person" means an individual, corporation, partnership, trust, association, limited liability company or similar entity or organization. 7 "Plans" is defined in Section 8.1.16(a). "Pole Attachment Agreement" is defined in Section 8.1.11(j). "Proration Periods" is defined in Section 10.5. "PUC" is defined in Section 4.1. "PUC Permits" is defined in Section 8.1.15(b). "Purchase Price" is defined in Section 3.3(c). "Purchased Exchanges" means the telephone exchanges listed in Schedule 1.1-C and any cross-border community served from any such exchange. "Purchased Property" is defined in Section 2.2. "Real Property Interests" means all easements, rights of way, licenses or other interests in real property of Seller or its Affiliates that are used primarily in the operation of the Business, other than Owned Real Property or Leased Real Property. "Real Property Leases" means the Leases set forth on Schedule 8.1.8. "Regulated Material" means (i) any "hazardous substance" as defined in CERCLA, (ii) any petroleum or petroleum substance, and (iii) any other pollutant, waste, contaminant, or other substance regulated under Environmental Requirements. "Regulatory Approvals" is defined in Section 4.1. "Regulatory Obligation Amount" is defined in Section 3.1. "Retained Books and Records" means, collectively, all corporate records and stock books of Seller and its Affiliates, the general ledger, all records required by Law to be retained by Seller and all books and records relating to (i) Tax Returns and Tax records, (ii) Excluded Property, (iii) attorney work product, and (iv) the Retained Liabilities. "Retained Future Regulatory Obligations" is defined in Section 2.4.1(g). "Retained Liabilities" is defined in Section 2.4.2. "SEC Financial Statements" is defined in Section 5.5. "Seller Hourly Pension Plan" is defined in Section 11.2.1(a)(ii). "Seller Pension" is defined in Section 11.2.1(c)(iii)(b). "Seller Pension Plan" and "Seller Pension Plans" are defined in Section 11.2.1(a)(ii). 8 "Seller Salaried Pension Plan" is defined in Section 11.2.1(a)(i). "Seller Savings Plans" are defined in Section 11.2.2(a). "Seller Welfare Plans" is defined in Section 11.2.3(a). "Seller's Actuary" is defined in Section 11.2.1(d)(ii). "Seller's Closing Certificate" is defined in Section 6.1.1. "Switch Software" shall mean software currently used by Seller to operate telecommunications switching equipment that is part of the Telephone Plant. "System Date" is defined in Section 8.1.22(c). "Tax Returns" means a report, return or other information statement required to be supplied to or filed with a Governmental Authority with respect to Taxes. "Tax(es)" means any foreign, federal, state, county or local income, sales, use, transfer, excise, franchise, stamp duty, custom duty, real and personal property, gross receipt, capital stock, business and occupation, disability, employment, payroll, recording, ad valorem, unemployment compensation, profits, registration, social security, estimated, add-on, minimum, or withholding tax relating to the Business or the Purchased Exchanges and any interest and penalties and additions to such taxes (civil or criminal) related thereto or to the nonpayment thereof and related notarial fees. "Telephone Plant" means (i) Owned Real Property, (ii) Real Property Interests, and (iii) the machinery, equipment, inventory, vehicles and all other assets and properties used primarily in the operation of the Business, including all plant, systems, structures, construction work in progress, telephone cable (whether in service or under construction), microwave facilities (including frequency spectrum assignment), telephone line facilities, machinery, furniture, fixtures, tools, implements, conduits, stations, substations, equipment (including central office equipment, subscriber station equipment and other equipment in general), instruments and house wiring connections. Without limiting the generality of the foregoing, Telephone Plant includes the assets used primarily in the operation of the Business that would be properly included in the fixed assets referenced in Part 32 of the FCC Rules and Regulations (47 CFR, Part 32), as such accounts are reflected in Schedule 8.1.17. "Third Party Claim" is defined in Section 12.4(a). "Third Party Intellectual Property" means Intellectual Property owned by any Person, other than Seller, without regard as to whether Seller has any rights therein or the right to assign such rights to Buyer. "Third Party Intellectual Property Contracts" is defined in Section 10.1.4. "Total Service Pension" is defined in Section 11.2.1(c)(iii)(B). 9 "Transaction Taxes" is defined in Section 10.11. "Transferred Books and Records" means all of Seller's or its Affiliates' customer or subscriber lists and records, accounts and billing records, plans, blueprints, specifications, drawings, surveys, engineering reports, personnel records of Transferred Employees (where applicable) and all other documents, computer data and records, in each case relating primarily to the operation of the Business, except for the Retained Books and Records. "Transferred Employees" is defined in Section 11.1. "Transition Services Agreement" is defined in Section 9.1. "Uncollectible Factor" is defined in Section 10.16(b). "Year 2000 Compliant" is defined in Section 8.1.22(c). 1.2 Interpretation. (a) Unless the context otherwise requires, (i) all references to Sections, Articles or Schedules are to Sections, Articles or Schedules of or to this Agreement, (ii) each accounting term not otherwise defined in this Agreement has the meaning assigned to it in accordance with GAAP, (iii) all references to the "knowledge" of Seller are deemed to refer to the actual knowledge of the Executive Officers of Seller, (iv) all references to the "knowledge" of Buyer or "knowledge" obtained by Buyer are deemed to refer to the actual knowledge of the Executive Officers of Buyer, except as otherwise provided herein, (v) the term "primarily" means primarily or exclusively, and (vi) the term "including" means including without limitation. (b) No provision of this Agreement will be interpreted in favor of or against either of the parties by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft of such provision or of this Agreement. ARTICLE 2 PURCHASE AND SALE OF ASSETS 2.1 Purchase and Sale of Assets. Upon the terms and subject to the conditions of this Agreement, Seller hereby agrees to sell, convey, transfer, assign and deliver to Buyer and Buyer hereby agrees to purchase, acquire and accept from Seller, in each case effective as of the Closing, all of Seller's and each of its Affiliates' right, title and interest in and to the Purchased Property. 2.2 Purchased Property. The term "Purchased Property" means all the following business, properties, assets and rights of Seller and its Affiliates on the Closing Date, other than the Excluded Property: (i) Telephone Plant; (ii) Earned End-User Accounts Receivable; (iii) Material and Supply Inventories; 10 (iv) Non-Regulated Construction Work in Progress; (v) FCC Licenses and Assigned Permits; (vi) Assigned Contracts; (vii) Transferred Books and Records; (viii) Real Property Leases; and (ix) all other business, property, assets, work in process and rights of Seller on the Closing Date not described above that relate primarily to the Purchased Exchanges. 2.3 Excluded Property. For purposes of this Agreement, "Excluded Property" means the following: (a) Cash, cash equivalents and investments; (b) All rights of Seller and its Affiliates under this Agreement, the Ancillary Documents and the certificates and other documents delivered to Seller by Buyer in connection with this Agreement; (c) All records prepared in connection with the sale of the Business, including bids received from third parties and analysis relating to the Business; (d) All rights related to the Retained Liabilities; (e) The Retained Books and Records; (f) Seller's and its Affiliates' interests in any business other than the Business, including the provision of wireless service (cellular and PCS), long distance and internet service or internet related services, air-to-ground communications (air phone service), and any Excluded Permits related thereto, and all assets of Seller and its Affiliates used in connection with any such business or related thereto, and all assets used by Seller and its Affiliates in rendering corporate services to Seller or the Business that are located outside the geographic area comprising the Purchased Exchanges; (g) Such other assets (i.e., encryption decoder devices, AWAS terminals, SODA, etc.), if any, as set forth on Schedule 2.3(g); (h) The Excluded Contracts; (i) The Excluded Marks; (j) All Intellectual Property, including the Licensed Intellectual Property and Third Party Intellectual Property (except for such rights to possess and use Third Party Intellectual Property as may be assigned in accordance with Section 10.1.4); and (k) All of Seller's and its Affiliates' insurance proceeds arising in connection with the operation of the Business or the Purchased Property prior to the Closing. 11 2.4 Assumption of Liabilities. 2.4.1 Assumed Liabilities. Upon the terms and subject to the conditions of this Agreement, Buyer hereby agrees to assume, as of the Closing Date, and agrees to pay, perform and discharge when due, all liabilities, responsibilities and obligations, beginning on the day following the Closing Date, relating to the Purchased Property other than the Retained Liabilities (subject to any different allocation of liability set forth in clauses (b), (c), (g) and (h) below) (the "Assumed Liabilities"), including the following: (a) Ordinary Course. All liabilities, responsibilities and obligations (including Taxes), arising out of or accruing or resulting from the use or ownership of the Purchased Property in the ordinary course after the Closing Date; (b) Employment Matters. All liabilities, responsibilities and obligations of Buyer as provided in Article 11 with respect to Transferred Employees; (c) Assigned Contracts, Real Property Interests and Real Property Leases. All liabilities, responsibilities and obligations that arise in connection with the performance of the Assigned Contracts, Real Property Interests and the Real Property Leases, other than performance obligations of Seller that mature prior to the Closing Date; (d) Joint Construction Projects. All liabilities, responsibilities and obligations to third parties that relate to arrangements and commitments between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (e) Construction in Progress. All liabilities, responsibilities and obligations relating to post-Closing engineering and construction required to complete scheduled construction and other capital expenditure projects for the Purchased Exchanges; (f) Customer Deposits and Construction Advances. All liabilities, responsibilities and obligations relating to Customer Advances, Customer Deposits and Construction Advances; (g) Future Regulatory Obligations. All liabilities, responsibilities and obligations, other than Future Capital Expenditure Obligations, related to the Purchased Exchanges arising out of any rule, regulation, law, mandate, decision or order of the FCC or the PUC after the Closing Date regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct or actions that occurred at any time prior to the Closing Date ("Future Regulatory Obligations"); provided that Buyer shall not be liable for any such Future Regulatory Obligation arising directly out of any intentional misconduct or material misstatement to the PUC by Seller that occurred prior to the Closing Date, except for such statements as may be based on reasonable interpretations of existing PUC regulations and current industry practice ("Retained Future Regulatory Obligations"); (h) Future Capital Expenditure Obligations. All liabilities, responsibilities and obligations related to the Purchased Exchanges arising out of any rule, 12 regulation, law, mandate, decision or order of the FCC or the PUC (i) issued at any time and requiring any capital expenditure after the Closing Date, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the Closing Date ("Future Capital Expenditure Obligations"); and (ii) issued after the date of this Agreement and requiring any capital expenditure after the date of this Agreement, regardless of whether the action taken by such Governmental Authority is or purports to be based on conduct, facts or actions that occurred at any time prior to the date of this Agreement ("Interim Capital Expenditure Obligations"); provided that (i) Seller shall retain liability for Interim Capital Expenditure Obligations incurred prior to Closing to the extent related to (A) FCC or PUC orders that impose capital expenditure obligations as a result of Seller's overearnings, (B) Seller's efforts to comply with FCC or PUC rules, regulations, laws, mandates, decisions or orders existing as of the date of this Agreement, or (C) capital expenditures already planned by Seller; and (ii) Seller shall retain liability for all other Interim Capital Expenditure Obligations to the extent Seller is fully reimbursed by Buyer at Closing for such obligations. Prior to the Closing Date, Seller shall notify Buyer of all potential Future or Interim Capital Expenditure Obligations within a reasonable time after publication of said obligations by a Governmental Authority; and (i) Litigation and Claims. All liabilities and obligations arising out of (i) litigation and claims that arise out of an occurrence after the Closing Date, (ii) litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations) regardless of when filed, and (iii) claims of a Governmental Authority arising from or related to a Future Regulatory Obligation (other than Retained Future Regulatory Obligations). Notwithstanding anything in this Section 2.4.1 to the contrary, "Assumed Liabilities" shall not include any liabilities, responsibilities or obligations expressly included in Retained Liabilities pursuant to Section 2.4.2. 2.4.2 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller (the "Retained Liabilities"): (a) Subject to Section 10.5, all trade payables and other accrued payment obligations of Seller as of the Closing Date; (b) All long-term debt of Seller (including indebtedness to the Bondholders) and debt of Seller owed to any one or more of its Affiliates; (c) Subject to Section 10.5, all Taxes relating to the operation of the Business on or before the Closing Date or the use, ownership or operation of the Purchased Property on or before the Closing Date; (d) Except to the extent otherwise provided in Article 11, all liabilities and obligations arising on or before the Closing Date with respect to the Transferred Employees, including (i) all liabilities responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (ii) any such liabilities 13 or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date, but excluding any Future Regulatory Obligations with respect to the Transferred Employees; (e) All liabilities, responsibilities and obligations arising out of litigation and claims that arise out of an occurrence prior to the Closing Date other than litigation and claims in respect of Future Regulatory Obligations (other than Retained Future Regulatory Obligations); (f) Any Retained Future Regulatory Obligations; and (g) All liabilities, responsibilities and obligations with respect to the Excluded Property and the Excluded Contracts. 2.5 No Assignment Without Consent. Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, conveyance, transfer, assignment or delivery or attempted sale, conveyance, transfer, assignment or delivery to Buyer of any Purchased Property (including any Contract) is prohibited by any applicable Law or would require any governmental or third-party authorizations, approvals, consents or waivers and such authorizations, approvals, consents or waivers shall not have been obtained prior to the Closing, this Agreement shall not constitute a sale, conveyance, transfer, assignment or delivery, or an attempted sale, conveyance, transfer, assignment or delivery thereof, if any of the foregoing would constitute a breach of applicable Law or the rights of any third party; provided, however, that, except to the extent that a condition to Closing set forth in Article 6 relating to the foregoing shall not be satisfied, the Closing shall occur notwithstanding the foregoing without any adjustment to the Purchase Price on account of such required authorization. Following the Closing, the parties shall use their commercially reasonable efforts, and shall cooperate with each other, to obtain promptly such authorizations, approvals, consents or waivers; provided, however, that neither Seller nor Buyer nor any of their respective Affiliates shall be required to pay any consideration therefor, other than filing, recordation or similar fees payable to any Governmental Authority, which fees shall be shared equally by Seller and Buyer. Pending or in the absence of such authorization, approval, consent or waiver, the parties shall cooperate with each other in any reasonable and lawful arrangements to provide to Buyer the benefits and liabilities of use of such Purchased Property, including, if permitted by the terms of any Real Property Lease or applicable Material Contract, through a sublease or subcontract in accordance with Section 4.3. If such authorization, approval, consent or waiver for the sale, conveyance, transfer, assignment or delivery of any such Purchased Property is obtained, Seller shall promptly convey, transfer, assign and deliver, or cause to be conveyed, transferred, assigned and delivered, such Purchased Property to Buyer. ARTICLE 3 PURCHASE PRICE 3.1 Purchase Price. The purchase price for the Purchased Property shall be the sum of (i) Fifty-Two Million Five Hundred Seventy-One Thousand dollars ($52,571,000) (the "Base Purchase Price"), (ii) amounts expended by Seller to comply with Interim Capital Expenditure Obligations (the "Regulatory Obligation Amount"), and (iii) the Non-Regulated Construction 14 Work in Process Amount, minus (iv) any Access Line Adjustment Amount calculated in accordance with Section 3.4. Payments from Buyer to Seller for Earned End-User Accounts Receivable and from Seller to Buyer for Customer Advances and Customer Deposits will occur subsequent to Closing in accordance with Article 10. 3.2 Closing Date Estimate. (a) Not less than three (3) business days prior to the Closing Date, Seller will give to Buyer a notice, setting forth Seller's good faith estimate as of the Closing Date of (i) the Regulatory Obligation Amount (the "Estimated Regulatory Obligation Amount"), (ii) the Non-Regulated Construction Work in Process Amount (the "Estimated Non-Regulated Construction Work in Process Amount") and (iii) the Access Line Adjustment Amount (the "Estimated Access Line Adjustment Amount"). (b) On the Closing Date, Buyer shall pay to Seller the sum of (i) the Base Purchase Price, (ii) the Estimated Regulatory Obligation Amount, and (iii) the Estimated Non-Regulated Construction Work in Process Amount, minus (iv) any Estimated Access Line Adjustment Amount (the "Closing Date Amount"). The Closing Date Amount shall be paid by delivery on the Closing Date of immediately available funds in U.S. dollars by wire transfer to an account that Seller shall designate to Buyer at least two (2) business days prior to the Closing Date. 3.3 Closing Date Statement. (a) Within sixty (60) days after Closing Date, Seller shall prepare and deliver to Buyer a written statement of the Base Purchase Price, Regulatory Obligation Amount, Non-Regulated Construction Work in Process Amount and any Access Line Adjustment Amount ("Closing Date Statement"). (b) Within fifteen (15) days after receipt of the Closing Date Statement, Buyer shall, in a written notice to Seller, either accept the Closing Date Statement or describe in reasonable detail any proposed adjustments to the Closing Date Statement and the reasons therefore. If Seller shall not have received a notice of proposed adjustments within such fifteen (15) day period, Buyer will be deemed irrevocably to have accepted such Closing Date Statement. (c) Upon the acceptance of any Closing Date Statement by Buyer, the parties shall, based thereupon, calculate the amount equal to the sum of the Base Purchase Price, Regulatory Obligation Amount and Non-Regulated Construction Work in Process Amount, minus any Access Line Adjustment Amount (collectively, the "Purchase Price"). If the Purchase Price as finally determined above is greater than the Closing Date Amount, Buyer shall promptly, but no later than three (3) business days after such acceptance, pay to Seller the amount of such difference. If the Purchase Price as determined above is less than the Closing Date Amount, Seller shall promptly, but no later than three (3) business days after such acceptance, pay to Buyer the amount of such difference. 15 (d) Seller and Buyer shall negotiate in good faith to resolve any disputes over any proposed adjustments to the Closing Date Statement, provided that if any such dispute is not resolved within thirty (30) days following Seller's receipt of the proposed adjustments, Buyer and Seller jointly shall select an independent public accounting firm that is nationally recognized in the United States to resolve such disputes in accordance with the standards set forth in this Section 3.3, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. (e) If Buyer disputes any portion of the Closing Date Statement, the parties shall calculate the portion of the Closing Statement that is not the subject of any dispute or proposed adjustment. If the undisputed portion of the Closing Statement (A) is greater than the respective estimated amounts paid on the Closing Date, Buyer shall promptly pay Seller the amount of such difference, or (B) is less than the respective estimated amounts paid on the Closing Date, Seller shall promptly pay Buyer the amount of such difference. Payments with respect to any undisputed portions of these adjustments shall be made no later than three (3) business days after delivery of notice of the proposed adjustments. Upon resolution of any dispute over any proposed adjustments as described above in Section 3.3(d), a party which is determined to owe the other party an amount shall pay that amount promptly, but no later than three (3) business days after resolution. (f) Any amount paid pursuant to this Section 3.3 after the Closing Date shall bear interest from the Closing Date through but excluding the date of payment, at a rate of eight percent (8%) per annum. Such interest shall accrue daily on the basis of a year of three hundred sixty-five (365) days and the actual number of days for which due and shall be payable together with the amount payable pursuant to this Section 3.3. All amounts payable pursuant to this Section 3.3 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer to, in the case of amounts payable by Buyer, the account identified by Seller as described in 3.2 above or to an alternate account that Seller may designate on the Closing Date Statement and, in the case of amounts payable by Seller, to such account of Buyer as Buyer shall designate in writing to Seller. 3.4 Access Line Adjustment Amount. The Purchase Price shall be subject to reduction in accordance with Section 3.1 if the number of access lines (including wholesale access lines) billed by Seller during the most recent month ended prior to the Closing Date (the "Closing Date Access Line Count") has decreased by more than ten percent (10%) from the number of access lines (including wholesale access lines) billed by Seller for the month ended December 31, 1998 (the "December 1998 Access Line Count"). Such reduction, if any, shall equal (a) the December 1998 Access Line Count minus the Closing Date Access Line Count, multiplied by (b) the Base Purchase Price divided by the December 1998 Access Line Count (collectively, the "Access Line Adjustment Amount"). 16 ARTICLE 4 REQUIRED APPROVALS, CONSENTS AND NOTIFICATIONS 4.1 State Regulatory Approval. Promptly after the date of this Agreement, Buyer and Seller shall file the appropriate applications and notices with the California Public Utilities Commission (the "PUC"), seeking orders permitting the transfer of service in the Purchased Exchanges to Buyer (collectively, the "Regulatory Approvals"). Buyer will be responsible for establishing the tariff for its post-Closing operations in the Purchased Exchanges. Each party agrees to use its commercially reasonable efforts to obtain the Regulatory Approvals and the parties agree to cooperate fully with each other and with the applicable regulatory agency to obtain the Regulatory Approvals at the earliest practicable date. 4.2 Debtholder Consents. Seller shall use its commercially reasonable efforts to obtain from its Bondholders the termination or release, at Closing, of all security agreements, mortgages and financing statements relating to the Purchased Property (such termination or release being hereinafter referred to as the "Debtholder Consents"). 4.3 Landlord and Other Consents. Promptly after the date hereof, the parties shall use their commercially reasonable efforts to mutually seek the consent of (i) the lessor to any Leased Real Property that requires consent as a condition to an assignment of the lease (which consents are identified in Schedule 8.1.8) and (ii) the applicable third party with respect to certain Material Contracts that require consent as a condition to assignment of such Material Contract (which consents are identified on Schedule 8.1.11). If a lessor refuses to consent to such an assignment, and if the applicable lease or Material Contract permits a sublease or subcontract without the consent of the lessor or other third party, the parties hereto shall, effective as of the Closing, enter into a sublease or subcontract upon terms and conditions as similar and comparable to an assignment of the lease or Material Contract as is reasonably feasible. 4.4 FCC Consents. Promptly after the date of this Agreement, the parties shall use their commercially reasonable efforts to obtain (i) the FCC's consent to the transfer of the FCC Licenses from Seller to Buyer, and (ii) the FCC waivers set forth on Schedule 4.4 (all such consents or waivers are collectively referred to as the "FCC Consents"). 4.5 HSR Act Review. By June 30, 1999, or such later date as the parties may mutually agree, the parties will make such filings as may be required by the HSR Act with respect to the transactions contemplated by this Agreement. Thereafter, the parties will file as promptly as practicable all reports or other documents required or requested by the U.S. Federal Trade Commission or the U.S. Department of Justice pursuant to the HSR Act or otherwise and will comply promptly with any requests by the Federal Trade Commission or the U.S. Justice Department for additional information concerning such transactions, so that the waiting period specified in the HSR Act will expire as soon as reasonably possible after the execution and delivery of this Agreement. Without limiting the foregoing, Seller and Buyer agree to use their commercially reasonable efforts to cooperate and oppose any preliminary injunction sought by any Governmental Authority preventing the consummation of the transactions contemplated by this Agreement. Buyer agrees to pay all application fees required in connection with any filings under the HSR Act. 17 Seller and Buyer shall cause their respective counsel to furnish each other such necessary information and reasonable assistance as the other may reasonably request in connection with its preparation of necessary filings or submissions under the provisions of the HSR Act. Seller and Buyer will cause their respective counsel to supply to each other copies of all correspondence, filings or written communications by such party or its Affiliates with any Governmental Authority or staff members thereof, with respect to the transactions contemplated by this Agreement and any related or contemplated transactions, except for documents filed pursuant to Item 4(c) of the Hart-Scott-Rodino Notification and Report Form or communications regarding the same documents or information submitted in response to any request for additional information or documents pursuant to the HSR Act which reveal Seller's or Buyer's negotiating objectives or strategies or purchase price expectations. 4.6 GTE/Bell Atlantic Merger. Notwithstanding anything else contained in this Agreement, but without modification of the rights of Buyer under Sections 6.1, 11.6.2, 12.2(a) or 13.1, Seller shall not be obligated to take any action that would violate the terms of its agreements regarding the Merger, or that would interfere with, delay or prevent the consummation of the Merger. In the event that the Closing does not occur as a direct result of the Merger, and not through any fault of Buyer, Seller's liability to Buyer under this Agreement shall be limited to the amount of Buyer's reasonable out-of-pocket expenses incurred in connection with this Agreement. ARTICLE 5 PRE-CLOSING COVENANTS 5.1 Investigation by Buyer. Prior to the Closing, upon reasonable notice from Buyer to Seller given in accordance with this Agreement and subject to approval by Seller's appointed representative, Seller will afford to the authorized representatives of Buyer reasonable access during normal business hours to the Transferred Books and Records, the Owned Real Property the Leased Real Property and the other Purchased Property so as to afford Buyer the opportunity to make such review, examination and investigation of the Business and the Purchased Property as Buyer may reasonably request; provided, however, that no environmental sampling or other testing shall be performed without Seller's prior written consent, which consent may be given or withheld in Seller's sole discretion. Buyer will not contact any employee, customer or supplier of Seller with respect to this Agreement, the matters involved herein or the Purchased Property without the prior written consent of Seller. Nothing herein will obligate Seller to take actions that would unreasonably disrupt the normal course of the business of Seller or violate the terms of any applicable Law or any Contract to which Seller or any of its Affiliates is a party or to which any of its assets is subject. Any information or documentation provided to Buyer or acquired by Buyer during this investigation shall be deemed "Evaluation Material" as that term is defined in the Confidentiality Agreement and shall be subject in all cases to the terms of the Confidentiality Agreement. 5.2 Operation of the Business in the Ordinary Course. 5.2.1 Preservation of Business. Except as contemplated on Schedule 5.2.1 or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing Seller shall: 18 (a) Conduct the Business in the ordinary course consistent with past practice and shall keep available to the Business its services and the services of its Affiliates to the same extent generally available on the date hereof; (b) Operate the Business in substantially the same manner as it is presently being conducted, and, with respect to the Business, refrain from entering into any Contract that would be a Material Contract other than in the ordinary course of business; (c) Not institute any proceeding with respect to, or otherwise change, amend or supplement any of its tariffs or make any other filings with the PUC except in the ordinary course of business, and except as disclosed on Schedule 8.1.15(a); (d) Maintain the Purchased Property in good repair, order and condition, reasonable wear and use excepted, and maintain the Materials and Supply Inventory in the ordinary course of business consistent with past practice; (e) Maintain insurance with respect to the Purchased Property consistent with past practice; (f) Make capital expenditures sufficient to support normal maintenance and customer growth in the Purchased Exchanges in a manner consistent with established regulatory performance objectives, which expenditures in (a) calendar year 1999 shall not be less than $627,000, and (b) calendar year 2000 shall not be less than $52,000 per month; and (g) Maintain the books and records of the Business substantially in accordance with prior practice, except as changes are mandated by Governmental Authorities or required by GAAP. 5.2.2 No Material Changes. Except as contemplated by this Agreement or as otherwise consented to by Buyer prior to the Closing, from the date of this Agreement until the Closing, Seller will not: (a) Make any material change in the general nature of the Business; (b) Sell, lease or dispose of, or make any Contract for the sale, lease or disposition of any Purchased Property, other than in the ordinary course of business; (c) Increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its Transferred Employees, except (i) as required by Law, (ii) pursuant to any Contract to which Seller is a party existing on the date hereof and listed on Schedule 5.2.2(c), (iii) increases in base pay in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (iv) as listed or described on Schedule 5.2.2(c); (d) (i) Materially amend, modify or terminate any Material Contract or permit any of the foregoing to occur other than in the ordinary course of business; or (ii) sell, transfer or otherwise dispose of any Purchased Property other than in the ordinary course of 19 business or as listed or described on Schedule 5.2.2(d), or encumber any Purchased Property, except for Permitted Encumbrances; or (e) Enter into any new written employment agreement, or union agreement with, or commitment to, the Transferred Employees (including any new commitment to pay retirement or other benefits or other amendments to Seller's retirement plans), provided that Seller may enter into new union agreements to the extent the new union agreements succeed any union agreement that expires prior to the Closing. Prior to finalizing any such new union agreement, Seller shall advise Buyer of its material terms and following the execution of any such agreement, Seller shall deliver a copy to Buyer. 5.3 Satisfaction of Conditions. Without limiting the generality or effect of any provision of Article 6, the parties will use their commercially reasonable efforts to satisfy promptly all the conditions required to be satisfied prior to the Closing. 5.4 Approvals. (a) Between the date of this Agreement and the Closing Date, Buyer and Seller will (i) cooperate with one another and take all reasonable steps to obtain, as promptly as practicable, all consents, approvals, authorizations, waivers and permits of any Governmental Authorities required of either party to consummate the transactions contemplated by this Agreement and (ii) provide such other information and communications to any Governmental Authority as may be reasonably requested. (b) To the extent that any consents, approvals, authorization or waiver of a third party with respect to any (i) Assigned Contract, (ii) Assigned Permit or (iii) any Pole Attachment Agreement, government grant or railroad crossing agreement listed on Schedule 8.1.18, is required in connection with the transactions contemplated by this Agreement, Seller shall use its commercially reasonable efforts to obtain such authorization, consent, approval or waiver prior to the Closing Date. 5.5 Audit or Review of Financial Statements. To the extent Buyer requires an audit or review of financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission under Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer to audit or review the Financial Statements delivered by Buyer in accordance with Section 8.1.21 and such other financial statements as may be required by Buyer to comply with Regulations S-K and S-X (collectively, the "SEC Financial Statements"). Seller's cooperation will include such access to workpapers and other supporting documents used in the preparation of the SEC Financial Statements and delivery of one or more representation letters from Seller to such auditors as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards or a review in accordance with AICPA standards and to render an opinion acceptable to the SEC with respect to the audit or review of the SEC Financial Statements, it being understood that such representation letters shall acknowledge (i) Seller's extensive use of estimates and allocations in the preparation of the SEC Financial Statements, and (ii) Seller's belief that the SEC Financial Statements represent the financial condition and results of operations of the Business, in accordance with GAAP, and that such estimates and 20 allocations were made on a reasonable basis and in accordance with GAAP. However, Buyer acknowledges that because the Business represents only a portion of Seller, Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. Seller will bear the cost of the preparation of its financial statements, including the SEC Financial Statements. Buyer will bear the cost of the preparation of any other financial statements that it will be required to file with the SEC, as well as the cost of the audit or review of the SEC Financial Statements. Buyer acknowledges that the SEC Financial Statements and any supporting documentation have been made available as an indication of the historical financial performance and condition of the Business. Except to the extent that the SEC Financial Statements reflect intentional misrepresentation or fraud, Buyer agrees not to make any claim related to the performance of the Business after the date of the SEC Financial Statements on the basis of a comparison to the SEC Financial Statements. 5.6 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller's transfer of the Purchased Property may, at Seller's election, be accomplished in a manner enabling such transfer to qualify as part of a like-kind exchange of property covered by Section 1031 of the IRC. If Seller so elects, Buyer shall cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the IRC (including any actions required to facilitate the use of a "qualified intermediary" within the meaning of the United States Treasury Regulations), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Purchased Property as part of a like-kind exchange of property covered by Section 1031 of the IRC. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts are not required to include an unreasonable delay in the consummation of the transactions contemplated by this Agreement. 5.7 Interconnection Agreements. Seller shall furnish to Buyer such necessary information as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Purchased Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible. 5.8 Leased Vehicles; Capital Leases. Seller or its Affiliates, as applicable, will pay the remaining balances on any vehicle leases or any capital leases relating to assets included in the Purchased Property and at Closing will deliver to Buyer title to such vehicles and assets, free and clear of all Liens. 5.9 Delivery of Interim Information. From the date of this Agreement until the Closing, Seller shall furnish Buyer monthly reports concerning the operating performance of the Business. Such reports shall contain such data as are typically reported to GTE management with respect to the Purchased Exchanges, including access line counts and service measures. 21 Seller shall provide Buyer reasonable access to Seller's management in order to discuss such data. In the event of any significant deterioration in operating performance, Seller shall consult with Buyer concerning its response. All information provided in accordance with this Section 5.9 shall be subject to the Confidentiality Agreement and to compliance with applicable antitrust Laws. ARTICLE 6 CONDITIONS PRECEDENT TO THE CLOSING 6.1 Conditions Precedent to Obligations of Buyer. The obligations of Buyer to consummate the Closing shall be subject to the satisfaction or waiver by Buyer, at or prior to the Closing, of each of the following conditions, any one or more of which may be waived at the option of Buyer: 6.1.1 No Misrepresentation or Breach of Covenants and Warranties. Seller shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Seller in Section 8.1 shall be true and correct as of the Closing, except for (i) such representations or warranties that are made expressly as of an earlier date, which shall have been true and correct as of such date except as would not have a Material Adverse Effect, and, (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Seller shall have delivered to Buyer a certificate ("Seller's Closing Certificate") in the form attached as Schedule 6.1.1, dated the Closing Date and signed by an Executive Officer of Seller, certifying each of the foregoing, or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.1.2 Documents. Seller shall have delivered to Buyer all documents required by Section 7.2. 6.1.3 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.1.4 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained, free of any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a Material Adverse Effect, and the FCC and PUC shall not otherwise have taken any action with respect to the Purchased Property that is reasonably likely to have a Material Adverse Effect. For purposes of this Section 6.1.4, any tariff that is substantially similar in all material respects to the existing tariff with respect to the applicable Purchased Exchange shall be deemed not to have a Material Adverse Effect. For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any competent jurisdiction, the effect of which prohibits the Closing. 6.1.5 No Material Adverse Effect. There shall not have occurred any event or condition which individually or in the aggregate has resulted in a Material Adverse Effect. 22 6.1.6 Closing of GTE California Transactions. The transactions contemplated the Asset Purchase Agreement between GTE California Incorporated and Citizens Utilities Company of even date herewith (the "GTE California Agreement") shall be closed simultaneously with the closing of those transactions contemplated by this Agreement. 6.2 Conditions Precedent to Obligations of Seller. The obligations of Seller to consummate the Closing shall be subject to the satisfaction or waiver by Seller, at or prior to the Closing, of each of the following conditions: 6.2.1 No Misrepresentation or Breach of Covenants and Warranties. Buyer shall have complied in all material respects with its covenants to be performed in whole or in part prior to the Closing, and the representations and warranties of Buyer in Section 8.2 shall be true and correct in all material respects as of the Closing, except (i) for such representations or warranties made expressly as of and only as of an earlier date, which shall be true and correct as of such date except as would not have a Material Adverse Effect, and (ii) to the extent that any breach of such representations and warranties has not, individually or in the aggregate, had a Material Adverse Effect; and Buyer shall have delivered to Seller a certificate ("Buyer's Closing Certificate") in the form attached as Schedule 6.2.1, dated the Closing Date and signed by an Executive Officer of Buyer, certifying each of the foregoing or specifying those respects in which such covenants have not been performed or such representations and warranties are not true and correct. 6.2.2 Documents. Buyer shall have delivered to Seller all documents required by Section 7.3. 6.2.3 Purchase Price. Buyer shall have delivered to Seller, in the manner specified in Section 3.1, the Closing Date Amount. 6.2.4 HSR. All required waiting periods under the HSR Act shall have expired or been terminated. 6.2.5 No Legal Obstruction. Each of the required Debtholder Consents shall have been obtained, and each of the required Regulatory Approvals and FCC Consents shall have been obtained free of any special terms, conditions or restrictions that are materially adverse to Seller based upon good faith business concerns that are not commercially unreasonable (other than any such approvals or consents which, if not obtained, would not have a Material Adverse Effect). For purposes of this Agreement, all such approvals and consents shall be deemed to have been obtained upon the granting of a Final Order. In addition, there shall not have been entered a preliminary or permanent injunction, temporary restraining order or other judicial or administrative order or decree in any jurisdiction, the effect of which prohibits the Closing. 6.2.6 Closing of GTE California Transactions. The transactions contemplated the Asset Purchase Agreement between GTE California Incorporated and Citizens Utilities Company of even date herewith (the "GTE California Agreement") shall be closed simultaneously with the closing of those transactions contemplated by this Agreement. 23 ARTICLE 7 THE CLOSING 7.1 The Closing. Subject to the terms and conditions of this Agreement, the closing of the purchase and sale of the Purchased Property and the assumption of the Assumed Liabilities (the "Closing") shall be held at 9 A.M. local time at the offices of GTE Network Services at 600 Hidden Ridge, Irving, Texas 75038, on the date agreed upon by the parties, provided such date shall be (i) the last business day of the month, and (ii) at least five (5) business days, but not more than ninety (90) days, after the date that all required Regulatory Approvals, Debtholder Consents and FCC Consents have been obtained, or at such other time and place as the parties may agree (the "Closing Date"). Such Closing shall be deemed to have occurred as of 11:59 p.m., local time, on the Closing Date. 7.2 Seller's Obligations at Closing. At the Closing, Seller shall deliver to Buyer the following documents: (a) (i) Bill of Sale and Assignment and Assumption Agreement, (ii) subject to Permitted Encumbrances (except as provided in Section 10.10), special warranty deeds or their equivalent in respect of the Owned Real Property and assignments of Real Property Leases to the extent any required consents have been obtained pursuant to Section 4.3, and (iii) subject to Section 2.5, assignments of the Assigned Contracts, the Real Property Interests and the Assigned Permits. For purposes of this Agreement, the term "Bill of Sale and Assignment and Assumption Agreement" means the form attached hereto as Schedule 7.2(a) executed by Seller; (b) A legal opinion from William Mundy, general counsel for GTE Network Services, as counsel for Seller, dated as of the Closing Date and in the form of Schedule 7.2(b); (c) Seller's Closing Certificate; (d) Instruments of assignment or, to the extent set forth in Section 4.3, subleases for the Leased Real Property; (e) Mortgage satisfactions, UCC Form 3 Termination Statements and other instruments necessary to remove, release and terminate all security interests held by the Bondholders on the Purchased Property; (f) All of the documents and papers required of Seller as conditions to Closing pursuant to Section 6.1, including the Regulatory Approvals, Debtholder Consents and FCC Consents; (g) A certificate substantially in the form of Schedule 7.2(g) certifying that Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC; (h) The License Agreement; and (i) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. 24 7.3 Buyer's Obligations at Closing. At the Closing, Buyer shall deliver to Seller the following: (a) The Closing Date Amount in the manner specified in Section 3.1; (b) The Bill of Sale, Assignment and Assumption Agreement, executed by Buyer; (c) A legal opinion from L. Russell Mitten II, Vice President and General Counsel of Buyer dated as of the Closing Date and in the form of Schedule 7.3(c); (d) Buyer's Closing Certificate; (e) All other documents and papers required of Buyer as conditions of Closing pursuant to Section 6.2, including the Regulatory Approvals; and (f) Such other documents and instruments as may be reasonably necessary to effect the transactions contemplated by this Agreement. ARTICLE 8 REPRESENTATIONS AND WARRANTIES 8.1 Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: 8.1.1 Authorization and Effect of Agreement. Seller has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements and to perform its obligations hereunder and thereunder. The execution and delivery by Seller of this Agreement and the Ancillary Agreements and the fulfillment of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Seller. This Agreement and the Ancillary Agreements have been duly executed and delivered by Seller and, assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Buyer, constitute valid and binding obligations of Seller enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.1.2 No Restrictions Against Sale of the Purchased Property. The execution and delivery of this Agreement and the Ancillary Agreements by Seller does not, and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not (i) conflict with or violate any provision of its certificate of incorporation or bylaws, (ii) subject to obtaining the approvals and or consents referred to in Section 2.5, Article 4 and Schedule 8.1.11(a-f), conflict with, violate or result in the breach of any provision of any Material Contract, or (iii) result in the creation of any Lien (other than Permitted Encumbrances) upon any of the Purchased Property under (a) any Material Contract or (b) any Law applicable 25 to any of the Purchased Property, except in the case of clauses (ii) or (iii) for any such conflict, violation, breach or Lien that would not have a Material Adverse Effect. 8.1.3 Consents and Approvals of Governmental Authorities. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Seller or in connection with the execution and delivery of this Agreement by Seller or the fulfillment by Seller of its obligations under this Agreement, except (i) FCC Consents and HSR Act clearance, (ii) the Regulatory Approvals, and (iii) any consent approval, order or authorization or registration declaration or filing, which if not obtained or made would not have a Material Adverse Effect. 8.1.4 No Material Violations. Except as indicated in Schedule 8.1.4 or as would not reasonably be expected to have a Material Adverse Effect, (a) the execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Seller of its obligations under this Agreement and the Ancillary Agreements will not violate any applicable Law, and (b) Seller is not in violation of any Law relating to or affecting the operation, conduct or ownership of the Business or the Purchased Property. 8.1.5 Corporate Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the state of California, and is duly qualified to conduct business in California. Seller has full power and authority to own its properties and to carry on the Business as it is now being conducted and to own, or hold under lease the Purchased Property. Seller holds valid permits, licenses, franchises, approvals and authorizations issued or granted by any Governmental Authority and adequate for the operation of the Business as currently conducted, except to the extent absence of any such permit, license, franchise, approval or authorization would not have an Material Adverse Effect. 8.1.6 Brokers. Seller has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Buyer for any broker's or finder's fees or similar fees or expenses. 8.1.7 Title to Owned Real Property. Seller has good fee simple title to all of the Owned Real Property, free and clear of any Lien other than Permitted Encumbrances and Liens of the Bondholders identified on Schedule 8.1.7(b). As of the date hereof, the address and a general description of each item of Owned Real Property are set forth on Schedule 8.1.7(a). Seller represents that the only creditors that have a Lien (other than any Permitted Encumbrances) on any of the Owned Real Property are the Bondholders identified on Schedule 8.1.7(b). 8.1.8 Real Property Leases. As of the date hereof, set forth on Schedule 8.1.8 is a list of the Real Property Leases. Each of the leases for the Leased Real Property is enforceable in accordance with its terms, subject to bankruptcy, insolvency and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with the principles of equity, and except as otherwise disclosed in Schedule 8.1.8, there is not under any lease any material default or a material breach of covenant by Seller. 26 8.1.9 Tangible Assets. All of the tangible Purchased Property is in substantially good operating condition and repair, normal wear and tear excepted. Except as set forth on Schedule 8.1.9 or elsewhere in this Agreement, Seller has good title to each item of tangible Purchased Property (other than Real Property Interests or office equipment or vehicles subject to leases) with a fair market value in excess of $5,000, free and clear of any Lien (other than Permitted Encumbrances). Except as set forth on Schedule 8.1.9, Seller has not received any written notice within the past twelve (12) months of a violation of any ordinances, regulations or building, zoning and other similar laws with respect to such assets that would have a Material Adverse Effect. EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 8.1.9, SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE CONDITION OR FITNESS OF THE TANGIBLE PURCHASED PROPERTY AND HEREBY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR WARRANTY AGAINST INFRINGEMENT. 8.1.10 No Material Adverse Change. Except as disclosed in Schedule 8.1.10, between December 31, 1997 and the date of this Agreement there has not occurred (i) any event or condition that would have a Material Adverse Effect; (ii) any increase in compensation payable or to become payable by Seller to any of its Transferred Employees or agents, other than normal merit or promotional increases other than payment under the retention pay program announced in connection with the network business repositioning of Seller and its Affiliates; (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract; or (iv) any material change in any accounting method, practice or policy of Seller with respect to the Business. 8.1.11 Material Contracts. Except for the agreements set forth on Schedule 8.1.11 subparts (b) through (j), there is no Assigned Contract (other than the Assigned Contracts entered into after the date of this Agreement in the ordinary course of business) that is: (a) an agreement containing a non-compete agreement or other covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any material respect with respect to the Business with any third party; (b) an agreement granting a Lien (other than a Permitted Encumbrance); (c) an agreement for the sale of any material Purchased Property or grant of any preferential rights to purchase any material Purchased Property; (d) an agreement for the provision of telephone service at public pay telephone locations; (e) an agreement made in the ordinary course of business other than as set forth above with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $100,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; 27 (f) an agreement not made in the ordinary course of business with respect to which the aggregate amount to be received or paid thereunder with respect to calendar year 1999 is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable; (g) an agreement with respect to 911 services or E911 services; (h) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Purchased Exchanges; (i) an agreement between Seller and a third party for the third party's co-location of equipment in facilities included in the Purchased Property pursuant to which Seller is currently providing facilities or a request to provide facilities is currently pending; or (j) an agreement with a third party in which the owner of utility poles has agreed to allow the other party to attach its telecommunications equipment or facilities to the utility poles (a "Pole Attachment Agreement"). Except as set forth on Schedule 8.1.11, to the knowledge of Seller, each Assigned Contract referred to in any of the clauses (a) to (j) above (collectively the "Material Contracts") is valid, binding and in full force and effect and is enforceable by Seller or Seller's Affiliate, as applicable, in accordance with its terms, except for any such failure to be valid, binding, in full force and effect or enforceable that is not reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 8.1.11, to the knowledge of Seller, Seller and Seller's Affiliates have performed all material obligations required to be performed by them to date under the Material Contracts, and they are not (with or without the lapse of time or the giving of notice, or both) in breach or default thereunder and, to the knowledge of Seller, no other party to any Material Contract is (with or without the lapse of time or the giving of notice, or both) in breach or default in any respect thereunder, in each case except for such noncompliance, breaches and defaults that, individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect. As of the date hereof, neither Seller nor any Seller's Affiliate has, except as disclosed on Schedule 8.1.11, received or given any written notice of the intention of any party to terminate any Material Contract. Complete and correct copies of all the Material Contracts, together with all modifications and amendments thereto to the date of this Agreement by Closing will, have been made available to Buyer or its representatives. 8.1.12 Insurance. The Purchased Property of an insurable nature and of a character usually insured by companies carrying on similar businesses is insured under insurance policies or self insured in such amounts and against such losses or casualties as is usual in Seller's industry. On the Closing Date, the coverage under the insurance policies and programs applicable to the Purchased Property will be terminated, and Buyer will be responsible for providing all insurance coverage for the Purchased Property. 8.1.13 Taxes. Except as disclosed on Schedule 8.1.13, (i) all Tax Returns required to be filed by Seller on or before the Closing Date have or will have been filed, and all 28 Taxes shown as due and payable on such Tax Returns have been or will be paid by Seller when required by law; (ii) no deficiencies or assessments for any Taxes have been asserted in writing or assessed against Seller that remain unpaid and that individually or in the aggregate are material to the Business; (iii) Seller has withheld all required federal, state and local payroll taxes relating to the Business and has remitted or will remit all amounts required to be remitted to the appropriate taxing authorities; (iv) there are no tax liens upon any of the Purchased Property except for statutory liens covering taxes not yet due and payable; (v) Seller is not a "foreign person" within the meaning of Section 1445(b)(2) of the IRC and shall provide an appropriate certificate for purposes of Section 1445(b)(2) of the IRC and (vi) there are no material, current audits or material audits for which written notice has been received (in either case, specifically with respect to the Business). 8.1.14 No Material Claims or Suits. Except as disclosed in Schedule 8.1.14 or with respect to Taxes, there are no claims, actions, lawsuits or legal proceedings pending before any Governmental Authority, or, to the knowledge of Seller threatened against or affecting the Business or Purchased Property that in Seller's opinion, if determined adversely to Seller, would reasonably be expected to have a Material Adverse Effect on the Business or materially adversely affect ability of Seller to consummate the transactions contemplated hereby. 8.1.15 Tariffs; FCC Licenses. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material respect under any such tariff. Except as disclosed on Schedule 8.1.15(a), there are no applications by Seller or petitions by others or proceedings pending or threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. To the knowledge of Seller, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 8.1.15(b) are the FCC Licenses and other material Assigned Permits (the "Material Permits") held by Seller and used in the operation of the Business. Except as listed on Schedule 8.1.15(b), to Seller's knowledge, each such FCC License or Material Permit is in full force and effect on the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such FCC Licenses or Material Permits subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC Licenses are free from all security interests, liens, claims, or 29 encumbrances of any nature whatsoever. There are no applications by Seller or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC Licenses that, in Seller's opinion, would reasonably be expected to have a Material Adverse Effect on the Business, other than such applications, petitions or proceedings as may be brought in the ordinary course of business or by end-users. 8.1.16 Employee Matters. (a) Schedule 8.1.16(a) lists (and identifies the sponsor of) each "Employee Pension Benefit Plan," as that term is defined in Section 3(2) of ERISA, each "Employee Welfare Benefit Plan," as that term is defined in Section 3(1) of ERISA (such plans being hereinafter referred to collectively as the "ERISA Plans"), and each other retirement, pension, profit-sharing, money purchase, deferred compensation, incentive compensation, bonus, stock option, stock purchase, severance pay, unemployment benefit, vacation pay, savings, medical, dental, post-retirement medical, accident, disability, weekly income, salary continuation, health, life or other insurance, fringe benefit, or other employee benefit plan, program, agreement, or arrangement maintained or contributed to by Seller or its Affiliates in respect of or for the benefit of any Transferred Employee or former employee of Seller, excluding any such plan, program, agreement, or arrangement maintained or contributed to solely in respect of or for the benefit of Transferred Employees or former employees employed or formerly employed by Seller outside of the United States, as of the date hereof (collectively, together with the ERISA Plans, referred to hereinafter as the "Plans"). Schedule 8.1.16(a) also includes a list of each written employment, severance, termination or similar-type agreement between Seller and its Affiliates and any Transferred Employee (the "Employment Agreements"). Seller has delivered to Buyer accurate and complete copies of all Plans and Employment Agreements (or representative samples in the case of form agreements) and, if applicable, summary plan descriptions with respect to such Plans and Employment Agreements and summary descriptions of any such Plan or Employment Agreement that is not otherwise in writing. Except for retention bonuses paid in connection with the closing of the transactions contemplated by this Agreement and except as otherwise disclosed on Schedule 8.1.16(a), the execution and delivery of this Agreement by Seller and the performance of this Agreement by Seller will not directly result now or at any time in the future in the payment to any Transferred Employee of any severance, termination, or similar-type payments or benefits being paid to any Transferred Employee. (b) Except as set forth on Schedule 8.1.16(b): (i) Neither Seller nor any of its Affiliates, any of the ERISA Plans, any trust created thereunder, or any trustee or administrator thereof, has engaged in any transaction as a result of which Seller or any of its Affiliates could be subject to any material liability pursuant to Section 409 of ERISA or to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed pursuant to Section 4975 of the IRC; and (ii) Since the effective date of ERISA, no material liability under Title IV of ERISA has been incurred or is reasonably expected to be incurred by Seller or any of its Affiliates (other than liability for premiums due to the PBGC), unless such liability has been, or prior to the Closing Date will be, satisfied in full. 30 (c) Except as set forth on Schedule 8.1.16(c), with respect to the ERISA Plans other than those ERISA Plans identified on Schedule 8.1.16(a) as "multiemployer plans": (i) the PBGC has not instituted proceedings to terminate any Plan that is subject to Title IV of ERISA (the "Retirement Plans"); (ii) none of the ERISA Plans has incurred an "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived, as of the last day of the most recent fiscal year of each of the ERISA Plans ended prior to the date of this Agreement; (iii) each of the ERISA Plans has been operated and administered in all material respects in accordance with its provisions and with all applicable laws; (iv) each of the ERISA Plans that is intended to be "qualified" within the meaning of Section 401(a) of the IRC and, to the extent applicable, Section 401(k) of the IRC, has been determined by the IRS to be so qualified, and nothing has occurred since the date of the most recent such determination (other than the effective date of certain amendments to the IRC, the remedial amendment period for which has not yet expired) that would adversely affect the qualified status of any of such ERISA Plans; (v) there are no pending material claims by or on behalf of any of the ERISA Plans, by any employee or beneficiary covered under any such ERISA Plan, or otherwise involving any such ERISA Plan (other than routine claims for benefits and routine expenses); (vi) each ERISA Plan which is a group health plan has been operated and administered in compliance with the continuation coverage provisions of Section 498B of the IRC and Part 6 of Title I of ERISA; (vii) all contributions and premiums that would normally be made or paid with respect to any ERISA Plan or Employment Agreement on behalf of Transferred Employees as of the Closing Date will have been made by the Closing Date; and (viii) as of the Closing Date no Transferred Employee will be excluded from coverage under any employee welfare benefit plan (as defined in Section 3(1) of ERISA) maintained or contributed to by Seller. (d) Except as set forth on Schedule 8.1.16(d), none of the ERISA Plans is a "multiemployer Plan," as that term is defined in Section 3(37) of ERISA, and with respect to any such multiemployer plans (as so defined) listed in Schedule 8.1.16(d), Seller has not made or incurred a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of ERISA that would result in the incurrence of a material liability by Seller. Except as set forth on Schedule 8.1.16(d), neither Seller nor any Affiliates of Seller has made or incurred a "complete withdrawal" or a "partial withdrawal" (as 31 such terms are defined in Sections 4203 and 4205, respectively, of ERISA) that would result in the incurrence of liability by Seller or its Affiliates, and the performance of this Agreement will not result in such withdrawal(s) or liability. (e) Except as set forth on Schedule 8.1.16(e), (i) none of the Transferred Employees are represented by a labor union or labor organization; (ii) Seller is not subject to any collective bargaining agreement covering any Transferred Employee; (iii) there are no current, or to the best knowledge of Seller, any pending or threatened strikes, slowdowns, picketing, or work stoppages affecting the Business or with respect to any Transferred Employee covered by collective bargaining; (iv) there is no pending lockout by Seller of any employees of the Business, and no such action is contemplated by Seller; (v) to the best knowledge of Seller, there is no pending or threatened organizing activity or petition for certification of a collective bargaining representative involving employees of the Business and there has been none within the twelve (12) months preceding the date of the Agreement; (vi) to the best knowledge of Seller, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state or federal labor or employment law or regulation in connection with the Business, including any charge or complaint filed by any employee or labor organization with the National Labor Relations Board, the Equal Employment Opportunity Commission, or any other administrative governmental agency, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business; (viii) with respect to employees of the Business, Seller has complied in all respects with all laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupational safety and health, immigration, and plant closings; and (ix) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the Transferred Employees. (f) This Agreement shall not result in any Transferred Employee becoming entitled to separation pay or severance which could be or become an obligation of Buyer. 8.1.17 Schedules of Telephone Plant. Schedule 8.1.17 sets forth, as of December 31, 1998, a materially accurate summary of the book value of the Telephone Plant as reflected in Seller's continuing property records. Schedule 8.1.17 also sets forth a materially accurate list of the vehicles, trailers and other mobile tools and mobile equipment that are part of the Purchased Property as of May 7, 1999. 8.1.18 Schedule of Real Property Interests. To the knowledge of Seller and as of the date of this Agreement, Schedule 8.1.18 sets forth a true and accurate list of all its Real Property Interests. 8.1.19 Compliance with Existing Environmental Requirements. Except as set forth in Schedule 8.1.19 or as would not have a Material Adverse Effect, to the knowledge of Seller: 32 (a) Seller's operation of the Business and the Purchased Property has been and is presently in substantial compliance with Existing Environmental Requirements; (b) No environmental remediation is occurring on any parcel of Owned Real Property or Leased Real Property nor has Seller or any Affiliate issued a request for proposal or otherwise requested an environmental remediation contractor to begin plans for such environmental remediation; (c) No underground storage tanks ("USTs") or aboveground storage tanks ("ASTs") are located on the Owned Real Property or Leased Real Property; (d) None of the Owned Real Property or Leased Real Property is situated in a state or federal "superfund" site or study area; and (e) Seller has delivered, or within 60 days after the date of this Agreement will deliver, to Buyer complete copies of all reports and studies relating to Seller's liability under or non-compliance with any Existing Environmental Requirements in connection with Seller's operation of the Business or use or ownership of the Purchased Property. 8.1.20 Environmental Permits. Except as set forth in Schedule 8.1.20, to the knowledge of Seller, it has obtained or filed for all necessary environmental permits, authorizations and licenses required to operate the Business or the Purchased Property, except where failure to obtain or file such permits, authorizations and licenses would not have a Material Adverse Effect on the Business. 8.1.21 Financial Statements. Schedules 8.1.21(a), 8.1.21(b) and 8.1.21(c) present the income statements, balance sheets and statements of cash flows, respectively, for the Business for the years ended December 31, 1997 and December 31, 1998 (collectively, the "Financial Statements"). The Financial Statements have been prepared based on the books and records of Seller. Such books and records have been maintained in accordance with GAAP, and where required by law, the applicable regulations of the FCC and PUC. However, because the Business represents only a portion of a larger entity, the Financial Statements are based on the extensive use of estimates and allocations. Seller believes these estimates and allocations have been performed on a reasonable basis in accordance with GAAP. However, Buyer acknowledges that because Buyer is not acquiring significant support elements located outside the Purchased Exchanges, and the Buyer will operate under new tariffs, carrier contracts and other conditions that will significantly impact the future revenues of the Business, the Financial Statements may not be representative of the financial performance of the Business during future periods. 8.1.22 Year 2000 Compliance. (a) As of the Closing Date, Seller shall have caused the modification or remediation of the Automated Assets in accordance with applicable manufacturer or vendor recommendations such that the Automated Assets are Year 2000 Compliant; provided that any and all Buyer or third-party supplied computer software, computer firmware and computer hardware that directly interfaces with the Automated Assets, co-exists with the Automated 33 Assets, or indirectly influences the operation of the Automated Assets are also demonstrated to be Year 2000 Compliant. (b) Seller shall be deemed to be in satisfaction of the requirements of subsection (a) of this Section 8.1.22 to the extent that Seller has (i) performed on or before the Closing Date any modification or remediation in accordance with applicable manufacturer or vendor recommendations for achieving Year 2000 compliance or Year 2000 readiness, or (ii) received on or before the Closing Date reasonable assurances from the applicable manufacturer or vendor that an Automated Asset, without modification or remediation, is Year 2000 compliant or Year 2000 ready. (c) When used in this Section 8.1.22, the following term shall have the respective meanings given below: "Automated Assets" means the computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software system(s) that are provided by Seller to Buyer as part of the Purchased Exchanges pursuant to this Agreement. "Calendar-Related" refers to the date values based on the Gregorian calendar, as defined in Encyclopedia Britannica, 15th edition, 1982, page 602, and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons and presentations. "Date Data" means any Calendar-Related data in the inclusive range January 1, 1900 through December 31, 2050, which the Automated Assets use in any manner. "System Date" means any Calendar-Related data value in the inclusive range January 1, 1985 through December 31, 2035 (including the natural transition between such values) which the Automated Assets shall be able to use as their current date while operating. "Year 2000 Compliant" means: (i) As of the Closing Date, in connection with Calendar-Related data and Calendar-Related processing of Date Data or of any System Date, the Automated Assets will not malfunction, will not cease to function and will not produce incorrect results; and (ii) As of the Closing Date, the Automated Assets will represent dates without ambiguity as to century when providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized and/or software systems and users by way of user interfaces, electronic interfaces and data storage. 8.1.23 Native American and Federal Consents. Except as set forth on Schedule 8.1.23 or as would not have a Material Adverse Effect, to the knowledge of the Seller: 34 (a) Schedule 8.1.23 sets forth all material easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA") (collectively, the "Native American Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducted, on Native American reservations; (b) All such Native American Authorizations are in full force and effect and Seller is not in default thereunder; (c) There are no material claims, actions, lawsuits or other proceedings pending or threatened with respect to any of the Purchased Property located, or any operations of the Business conducted, on Native American reservations, and no tribal authority has given written notice of any cancellation, revocation, termination or material amendment or modification of any Native American Authorization; and (d) No material consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement. 8.1.24 Loss of Major Customer. Except as set forth on Schedule 8.1.24, since January 1, 1997, Seller has not suffered the loss of any customer of the Business for which Seller billed in excess of $50,000 annually during the years ended December 31, 1997 or 1998. 8.1.25 Records. The continuing property records and other records related to the Purchased Property maintained by Seller conform in all material respects with the applicable rules and regulations of the FCC and PUC. Seller has retained substantially all original cost documentation relating to the Purchased Property regarding the expenditures made by Seller for the Telephone Plant within the period required by applicable Law. 8.2 Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: 8.2.1 Corporate Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware and is duly qualified to conduct business in California and has the requisite corporate power and authority to own, lease or otherwise hold the assets owned, leased or held by it. 8.2.2 Authorization and Effect of Agreement. Buyer has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements, to carry on the Business as presently conducted and to fulfill all other obligations of Buyer under this Agreement and the Ancillary Agreements. The execution and delivery by Buyer of this Agreement and the Ancillary Agreements, and the fulfillment by it of its obligations under this Agreement and the Ancillary Agreements have been duly authorized by all necessary corporate action on the part of Buyer. Buyer has the requisite legal capacity to purchase, own and hold the Purchased Property upon the consummation of the sale of the Purchased Property. This Agreement and the Ancillary Agreements have been duly executed and delivered by Buyer and, 35 assuming the due execution and delivery of this Agreement and the Ancillary Agreements by Seller, constitute valid and binding obligations of Buyer enforceable in accordance with their terms subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting the rights of creditors generally and subject to the exercise of judicial discretion in accordance with principles of equity. 8.2.3 No Restrictions Against Purchase of the Purchased Properties. The execution and delivery of this Agreement and the Ancillary Agreements by Buyer do not, and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not, conflict with, violate or result in the breach of any provision of the certificate of incorporation or bylaws of Buyer or, conflict with, violate or result in the breach of any contract to which Buyer is a party. No material consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required to be obtained or made by or with respect to Buyer in connection with the execution and delivery of this Agreement by Buyer or the fulfillment by Buyer of its obligations under this Agreement, except the filings and approvals described in Article 4. 8.2.4 No Violation of Law. The execution and delivery of this Agreement and the Ancillary Agreements and the fulfillment by Buyer of its obligations under this Agreement and the Ancillary Agreements will not violate any Law except to the extent any such violation would not have a material adverse effect on the ability of Buyer to fulfill its obligations hereunder and thereunder. 8.2.5 Financial Capacity. (a) Buyer has sufficient cash or other sources of funds to pay the Purchase Price in the manner specified in Section 3.1 and all related fees and expenses. (b) Buyer has sufficient financial resources to operate the Business after the Closing Date. Without limiting the generality of the foregoing, Buyer has sufficient financial resources to satisfy any applicable requirement relating to financial capacity or capital imposed by any Governmental Authority in any state in which the Business is conducted. Buyer is solvent, is able to pay its debts as they become due, and owns property that has both a fair value and a fair saleable value in excess of the amount required to pay its debts as they become due. 8.2.6 Brokers. Buyer has not paid or become obligated to pay any fee or commission to any broker, finder, investment banker or other intermediary in connection with the transactions contemplated by this Agreement in such a manner as to give rise to a valid claim against Seller for any broker's or finder's fees or similar fees or expenses. 8.2.7 Consents and Approvals of Governmental Authority. Subject to Article 4 with respect to Regulatory Approvals and FCC Consents, no consent, approval or authorization of, or declaration, filing or registration with, any Governmental Authority or regulatory authority is required in connection with the execution, delivery and performance of this Agreement by Buyer or the consummation by Buyer of the transactions contemplated herein, except for filings 36 with the Federal Trade Commission and Department of Justice pursuant to the HSR Act, if required. ARTICLE 9 CONTINUING BUSINESS RELATIONSHIPS 9.1 Transition Services Agreement. The parties agree to cooperate with each other to ensure that the transition of the ownership of the Purchased Property proceeds with minimal disruption to the services being provided to subscribers. The parties agree that it may be necessary for Seller to assist Buyer in converting Seller's systems and processes with respect to the Purchased Property to Buyer's systems and processes. Seller and Buyer agree to execute a separate "Transition Services Agreement" substantially in the form attached hereto as Schedule 9.1 for the provision of such services. 9.2 Optional Services Agreement. It is understood and agreed that Buyer may not have for a period of time after Closing Date, certain systems or processes necessary to provide some basic customer services. Seller will at Buyer's request and for the fees described in Schedule 9.2 provide any or all of the services described in a separate "Optional Services Agreement" signed by the parties substantially in the form attached hereto as Schedule 9.2. 9.3 Directory Publishing. 9.3.1 Assumption of Certain Directory Publishing Agreement Rights and Obligations. Seller is party to a directories publishing agreement with [GTE Directories Service Corporation n/k/a GTE Directories Corporation or GTE Directories Corporation as purchaser of the rights and interests of Associated Directory Services, Inc. f/k/a Mast Advertising and Publishing, Inc.] herein "Publisher." This [These] agreement[s] is [are] identified in Schedule 9.3.1 attached hereto ("Publishing Agreement[s]"). Pursuant to this [these] agreement[s] Publisher has the exclusive right and obligation to sell advertising, and to publish, print and distribute directories containing telephone numbers relating to the Purchased Exchanges. Buyer agrees to execute an agreement effective as of the Closing to assume and appropriately amend the Publishing Agreement[s] as it[they] relate to the Purchased Exchanges, including the extension of the Contel Publishing Agreements expiring prior to the Seller's Master Publishing Agreement which expires December 31, 2001, so that such extensions expire on December 31, 2001. If the directories for any of the Purchased Exchanges are published by a third party non-Affiliate of Seller, then to the extent requested by Buyer, Seller agrees to assist Buyer in obtaining such third party's consents to the continuation of such publishing arrangements; provided that Seller shall have no obligation to pay compensation or other consideration in connection with such assistance. 9.3.2 Co-Bound Directories Acknowledgement. Buyer acknowledges that Publisher may have a pre-existing obligation (which Publisher may choose to continue) to sell advertising, publish, print and distribute the telephone numbers of third party local exchange telephone companies in the same directory as the Purchased Exchanges ("Co-Bound" directory). Co-Bound directory agreements of which Seller is aware, if any, are identified on Schedule 9.3.2. 37 9.3.3 Meeting to Discuss Directory Publication. Within ninety (90) days following the date of this Agreement, Buyer agrees to meet with Seller and Publisher for the purpose of having an initial discussion about the first directory publication after the Closing Date. This meeting will be held at Publisher's address unless otherwise agreed between the parties and Publisher. All parties shall employ their respective commercially reasonable efforts to ensure that directory publication is not interrupted following the Closing Date. 9.4 GTE Supply Relationship. Within 90 days of this Agreement, Buyer agrees to meet with representatives of GTE Supply for purposes of negotiating in good faith an agreement for GTE Supply to provide ongoing procurement and materials management functions for the Business on substantially the same terms as contained in the Buyer's existing agreement with GTE Supply; provided that Buyer may negotiate in good faith with respect to any volume discounts that may be available from GTE Supply. ARTICLE 10 ADDITIONAL COVENANTS OF THE PARTIES 10.1 Intellectual Property. 10.1.1 No License. Buyer and Seller agree and understand that except as expressly set forth in writing in the License Agreement and Section 10.1.3, Seller has not granted any rights or licenses, express or implied, of, and nothing shall constitute or be construed as a license of Seller under any Intellectual Property now or hereafter owned, obtained or licensable by Seller or under any Third Party Intellectual Property. 10.1.2 Infringement. (a) Notwithstanding anything in this Agreement to the contrary, Seller shall have no obligation to defend, indemnify or hold harmless Buyer or any of its Affiliates, from any damages, costs or expenses resulting from any obligation, proceeding or suit based upon any claim that any activity subsequent to the Closing Date engaged in by Buyer, a customer of Buyer's or anyone claiming under Buyer, constitutes direct or contributory infringement, misuse of, or misappropriation of, or inducement to infringe, any Third Party Intellectual Property. (b) Buyer shall defend, indemnify and hold harmless Seller and its Affiliates from and against any and all Indemnifiable Losses resulting from any obligation, proceeding or suit based upon any claim alleging or asserting direct or contributory infringement, or misuse or misappropriation of or inducement to infringe by Seller or any of its Affiliates of any Third Party Intellectual Property, to the extent that such claim is based on, or would not have arisen but for, activity conducted or engaged in subsequent to the Closing Date by Buyer, a customer of Buyer's, or anyone claiming under Buyer. 10.1.3 Trademark Phaseout. (a) Buyer acknowledges that Seller or its Affiliates are the owners of Excluded Marks that qualify as Excluded Property under Section 2.3. Buyer understands and 38 agrees that the Excluded Marks, or any right to or license of the Excluded Marks, are not being transferred pursuant to this Agreement. Buyer acknowledges the exclusive and proprietary rights of Seller and its Affiliates in the use of the Excluded Marks, and Buyer agrees that it shall not use the Excluded Marks (or any names, domain names, marks or indicia confusingly similar to the Excluded Marks) except and to the extent expressly set forth in this Section 10.1.3 or assert any rights or claims in such Excluded Marks (or in any names, domain names, marks or when confusingly similar to the Excluded Marks). After the Closing, all Excluded Marks of Seller and its Affiliates shall be replaced by Buyer, at Buyer's expense, as soon as possible, but in no event later than one hundred twenty (120) days after the Closing Date for items with Excluded Marks affixed to them which Buyer has continued to use in Buyer's operation of the Business, including buildings, vehicles, heavy equipment, hard hats, tools, tool boxes, kits (safety and others), signs, public (pay) telephones, manual covers and notebooks. After the Closing, Buyer will not use, and will destroy or deliver to Seller, all such items with Excluded Marks affixed to them that have no valid continuing use in Buyer's operation of the Business, including items affecting customer or employee relations or items that do not reflect Buyer's true identity. Specific items to be destroyed or returned include items with Excluded Marks affixed to them including giveaways; order, purchase or materials forms; requisitions; invoices; statements; time sheets/labor reports; bill inserts; stationery; personalized note pads; maps; organization charts; bulletins/releases; sales/price literature; manuals or catalogs; report covers/folders; program materials; and materials such as media contact lists/cards. The one hundred twenty (120) day time period for replacement of Excluded Marks affixed to telephone directories that were already published or closed for publication at the Closing Date shall be extended to the expiration date of such directories. (b) Buyer recognizes the great value of the goodwill associated with the Excluded Marks, and acknowledges that the Excluded Marks and all rights therein and the goodwill pertaining thereto belong exclusively to Seller and that the Excluded Marks have a secondary meaning in the minds of the public. Buyer further agrees that any and all permitted use of the Excluded Marks pursuant to this Agreement shall inure to the sole and exclusive benefit of Seller. (c) Buyer agrees that any permitted use of the Excluded Marks in the operation of the Business after the Closing shall be provided in accordance with all applicable federal, state and local laws, and that the same shall not reflect adversely upon the good name of Seller or its Affiliates, and that the operation of the Business will be of a high standard and skill. (d) Buyer acknowledges that its failure to cease use of the Excluded Marks as provided in this Agreement, or its improper use of the Excluded Marks, will result in immediate and irreparable harm to Seller and its Affiliates. Buyer acknowledges and admits that there is no adequate remedy at law for such failure to terminate use of the Excluded Marks, or for such improper use of the Excluded Marks. Buyer agrees that in the event of such failure or improper use, Seller and its Affiliates shall be entitled to equitable relief by way of temporary restraining order, or preliminary or permanent injunction, or any other relief available under this Agreement. (e) Buyer will not contest the ownership or validity of any rights of Seller or its Affiliates in the Excluded Marks. 39 10.1.4 Third Party Software. To the extent that the transfer of Purchased Property by Seller to Buyer under this Agreement results in the transfer of possession to Buyer of software that at the Closing Date is Third Party Intellectual Property, which software was located in and rightfully used by Seller in the geographical area of the Purchased Exchanges prior to the Closing Date in the normal and ordinary operation of the Business pursuant to Contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then subject to Section 2.5, effective as of the Closing and provided that no payments to any Person other than a Switch Software vendor (which, if any, shall be paid by Seller) are thereby required, at Closing Seller shall assign to Buyer, and Buyer shall accept all rights and licenses if any to posses and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. Buyer understands and agrees that except as provided above in this Section 10.1.4, or as expressly provided elsewhere in this Agreement or in another written agreement between Buyer and Seller, no rights or licenses to use or possess such software or any Third Party Intellectual Property are transferred to Buyer. Buyer shall properly dispose of, and shall not use, any software of which Buyer acquires possession in connection with Purchased Property and (i) which, after the Closing Date, Buyer knows, or reasonably should know, is not the subject of a Third Party Intellectual Property Contract that has been rightfully transferred to Buyer or for (ii) which Buyer does not have a separate license. Seller makes no warranty or representation that any Third Party Intellectual Property Contract or any right therein is assignable in whole or in part to Buyer. 10.2 Effect of Due Diligence and Related Matters. (a) Buyer represents that it is a sophisticated entity that was advised by knowledgeable counsel and financial advisors and, to the extent it deemed necessary, other advisors in connection with this Agreement and has conducted its own independent review and evaluation of the Purchased Property. Accordingly, Buyer covenants and agrees that (i) except for the representations and warranties set forth in this Agreement, Buyer has not relied and will not rely upon any document or written or oral information furnished to or discovered by it or its representatives, including any financial data, (ii) there are no representations or warranties by or on behalf of Seller or its Affiliates or representatives except for those expressly set forth in this Agreement, and (iii) to the fullest extent permitted by law, Buyer's rights and obligations with respect to all of the foregoing matters will be solely as set forth in this Agreement. (b) Upon the Closing, Buyer shall be deemed to have waived any claim with respect to a breach of any representation, warranty, covenant or obligation of Seller, or any failure of a condition, hereunder of which Buyer had knowledge; provided that Buyer shall be deemed to have knowledge of the information made available to Buyer and/or its representatives during its review of the Purchased Property prior to the date of this Agreement, which information is contained in the Due Diligence Documents. (c) After the date of this Agreement and prior to the Closing Date, Buyer shall promptly notify Seller if Buyer obtains knowledge of any actual breach of any representation, warranty, covenant or obligation of Seller or any actual or prospective failure of a 40 condition, hereunder of which Buyer obtains knowledge. Failure to provide timely notice shall be deemed to constitute a waiver of any claim with respect to such breach. 10.3 Confidentiality. Whether or not the Closing occurs, the parties hereto and their respective officers, directors, employees and representatives will comply with the Confidentiality Agreement, the provisions of which are expressly incorporated herein in their entirety by this reference. 10.4 Further Assurances. After the Closing, Seller will use its commercially reasonable efforts to furnish to Buyer such other instruments and information as Buyer may reasonably request in order to convey to Buyer title to the Purchased Property, to be delivered from time to time upon Buyer's reasonable request. 10.5 Prorations. The following liabilities shall be prorated between Seller and Buyer: (i) utility charges (which shall include water, sewer, electricity, gas and other utility charges) with respect to the Owned Real Property, the property subject to the Real Property Leases and customer owned equipment, (ii) rental charges (which shall include rental charges and other lease payments under the Real Property Leases), (iii) personal services (these services are charged for a period which includes the Closing Date; this shall include contract labor), and (iv) real and personal property taxes, ad valorem taxes, and franchise fees or taxes (collectively, "Periodic Taxes"). With respect to measurement periods during which the Closing Date occurs (all such periods of time being hereinafter called "Proration Periods"), the liabilities described in clauses (i), (ii) and (iii) of the preceding sentence shall be apportioned between Seller and Buyer as of the Closing Date, with Buyer bearing only the expense thereof in the proportion that the number of days remaining in the applicable Proration Period on and after the Closing Date bears to the total number of days covered by such Proration Period. Periodic Taxes attributable to Proration Periods shall be prorated between Buyer and Seller based on the relative periods the Purchased Property was owned by each respective party during the fiscal period of the taxing jurisdiction for which such taxes were imposed by such jurisdiction (as such fiscal period is or may be reflected on the bill rendered by such taxing jurisdiction). On the Closing Date, Buyer and Seller shall pay or be reimbursed, on this prorated basis, for Periodic Taxes that have been paid before the Closing Date. On the Closing Date, Buyer and Seller shall also be reimbursed, on this prorated basis, for Periodic Taxes that are to be paid on or after the Closing Date. The reimbursement of Periodic Taxes that are to be paid on or after the Closing Date shall be based on a reasonable estimate of the amount of such Periodic Taxes to be paid (based on past experience). To the extent that Buyer or Seller are not reimbursed on the Closing Date for Periodic Taxes that are paid after the Closing Date, or, in the event the estimated amount of the preceding sentence proves to have been inaccurate, Buyer or Seller shall promptly forward an invoice to the other party for its reimbursable pro rata share, if any. If the other party does not pay the invoice within thirty (30) calendar days of receipt, the amount of such payment shall bear interest at the rate of eight percent (8%) per annum. Similarly, all prepayments made or received by Seller or Buyer with respect to service or maintenance agreements with third parties or license or other fees payable to or by third parties and relating to the Business shall be prorated on an appropriate basis between Seller and Buyer. 41 10.6 Cost Studies/NECA Matters. 10.6.1 Prior to Closing. Seller agrees that, with respect to all toll revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Purchased Property prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any matters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Long Term Support ("LTS"), and Telecommunications Relay Services funds. 10.6.2 From and After Closing. (a) Buyer shall receive all USF funds, from and after the Closing Date, as determined by USAC from data submitted by Seller prior to Closing Date pursuant to FCC Rules and Regulations as stated in Part 36.611 and Part 36.612 for rural carriers and Part 54 for non-rural carriers. After Closing Date Buyer shall make all submissions and filings for USF funds for all years for which Seller had not made a submission prior to Closing Date in accordance with FCC Rules and Regulations. Within a reasonable time after Buyer's written request, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Purchased Property during any year for which Buyer shall make a submission, and such reasonable assistance as required in connection with Buyer's preparation of necessary filings or submissions. (b) Notwithstanding the foregoing, Buyer's right to receive all USF revenue is conditioned upon Buyer's payment, from and after the Closing Date, of all universal service contribution liability assessed by USAC based on end-user retail revenues for the previous year generated by assets being sold. 10.7 Customer Deposits. Within thirty (30) days after Closing, Seller agrees to transfer to Buyer the customer deposits together with any interest accrued thereon (collectively "Customer Deposits"), together with all of Seller's obligations and rights to hold the Customer Deposits of the Business, up to the Closing Date, and Buyer agrees to hold, disburse and retain such deposits so delivered to it as if it were Seller. 10.8 Access to Books and Records. (a) After the Closing, Seller will retain all Retained Books and Records for a period of three (3) years. (b) After the Closing, upon reasonable notice and subject to the Confidentiality Agreement, the parties will give to the representatives, employees, counsel and accountants of the other, access, during normal business hours, to books and records relating to the Business and the Purchased Property, and will permit such persons to examine and copy such records, in each case to the extent reasonably requested by the other party in connection with tax and financial reporting matters (including any Tax Returns and related information, but not attorney work product or similar work product prepared by accountants), audits, legal 42 proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any Contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any Tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any Tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 10.8(b). 10.9 Purchase Price Allocation. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the IRC. If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax Returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the IRC and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable Law. 10.10 Owned Real Property Transfers. Within sixty (60) days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies in Seller's possession covering the Owned Real Property. Thereafter, no later than thirty (30) days before the Closing Date, Seller shall deliver (at Seller's expense) to Buyer title commitments for owners' policies of title insurance prepared by a title insurance company reasonably acceptable to Buyer and a certified current survey, with respect to all Owned Real Property included in the Purchased Property and in which Seller purports to own fee title. Buyer acknowledges that such title commitments shall be for CLTA owners' policies of title insurance (or its equivalent) unless Buyer has requested in writing, prior to the date hereof, that such commitments be issued for other forms of title insurance (in which event, Buyer shall bear all costs and premiums for such title insurance to the extent attributable to such coverage being in excess of CLTA coverage or its equivalent). Such title commitments shall reflect that upon the consummation of the sale to Buyer contemplated by this Agreement and the payment of all premiums and charges due for such title insurance, Buyer will be vested with good, fee simple title to such Owned Real Property, subject only to the exceptions show thereon, the title company's standard exceptions and exclusions, and such matters that arise after the date and time of such title commitment. Except as provided in the following sentence, in the event that Buyer requires endorsements to such title commitments or the applicable title insurance policies, such endorsements shall be obtained at Buyer's sole cost and expense and shall not be a condition to Closing. On the Closing Date, Seller shall convey the Owned Real Property to be transferred to Buyer subject only to Permitted Encumbrances, provided that Seller may transfer such property subject to one 43 or more exceptions that are not Permitted Encumbrances if Seller commits in writing, in form and substance reasonably acceptable to Buyer, on or before the Closing Date, to cause any such exception that is not a Permitted Encumbrance to be removed, insured or bonded over to Buyer's reasonable satisfaction, or if Seller indemnifies Buyer with respect to such exceptions to Buyer's reasonable satisfaction on or before the Closing Date. With respect to each parcel of Owned Real Property covered by a title commitment referenced above, the amount of title insurance provided under the applicable title insurance policy shall be the fair market value of the applicable property, which shall be determined by Buyer at its sole cost and expense using commercially reasonable methods of valuation, provided that all such valuations shall be consistent with all allocations of the Purchase Price made hereunder or pursuant to this Agreement, and shall be acceptable to the title insurance company. The determination of fair market value shall be made in a timely manner such that the title commitments can be issued in a timely manner prior to the Closing Date. Seller agrees that prior to Closing it will provide the title company with such instructions, authorizations, affidavits, and indemnities as may be reasonably necessary for the title company to issue title policies to Buyer, dated as of the Closing Date, for all of the Owned Real Property with so-called non-imputation endorsements. By no later than forty-five (45) days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering each parcel of the Owned Real Property covered by the title commitments. Buyer will use its commercially reasonable efforts to work with the title company between the date hereof and fifty-five (45) days after Closing Date to resolve any issues with respect to such title commitments. Seller shall be responsible for the payment of all title insurance premiums attributable to the CLTA portion of the coverage afforded by each such policy obtained, and Buyer shall be responsible for the payment of all title insurance premiums in excess of such amount and for the payment of all endorsement charges and other fees and costs imposed by the title company. 10.11 Transaction Taxes. Buyer shall bear and be responsible for paying any sales, use, transfer, documentary, registration, business and occupation and other similar taxes (including related penalties (civil or criminal), additions to tax and interest) imposed by any Governmental Authorities with respect to the transfer of Purchased Property to Buyer (including the Owned Real Property) ("Transaction Taxes"), regardless of whether the tax authority seeks to collect the such taxes from Seller or Buyer. Seller shall prepare all tax filings related to any sales, use, transfer, documentary, registration, business and occupation and other similar taxes. Seller, fifteen (15) days prior to making such filings shall provide to the Buyer Seller's work papers for the Buyer's review and approval. Buyer shall provide to the Seller ten (10) days prior to the filing date approval of such work papers. Buyer shall also be responsible for (i) administering the payment of such Transaction Taxes, (ii) defending or pursuing any proceedings related thereto, and (iii) paying any expenses related thereto. Seller shall give prompt written notice to Buyer of any proposed adjustment or assessment of any Transaction Taxes with respect to the transaction, or of any examination of said transaction in a sales, use, transfer or similar tax audit. In any proceedings, whether formal or informal, Seller shall permit Buyer to participate and control the defense of such proceeding, and shall take all actions and execute all documents required to allow such participation. Seller shall not negotiate a settlement or compromise of any Transaction Taxes without the written consent of Buyer, which consent shall not be unreasonably withheld. 44 10.12 Bulk Sales Laws. Seller and Buyer waive compliance with applicable laws under any version of Article 6 of the Uniform Commercial Code adopted by any state or any similar law relating to the sale of inventory, equipment or other assets in bulk in connection with the sale of the Purchased Property. 10.13 Prepaid Non-Regulated Maintenance Agreements. Within thirty (30) days following Closing, Seller shall pay to Buyer an amount equal to the pro rata portion of all prepaid but unearned revenues from Seller's customers for all non-regulated maintenance agreements as of the Closing Date. 10.14 Vehicle Registration. Buyer agrees to use its commercially reasonable efforts to file promptly the appropriate vehicle title applications and registrations to change the name of the titled owner on each vehicle title certificate and change the motor vehicle registration (with respect to license plate information) on each vehicle being transferred to Buyer from Seller pursuant to this Agreement. Buyer agrees that it shall remove and destroy Seller's existing license plates from all vehicles received upon the earlier of receipt of new license plates or sixty (60) days following Closing. 10.15 Carrier Access Billing and Accounts Receivable Transition. Seller shall render its own final carrier access bills to its interexchange carriers for minutes, messages and other applicable charges up to the Closing Date. Seller shall be responsible for collecting and settling any disputes associated with its final bills to the interexchange carriers. 10.16 End-User Billing and Accounts Receivable Transition. Buyer agrees to purchase Seller's Earned End-User Accounts Receivable and make payment to Seller for those accounts in the manner described below: (a) Seller shall transfer to Buyer, as soon as reasonably available after Closing, all open end-user customer account records to Buyer as of the end of business on the Closing Date. Following the Closing, Buyer shall be responsible for administering those records including the application of cash receipts to customer accounts, whether related to services rendered before or after the Closing. Seller shall promptly forward to Buyer all customer payments and related remittance documents received by Seller after the Closing for processing by Buyer. (b) Within twenty (20) days following the Closing, Seller shall provide an accounting to Buyer of the Earned End-User Accounts Receivable Amount and the Customer Advances as well as the most recent twelve (12) month history of Seller's uncollectible net writeoffs expressed as a percentage of billings for the Business (the "Uncollectible Factor"). This data and the resulting calculation of the Earned End-User Accounts Receivable Amount shall be summarized in an accounts receivable settlement statement (the "Accounts Receivable Settlement Statement"). Within thirty (30) days following the Closing, Buyer shall remit to Seller an amount equal to 80% of the Earned End-User Accounts Receivable Amount less 100% of the Customer Advances. Within sixty (60) days following the Closing, Buyer shall remit an additional 15% of the Earned End-User Accounts Receivable Amount and within ninety (90) days will remit the final 5%. 45 (c) Not later than ten (10) days prior to the due dates for the sixty (60) and ninety (90) day payments referred to in Section 10.16(b), Seller will provide Buyer with an updated Accounts Receivable Settlement Statement reflecting any adjustments based upon non-sufficient funds checks, billing adjustments or other facts that relate to pre-closing activity that became known after the preparation of the original statement. (d) If at any time during the ninety (90) day period following the Closing, Buyer or Seller discovers any material discrepancy in the Accounts Receivable Settlement Statement, both parties agree to use commercially reasonable efforts to resolve any discrepancy in a timely manner, and also agree to make payments related to any undisputed amounts as set forth above. (e) At any time between ninety (90) and two hundred seventy (270) days following the Closing, Buyer may, at its discretion, prepare an analysis of actual bad debt write-off experience related to the Earned End-User Accounts Receivable purchased from Seller. If such analysis reasonably demonstrates that write-offs have exceeded the estimated amount in the final Accounts Receivable Settlement Statement (as had been calculated using the Uncollectible Factor) by more than 10%, Seller will pay to Buyer the full amount of the difference within thirty (30) days of receipt of Buyer's request for payment, together with Buyer's write-off analysis, Buyer will provide Seller sufficient detail in its write-off analysis, and as reasonably necessary, access to billing and collection records, to allow Seller to validate the accuracy of Buyer's request. Any disputes regarding the amounts of such request shall be settled using the procedure described in Section 3.3(d). ARTICLE 11 EMPLOYEES AND EMPLOYEE MATTERS 11.1 Employment of Transferred Employees. Subject to the other provisions of this Section 11.1, all Active Employees of Seller employed in the Business, and all Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date (hereinafter collectively referred to as "Transferred Employees") shall be employed by (or become the responsibility of, as applicable) Buyer as of the Closing Date in the same or comparable positions, and at the same or comparable total compensation (including base pay and bonus), as were in effect on the Closing Date, except as otherwise provided in this Agreement. For purposes of the preceding sentence, the term "Active Employees" shall include all full-time and part-time employees, employees on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights, and employees on other approved leaves of absence with a legal or contractual right to reinstatement. For a period of twelve (12) months following the Closing Date, Buyer shall not actively solicit either directly or indirectly through any agents, and Buyer shall not permit any of its Affiliates to actively solicit either directly or indirectly through any agents, any person who retires or otherwise terminates from any employment at or in association with Seller during the six-month period beginning three (3) months before the Closing Date, and Buyer shall neither employ nor permit any of its Affiliates to employ any individuals who are identified to Buyer by Seller as individuals who terminated from any employment or association with Seller during such six-month period. On or before the execution date of this Agreement, Seller shall have delivered to Buyer a list of the persons who would have been Transferred Employees had the Closing Date 46 occurred on March 31, 1999, showing the following information for each such person: (i) the name of each such person; (ii) the name of his or her current employer; (iii) his or her current base pay, 1998 bonus and projected 1999 bonus; (iv) his or her hire date, any rehire date (if available) and years of service; (v) his or her then-current position; (vi) whether such employee is (x) subject to a collective bargaining agreement or represented by a labor organization, if any, and including the name and date of each such bargaining agreement or (y) on military leave, maternity leave, leave under the Family and Medical Leave Act of 1993, short-term disability, on layoff with recall rights or on other approved leave of absence with a legal or contractual right to reinstatement; and (vii) for any employee who is not employed exclusively in the Business, a description of the nature of his or her employment and the percentage of his or her time actually allocated to the Business in calendar year 1998. Seller shall update such list at such time or times requested by Buyer, but not more often than as of the end of each calendar quarter occurring between the execution date hereof and the Closing Date, commencing with the quarter ending June 30, 1999, and as of the month ending immediately prior to the Closing Date, in each case assuming the Closing Date had occurred on such date, and shall deliver such updated lists to Buyer within ten (10) days after the end of each such calendar quarter or month-end, as applicable. Any person who is not on such list as updated as of the end of the month immediately preceding the Closing Date shall not be a Transferred Employee, and for all purposes under this Agreement the Transferred Employees shall include only those persons on such list as updated as of such month-end who continue to be Active Employees of Seller employed in the Business or Active Employees of Seller and its Affiliates whose duties relate primarily to the Business, on the Closing Date. 11.1.1 Assumption of Collective Bargaining Agreement Obligations. On and after the Closing Date, Buyer, as successor employer to Seller, shall assume all of the employer's obligations under, and be bound by the provisions of, each collective bargaining agreement to the extent of provisions covering Transferred Employees. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. 11.1.2 Assumption of Employment and Other Agreements. On and after the Closing Date, except as otherwise provided in this Agreement or in Schedule 11.1.2, Buyer, as successor employer to Seller, shall assume all obligations of each employment agreement or any other agreement by Seller relating to conditions of employment, employment separation, severance, or employee benefits in connection with the Transferred Employees, but only to the extent that they have been disclosed to Buyer on Schedule 8.1.16(a) and copies have been furnished to Buyer as soon as administratively practicable prior to the execution of this Agreement. To the extent that Buyer assumes any obligations under this Article 11, Buyer may reduce or eliminate benefits under any agreement, plan, policy or program only to the extent required to comply with applicable law, or to the extent that Seller, its Affiliates, or any successors or assigns, make amendments or changes to its benefit plans, policies or programs to eliminate or reduce benefits. Until the fifth anniversary of the Closing Date, Seller promptly shall deliver to Buyer a copy of each material amendment or change that Seller makes to its Plans and Employment Agreements to eliminate or reduce benefits thereunder and shall confirm to Buyer on an annual basis whether, and the extent to which, it has amended its Plans and Employment Agreements and provide sufficient detail to enable Buyer to determine whether Seller has reduced or eliminated benefits thereunder. After the fifth anniversary of the Closing 47 Date, Buyer may amend such plans, policies, and programs in any manner it determines, consistent with applicable law and collective bargaining agreements. 11.1.3 Recognition of Transferred Employee Service. On and after the Closing Date, and subject to the provisions of any applicable collective bargaining agreement, and except as otherwise provided in this Article 11, Buyer shall recognize the service of each Transferred Employee for all employment-related purposes determined in accordance with the practices and procedures of Seller in effect on the Closing Date, as if such service had been rendered to Buyer. 11.1.4 Assumption of Obligation to Pay Bonuses. Transferred Employees shall not accrue benefits under any employee benefit policies, plans, arrangements, programs, practices, or agreements of Seller or any of its Affiliates after the Closing Date. Buyer shall assume the obligation to pay to Transferred Employees any bonuses that would have been payable to the Transferred Employees with respect to the calendar year in which the Closing Date occurs had the Transferred Employees remained employees of Seller or one of its Affiliates, in accordance with the provisions of the policy, plan, arrangement, program, practice or agreement under which the bonus would have been paid. 11.1.5 No Duplicate Benefits. Nothing in this Agreement shall cause duplicate benefits to be paid or provided to or with respect to a Transferred Employee under any employee benefit policies, plans, arrangements, programs, practices, or agreements. 11.1.6 Affiliate Employees. If any employee identified in the list provided pursuant to Section 11.1 is an employee of an Affiliate of Seller whose duties relate primarily to the Business, he or she shall be considered a Transferred Employee and shall be treated under this Agreement in a manner that is comparable to the treatment given to the Transferred Employees who are employed by Seller, except that his or her service as of the Closing Date shall be determined in accordance with the practices and procedures of his or her employer, as disclosed to Buyer in accordance with Section 11.1.2. 11.2 Transferred Employee Benefit Matters. 11.2.1 Defined Benefit Plans. (a) Seller Pension Plans. As of the date of this Agreement, Seller participates in the following single-employer defined benefit pension plans maintained in the United States: (i) the GTE Service Corporation Plan for Employees' Pensions (the "Seller Salaried Pension Plan"); and (ii) the GTE Northwest/GTE California Plan for Hourly-Paid Employees' Pensions (collectively, the "Seller Hourly Pension Plan"). The plans identified in this Section 11.2.1(a) shall be referred to collectively in this Agreement as the "Seller Pension Plans," and each such plan shall be referred to individually as a "Seller Pension Plan." 48 (b) Buyer Obligations. Buyer shall take all actions necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more pension plans (hereinafter referred to in the aggregate as the "Buyer Pension Plans" and individually as the "Buyer Pension Plan") effective as of the Closing Date and to ensure that each Buyer Pension Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Pension Plan is a qualified, single-employer defined benefit plan under Section 401(a) of the IRC; (ii) any Buyer Pension Plan that was in effect before the Closing Date shall not have any "accumulated funding deficiency," as defined in Section 302 of ERISA and Section 412 of the IRC, whether or not waived, immediately before the Closing Date; (iii) the Buyer Pension Plan is not the subject of termination proceedings or a notice of termination under Title IV of ERISA; (iv) the Buyer Pension Plan does not exclude Transferred Employees from eligibility to participate therein; (v) the Buyer Pension Plan does not violate the requirements of any applicable collective bargaining agreement; and (vi) with respect to Transferred Employees who were participants in the Seller Hourly Pension Plan by virtue of their coverage under a collective bargaining agreement on the Closing Date, the terms of the Buyer Pension Plan are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. For purposes of this Section 11.2.1, Transferred Employees who were participants in the Seller Hourly Pension Plan other than by virtue of their coverage under a collective bargaining agreement on the Closing Date shall be treated as Transferred Employees who, on the Closing Date, participate in the Seller Salaried Pension Plan. Within the 30-day period immediately preceding any transfer of assets and liabilities from a Seller Pension Plan to a Buyer Pension Plan pursuant to this Section 11.2.1(b), Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Pension Plan satisfies each of the requirements set forth in this Section 11.2.1(b). (c) Transfer of Liabilities. (i) In accordance with the provisions of this Section 11.2.1, Buyer shall cause the Buyer Pension Plans to accept all liabilities for benefits under the Seller Pension Plans, whether or not vested, that would have been paid or payable (but for the transfer of assets and liabilities pursuant to this Section 11.2.1) to or with respect to the Transferred Employees under the terms of the Seller Pension Plans and that are "Section 411(d)(6) protected benefits" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder) that have accrued under the Seller Pension Plan to or with respect to the Transferred Employees based on accredited service and compensation under the Seller Pension Plans as of the Closing Date. For a period of not less than five (5) years after the Closing Date, and unless otherwise required to comply with applicable law or permitted by Section 11.1.2, Buyer shall not amend the Buyer Pension Plans, or permit the Buyer Pension Plans to be amended, to eliminate any benefit, whether or not vested, with respect to which liabilities are transferred pursuant to the foregoing provisions of this subsection (i), to the extent any such benefit is a "Section 411(d)(6) protected benefit" (as defined by Section 411(d)(6) of the IRC and the regulations thereunder). On or before the Closing Date, Seller or an Affiliate thereof shall take action to fully vest Transferred Employees in their benefits (if any) under the Seller Pension Plans. (ii) (A) For purposes of eligibility and vesting under the Buyer Pension Plans, each Transferred Employee whose accrued benefit is transferred from a 49 Seller Pension Plan to a Buyer Pension Plan shall be credited with service as of the Closing Date as determined under the terms of the Seller Pension Plan. The benefit under the Buyer Pension Plan for each Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be calculated under terms of the Buyer Pension Plan that are substantially identical in all material respects to the terms of the Seller Hourly Pension Plan. The benefit for each Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall not be less than the greater of (x) the sum of the Transferred Employee's "Seller Pension" and "Buyer Pension," or (y) the Transferred Employee's "Total Service Pension," each as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1. (B) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Salaried Pension Plan and who, under the terms of the Seller Salaried Pension Plan, has at least 15 years of accredited service and combined years of age and accredited service of at least 74 as of the Closing Date shall be eligible, after the Transferred Employee's employment with the Buyer and its Affiliates is terminated and after the Transferred Employee's combined years of age and years of accredited service equal or exceed 76, to receive his or her "Seller Pension" (as determined under the rules set forth in subsection (c)(iii) of this Section 11.2.1) as an immediate early retirement pension under the applicable Buyer Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Salaried Pension Plan as of the Closing Date. For a period of at least five (5) years following the Closing Date, the Buyer shall cause any agreement, pursuant to which the accrued benefit of any Transferred Employee under a Buyer Pension Plan is transferred to another pension plan, to incorporate a provision in substance identical to this subsection (ii)(B). (C) Except as provided in paragraph (E), below, the benefit under the Buyer Pension Plan of a GATT Grandfathered Participant, when expressed in the form of a lump sum, shall not be less than the benefit under the Buyer Pension Plan determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. The method used to convert a GATT Grandfathered Participant's accrued benefit into a lump-sum amount under the Buyer Pension Plan after 1999 shall be not less favorable to a GATT Grandfathered Participant than the method used for similar purposes by the Seller Pension Plan. For purposes of this paragraph (c)(ii)(C), "GATT Grandfathered Participant" shall mean a Transferred Employee (x) with respect to whom liabilities are transferred pursuant to this subsection (c) and (y) who, taking service from Buyer into account as service with Seller, would have been eligible under the Seller Pension Plan, but for the transfer of liabilities pursuant to this subsection (c), to have his benefit under the Seller Pension Plan (when expressed in the form of a lump sum) determined without regard to the changes to Section 417 of the IRC made by the Uruguay Round Agreements Act. (D) Except as provided in paragraph (E), below, each Transferred Employee who, as of the Closing Date, participates or formerly participated in the Seller Hourly Pension Plan shall be eligible, after the Transferred Employee's employment with Buyer and its Affiliates is terminated, to receive an early retirement pension under the Buyer 50 Pension Plan in accordance with early retirement provisions that are no less favorable to the Transferred Employee than the early retirement provisions of the Seller Hourly Pension Plan as of the Closing Date. (E) Notwithstanding paragraphs (B), (C), and (D), above, if the actuary for the Buyer Pension Plan certifies in writing (with a copy to Seller) that the Buyer Pension Plan will violate the requirements imposed by Treasury Regulation section 1.401(a)(4)-4 unless certain benefits otherwise called for by such paragraphs are not provided by the Buyer Pension Plan, Buyer shall cause such benefits to be provided under a nonqualified deferred compensation plan, rather than under the Buyer Pension Plan, at the same time and in the same form as they otherwise would have been provided under the Buyer Pension Plan; provided that (1) such benefits shall be provided by the Buyer Pension Plan to the maximum extent possible without causing the Buyer Pension Plan to violate Treasury Regulation section 1.401(a)(4)-4; and (2) to the extent that any benefit payable outside of the Buyer Pension Plan pursuant to this paragraph (E) is payable to an individual who is not a member of a "select group of management or highly compensated employees" within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, Buyer shall cause a cash payment or payments to be made to each such individual within 24 months of the termination of the individual's employment with Buyer, in addition to all other payments due or otherwise payable to such individual, in an amount that is reasonably calculated to be actuarially equivalent, on a pre-tax basis, to the value of such benefit. (iii) (A) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Hourly Pension Plan by virtue of his or her coverage under a collective bargaining agreement, shall be calculated as set forth in paragraph (c)(ii)(A) of this Section 11.2.1. (B) The Buyer Pension Plan benefit of a Transferred Employee who, on the Closing Date, participates in the Seller Salaried Pension Plan, shall be calculated by applying the benefit formula set forth in paragraph (c)(ii)(A) of this Section 11.2.1, in accordance with the rules described in the remainder of this paragraph (B). A Transferred Employee's "Seller Pension" shall be calculated by applying the benefit formula under the Seller Salaried Pension Plan (as in effect on the Closing Date) to the Transferred Employee's service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date. A Transferred Employee's "Buyer Pension" shall be not less than an amount calculated by applying the benefit formula under the Buyer Pension Plan to the Transferred Employee's total accredited service and compensation under the Buyer Pension Plan (including service and compensation credited under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation had been earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan after the Closing Date), multiplied by the ratio of accredited service earned after the Closing Date to such total accredited service; provided that for a period of at least five (5) years following the Closing Date, Buyer shall cause the benefit formula used in determining such "Buyer Pension" to provide "section 411(d)(6)" benefits at least as valuable as were provided under the benefit formula applicable to the Transferred Employee under the Seller Salaried Pension Plan on the Closing Date. A Transferred Employee's "Total Service Pension" shall be calculated by applying the benefit formula under 51 the Buyer Pension Plan (before its amendment to reflect the five (5) year inclusion of Seller's formula) to the Transferred Employee's accredited service (including service and compensation credited with the Seller under the Seller Salaried Pension Plan as of the Closing Date as if such service and compensation was earned under the Buyer Pension Plan and service and compensation credited under the Buyer Pension Plan on and after the Closing Date). For purposes of computing a Transferred Employee's "Total Service Pension," compensation received by such a Transferred Employee from the Seller shall be treated as compensation received from the Buyer. The Seller Pension, the Buyer Pension, and the Total Service Pension shall take into account the Transferred Employee's actual age and entire period of service (including service credited under the Seller Salaried Pension Plan as of the Closing Date and service credited under the Buyer Pension Plan on and after the Closing Date) for vesting and benefit eligibility purposes. (C) Each Transferred Employee who is eligible to receive a benefit under the Buyer Pension Plan may elect to receive the portion of said benefit that is equal to the Seller Pension in any form, and with any early retirement or other actuarial subsidy, that was available under the Seller Pension Plan on the Closing Date, without regard to whether the Transferred Employee is eligible to elect or receive, or does elect or receive, the same form of payment or early retirement or actuarial subsidy for the remainder of the pension under the Buyer Pension Plan. (iv) Within sixty (60) days after the Closing Date, Seller shall deliver to Buyer a list reflecting each Transferred Employee's service and compensation under each of the Seller Pension Plans and each Transferred Employee's accrued benefit thereunder as of the Closing Date. (d) Transfer of Assets. (i) In accordance with the provisions of subsection (d) (i) of this Section 11.2.1 and subject to the provisions of subsection (d)(vi) of this Section 11.2.1, Seller shall direct the trustee of the Seller Pension Plans to transfer to the trustee or funding agent of the Buyer Pension Plan the amount required to be transferred by Section 414(l) of the IRC and the regulations thereunder for all Transferred Employees whose accrued benefits are transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, determined using the following assumptions (the "Pension Assets"): Interest Rate: Rate used to value annuities under PBGC Regulation ss. 4044.52(a)(1) for the month in which the Closing Date occurs Annual Rate of Increase in Salaries: 0% Annual Rate of Increase in Social Security Taxable Wage Base: 0% Annual Rate of Increase in Consumer Price Index: 0% Annual Rate of Increase in Limits on Benefits and Compensation: 0% 52 Mortality: Rates specified under PBGC Regulation ss. 4044.53(c) Termination: None Disability: None Retirement: Expected retirement age as specified under PBGC Regulation ss. 4044.55 Lump Sums: None All other demographic assumptions to match those used by Seller in the preparation of financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. In no event shall the amount of Pension Assets transferred be less than the Projected Benefit Obligation associated with all the liabilities being assumed in the aggregate in Section 11.2.1(c) using the assumptions specified by Seller in the preparation of its financial statement disclosures under Statement of Financial Accounting Standards No. 87 for the 1998 fiscal year. The Pension Assets shall be transferred in cash. Except in the case of an arithmetical error in the calculation of the amount of Pension Assets to be transferred, under no circumstances shall Seller or the Seller Pension Plans be liable to transfer any additional amount to Buyer or a Buyer Pension Plan or any other person in respect of the accrued benefits transferred to a Buyer Pension Plan pursuant to Section (c) of this Section 11.2.1, including but not limited to any circumstance under which any person (including a governmental agency) states a claim to some portion or all of the Pension Assets. (ii) Seller shall appoint an actuary ("Seller's Actuary") to determine the amount to be transferred pursuant to subsection (d)(i) of this Section 11.2.1 and shall provide such determination to Buyer, together with a computer file containing all of the data used by Seller's actuary to calculate Pension Assets, within ninety (90) days after the Closing Date. Buyer shall appoint an actuary ("Buyer's Actuary") who shall have the right to audit and review the determination made by Seller's Actuary. If Buyer's Actuary is unable to agree with Seller's Actuary on the amount of the transfer within ninety (90) days after Seller informs Buyer of the amount to be transferred and provides Buyer with the computer file containing all of the data used by Seller's actuary to calculate Pension Assets, Seller and Buyer shall jointly select a third actuary, whose determination shall be binding on Seller and Buyer. Each of Seller and Buyer shall bear the fees, costs and expenses of their respective actuaries, and the fees, costs, and expenses of the third actuary shall be borne one-half by Seller and one-half by Buyer. (iii) Interest on the Pension Assets shall accrue from the Closing Date to the actual date of transfer at the assumed discount rate used in accordance with paragraph (i) of this Section (d); provided that any Pension Assets that are distributed from the Seller Pension Plans before the date of transfer pursuant to subsection (d)(vi) of this Section 11.2.1 53 shall be credited with interest (such interest to be credited to the Buyer Pension Plans) only from the Closing Date to the date of distribution. (iv) Under the terms of each Buyer Pension Plan, the accrued benefit of each Transferred Employee immediately after the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not be less than the sum of each Transferred Employee's accrued benefits under the Seller Pension Plan and the Buyer Pension Plan immediately before the transfer of assets and liabilities. Neither Seller nor its Affiliates nor the Seller Pension Plans nor any trustee thereof shall retain any liability for benefits under the Seller Pension Plans for any Transferred Employee with respect to whom cash has been transferred to a Buyer Pension Plan pursuant to this Section 11.2.1 or distributed pursuant to subsection (d)(vi) of this Section 11.2.1. (v) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.1, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.1 shall not take place until as soon as practicable after the latest of (i) the expiration of the 30-day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, or (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Pension Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Pension Plan is qualified under Section 401(a) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Pension Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired), and (yy) information enabling the enrolled actuary for the Buyer Pension Plan to issue the certification required by Section 6058(b) of the IRC. (vi) (A) If, after the Closing Date and before the date of transfer of assets and liabilities from the Seller Pension Plans pursuant to this Section 11.2.1, the accrued benefit as of the Closing Date becomes payable under a Seller Pension Plan to or with respect to a Transferred Employee, Buyer shall (xx) furnish GTE Service Corporation with a copy of a properly completed application for such benefits, and (yy) direct GTE Service Corporation to instruct the trustee of the Seller Pension Plan to make benefit payments in the form and amount determined by GTE Service Corporation in accordance with the properly completed application for benefits. Seller shall cause GTE Service Corporation to comply with any such direction. (B) Notwithstanding anything herein to the contrary, the assets and liabilities to be transferred from the trustee of the Seller Pension Plans to the trustee or funding agent of the Buyer Pension Plan pursuant to this Section 11.2.1 shall be reduced, as provided in this subsection (vi), to reflect any benefit payments made pursuant to this subsection (vi) regardless of the form in which paid and any expenses described in paragraph (B) of this subsection (vi) that have not otherwise been paid pursuant to this subsection (vi). 54 11.2.2 Savings Plans. (a) As of the date of this Agreement, Seller participates in the GTE Savings Plan and the GTE Hourly Savings Plan (collectively referred to as the "Seller Savings Plans"). Except as provided in Section (g) of this Section 11.2.2, Transferred Employees shall not be entitled to make contributions to or to benefit from matching or other contributions under the Seller Savings Plans on and after the Closing Date. (b) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts one or more savings plans (hereinafter referred to in the aggregate as the "Buyer Savings Plans" and individually as the "Buyer Savings Plan") effective as of the Closing Date and to ensure that each Buyer Savings Plan satisfies the following requirements as of the Closing Date: (i) the Buyer Savings Plan is a qualified, single-employer individual account plan under Section 401(a) of the IRC; (ii) the Buyer Savings Plan does not exclude Transferred Employees from eligibility to participate therein; (iii) the Buyer Savings Plan permits Transferred Employees to make before-tax contributions (under Section 401(k) of the IRC) and provides for matching contributions by the Buyer; and (iv) the Buyer Savings Plan does not violate the requirements of any applicable collective bargaining agreement. Within the thirty (30) day period immediately preceding any transfer of assets and liabilities from a Seller Savings Plan to a Buyer Savings Plan pursuant to this Section 11.2.2, Buyer shall provide Seller with a written certification, in a form acceptable to Seller, that the Buyer Savings Plan satisfies each of the requirements set forth in this Section (b). (c) (i) Seller shall fully vest the Transferred Employees in their account balances under the Seller Savings Plan as of the Closing Date and shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans an amount in cash equal in value to the account balances of the Transferred Employees covered by the Seller Savings Plans as of the date of the transfer; provided that to the extent the account balances to be transferred consist in whole or in part of outstanding loans, Seller shall direct the trustee of the Seller Savings Plans to transfer to the trustee or funding agent of the Buyer Savings Plans, in lieu of cash, the promissory notes and related documents evidencing such loans. Buyer and Seller shall take such actions as may be required to effect the assignment of such loans by the trustee of the Seller Savings Plan to the trustee or funding agent of the Buyer Savings Plan, and Buyer shall cause the trustee or funding agent of the Buyer Savings Plan to accept the assignment of such loans. (ii) After the date of the transfer of assets and liabilities pursuant to this Section 11.2.2, Buyer shall assume all liabilities for the benefits payable to or with respect to such Transferred Employees under the Seller Savings Plans, and Seller and the Seller Savings Plans and their implementing trust shall retain no liability for such benefits. (d) For purposes of eligibility and vesting under the Buyer Savings Plans, each Transferred Employee shall be credited with service as of the Closing Date as determined under the terms of the Seller Savings Plans. As soon as practicable after the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees covered by the Seller Savings Plans, together with each Transferred Employee's service under each of the Seller Savings Plans as of the Closing Date. 55 (e) In connection with the transfer of assets and liabilities pursuant to this Section 11.2.2, Seller and Buyer shall cooperate with each other in making all appropriate filings required by the IRC or ERISA and the regulations thereunder, and the transfer of assets and liabilities pursuant to this Section 11.2.2 shall not take place until as soon as practicable after the latest of (i) the expiration of the thirty (30) day period following the filing of any required notices with the IRS pursuant to Section 6058(b) of the IRC, and (ii) the date Buyer has delivered to Seller (xx) a copy of the Buyer Savings Plan and a copy of the most recent determination letter from the IRS to the effect that the Buyer Savings Plan is qualified under Sections 401(a) and 401(k) of the IRC, together with documentation reasonably satisfactory to Seller of the due adoption of any amendments to the Buyer Savings Plan required by the IRS as a condition to such qualification and a certification from Buyer that no events have occurred that adversely affect the continued validity of such determination letter (apart from the enactment of any Federal law for which the remedial amendment period under Section 401(b) of the IRC has not yet expired). (f) As of the Closing Date, Seller shall cause GTE Service Corporation to deliver to Buyer a list of the Transferred Employees who have outstanding loans under the Seller Savings Plans, together with copies of said Transferred Employees' notes, disclosure statements, and security agreements under the Seller Savings Plans. Seller shall also notify Buyer within thirty (30) days after the Closing Date of any Transferred Employee who initiated a loan within thirty (30) days before the Closing Date. Subject to obtaining the consent of the applicable Transferred Employee if required by law, from the Closing Date until the earliest of (i) the actual date of transfer of assets and liabilities pursuant to this Section 11.2.2; (ii) the full amortization of the Transferred Employee's indebtedness; (iii) the distribution of the entire balance of the Transferred Employee's accounts; or (iv) the last date on which Buyer or one of its Affiliates pays remuneration to the Transferred Employee, Buyer or its Affiliate shall (x) continue the payroll deductions pursuant to which each such Transferred Employee is discharging indebtedness to a Seller Savings Plan and (y) remit the deducted funds to Fidelity Management Trust Company, the trustee of the Seller Savings Plans, as soon as practicable, but in no event more than thirty (30) days, after the date of deduction, together with an accounting that identifies the Transferred Employees with respect to whom the funds were deducted and the amount deducted for each Transferred Employee. All such remitted funds shall be transferred to the appropriate Seller Savings Plan and applied to reduce the appropriate Transferred Employee's outstanding indebtedness. Buyer's obligations under this Section (f) are limited to payroll deductions of loan repayments by the Transferred Employees and remittance of those funds, and nothing herein shall be construed to obligate Buyer to repay to Seller any portion of the outstanding indebtedness of the Transferred Employees that are not otherwise discharged by the Transferred Employees themselves. (g) Seller shall make all required matching contributions with respect to the Transferred Employees' contributions made to the Seller Savings Plan by the Transferred Employees in respect of the period ending on or before the Closing Date in the year containing the Closing Date that would have been eligible for matching contributions without regard to any continued service (e.g., last day of the year employment or 1000 hours) requirements. Such matching contributions shall be made not later than the date on which all other matching contributions are made to the Seller Savings Plans with respect to contributions made at the same 56 time as the Transferred Employees' contributions. For not less than five (5) calendar years following the Closing Date (including the year in which the Closing occurs), Buyer shall, subject to applicable plan qualification requirements, provide salaried Transferred Employees with a matching contribution in the Buyer's Savings Plan equal to $.75 for each $1 contributed by Transferred Employees up to six percent (6%) of compensation (as defined in Buyer's Savings Plan). 11.2.3 Welfare Plans. (a) Buyer shall take all action necessary and appropriate to ensure that, as soon as practicable after the Closing Date, Buyer maintains or adopts, as of the Closing Date, one or more employee welfare benefit plans, including medical, health, dental, flexible spending account, accident, life, short-term disability, and long-term disability and other employee welfare benefit plans providing preretirement welfare benefits for the benefit of (i) the non-bargained Transferred Employees (the "Non-union Welfare Plans") and (ii) the union-represented Transferred Employees in accordance with the provisions of applicable collective bargaining agreements (the "Bargained Welfare Plans"). The Non-union Welfare Plans and the Bargained Welfare Plans are hereinafter referred to collectively as the "Buyer Welfare Plans." The Buyer Welfare Plans shall provide as of the Closing Date pre-retirement benefits to Transferred Employees (and their dependents and beneficiaries) that, in the aggregate, are comparable to the pre-retirement benefits to which they were entitled under the corresponding employee welfare benefit plans maintained by Seller on the Closing Date. For purposes of determining eligibility to participate in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions or requirements for evidence of insurability under the Buyer Welfare Plans shall be waived for Transferred Employees, and Transferred Employees shall receive credit under the Buyer Welfare Plans for co-payments and payments under a deductible limit made by them and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in accordance with the corresponding Seller Welfare Plans. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees who had credited service under a Seller Welfare Plan, together with each such Transferred Employee's service, co-payment amounts, and deductible and out-of-pocket limits under such plan. (b) (i) Except as otherwise provided in subsection (b)(ii) or (b)(iii) of this Section (b) or in an applicable collective bargaining agreement, Buyer shall provide or cause to be provided retiree medical, health, and life benefits to each Transferred Employee (or the dependents or beneficiaries of such Transferred Employee, as the case may be) under the same terms and conditions as apply to comparable employees of Buyer, and Seller shall have no obligation to provide retiree medical, health, and life benefits in respect of any Transferred Employee on or after the Closing Date. (ii) Subject to Section 11.4, below, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is not subject to a collective bargaining agreement as of the Closing Date, who has combined age and years of accredited service (within the meaning of the Seller Pension Plan) as of the Closing Date 57 equal to at least 66, and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Nonunion Transferred Employee"), Seller shall provide or cause to be provided to each such Retired Nonunion Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits under terms and conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated noncollectively bargained employees retiring as of the Closing Date; provided that nothing in this subsection (b)(ii) shall be construed to prevent any Retired Nonunion Transferred Employee (or his or her dependents or beneficiaries) from voluntarily relinquishing such benefits. For a period of five (5) years following the retirement of each Retired Nonunion Transferred Employee from Buyer and its Affiliates or any successor thereof, Buyer shall reimburse Seller, in accordance with this subsection (b)(ii), for the cost of the retiree medical, health, and life coverage for which Seller is responsible and that Seller actually provides pursuant to this subsection (b)(ii). The five (5) year time period for this reimbursement obligation shall be determined separately in respect of each Retired Nonunion Transferred Employee. For each year for which Buyer is required to reimburse Seller under this subsection (b)(ii), Buyer shall pay Seller annually in arrears, within 30 days after Seller provides a statement therefor to Buyer, (A) $4,000 with respect to each Retired Nonunion Transferred Employee who has not yet attained age 65 during the year for which the payment is made and $4,000 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has not yet attained age 65 during the year for which the payment is made, and (B) $1,800 with respect to each Retired Nonunion Transferred Employee who has attained at least age 65 during the year for which the payment is made and $1,800 with respect to each spouse who is covered with respect to a Retired Nonunion Transferred Employee and who has attained at least age 65 during the year for which the payment is made. No reimbursement shall be due with respect to any dependent, other than a spouse, covered with respect to a Retired Nonunion Transferred Employee. The reimbursement obligation for partial years shall be prorated based on the portion of the year covered by the obligation. Each Retired Nonunion Transferred Employee (or his or her dependent or beneficiary, as the case may be) who is provided benefits by Seller under this subsection (b)(ii) shall be required to pay to Seller any premium, contribution or other payment required under, and shall be subject to any copayment or deductible required under, the terms of Seller's applicable retiree medical, health, or life benefit plan; to the extent that any amount constituting such a payment is deducted from any plan, program, or arrangement maintained by Buyer or one of its Affiliates or is otherwise paid to Buyer or one of its Affiliates by such person, Buyer shall cause such amount to be paid to Seller as soon as administratively practicable. (iii) In addition to any other benefits to be provided pursuant to this Article XI, following the retirement from Buyer and its Affiliates or any successor thereof of a Transferred Employee who is subject to a collective bargaining agreement as of the Closing Date and who as of his or her retirement has combined age and years of accredited service (within the meaning of the Seller Pension Plan) equal to at least 76 and at least 15 years of accredited service (within the meaning of the Seller Pension Plan) (a "Retired Union Transferred Employee"), Buyer shall provide or cause to be provided to each such Retired Union Transferred Employee (and/or his or her dependents and beneficiaries) retiree medical, health, and life benefits, for a period of at least five (5) years following the Closing Date, under terms and 58 conditions that are substantially identical to the terms and conditions under the corresponding programs offered by Seller to its similarly situated collectively bargained employees retiring as of the Closing Date. As of the date of this Agreement, Seller maintains one or more voluntary employees' beneficiary associations (within the meaning of Section 501(c)(9) of the IRC) to fund retiree medical, health, and life benefits with respect to the Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date (the "Seller VEBA"). Within 90 days following the Closing Date, Seller shall direct the trustee of the Seller VEBA to transfer an amount in cash from the Seller VEBA to the trustee of one or more voluntary employees' beneficiary associations (within the meaning of Section 501(c)(9) of the IRC) that Buyer maintains or shall cause to be maintained to fund retiree medical, health, and life benefits with respect to the Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date. The amount to be transferred pursuant to the preceding sentence shall be equal, based on the actuarial assumptions set forth in Schedule 11.2.3(b)(iii), to the aggregate Accumulated Postretirement Benefit Obligation (as defined in Statement of Financial Accounting Standards No. 106) as of the Closing Date (which shall be the actuarial assumptions used by seller in developing the level of expense under Statement of Financial Accounting Standards No. 106 for the 1999 fiscal year) attributable to retiree medical, health, and life benefits for Transferred Employees who are subject to a collective bargaining agreement as of the Closing Date. (iv) Benefits provided pursuant to subsections (b)(ii) and (b)(iii) of this Section (b) (including for this purpose, the determination of who is eligible for such benefits) shall take into account service with Buyer or any of its Affiliates on and after the Closing Date in the same manner as if such post-Closing Date service was performed with Seller. Buyer shall provide Seller with such information as shall be reasonably required to implement the immediately preceding sentence with respect to subsection (b)(ii) of this Section (b). (c) Buyer shall refer to GTE Service Corporation and GTE Service Corporation shall assume responsibility for any valid claim under a Seller Welfare Plan for disability, medical, or dental benefits made by a Transferred Employee on or after the Closing Date arising from a disability or loss incurred on or before the Closing Date. Nothing in this Section 11.2.3 shall require Seller, any Affiliate of Seller, or the Seller Welfare Plans to make any payment or to provide any benefit not otherwise provided by the terms of the Seller Welfare Plans. (d) Seller, Buyer, their respective Affiliates, and the Seller Welfare Plans and the Buyer Welfare Plans shall assist and cooperate with each other in the disposition of claims made under the Seller Welfare Plans pursuant to subsection (c) of this Section 11.2.3, and in providing each other with any records, documents, or other information within its control or to which it has access that is reasonably requested by any other as necessary or appropriate to the disposition, settlement, or defense of such claims. (e) Except as otherwise provided in Section 11.2.3(b)(iii) or in Section 11.2.3(f), nothing in this Agreement shall require Seller or its Affiliates to transfer assets or reserves with respect to the Seller Welfare Plans to Buyer or the Buyer Welfare Plans. 59 (f) Seller will make available to Buyer, prior to the Closing Date, a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller under the GTE Flexible Reimbursement Plan (the "FRP"), together with the elections made prior to the Closing Date with respect to such accounts through the Closing Date, any balances standing to the credit of Transferred Employees, and the corresponding amounts being transferred to the corresponding Buyer's plan in accordance with the following sentence. As of the Closing Date, Seller shall cause the portion of the FRP applicable to Transferred Employees to be segregated into a separate component and all account balances of the Transferred Employees in the FRP shall be transferred to a flexible reimbursement plan that Buyer shall cause to be maintained for the duration of the calendar year in which the Closing Date occurs. (g) On and for a period of at least three (3) years after the Closing Date, Transferred Employees not subject to a collective bargaining agreement shall be eligible for benefits under a Buyer severance or separation pay policy or plans that are the same as or comparable to the severance or separation pay policy benefits that are provided by Seller (or the applicable Affiliate, if the Transferred Employee is employed by an employer other than the Seller) or a Seller Pension Plan as of the Closing Date. Buyer shall recognize the service of each such Transferred Employee with Seller and its Affiliates for eligibility, vesting, and benefit determinations under the Buyer severance or separation pay policy or plan. Transferred Employees subject to a collective bargaining agreement shall be eligible for severance or separation pay benefits in accordance with the terms of the applicable collective bargaining agreement. 11.3 Miscellaneous Benefits. 11.3.1 Vacation. (a) On or after the Closing Date, Buyer shall allow Transferred Employees to receive paid time off in the calendar year of the Closing for any unused vacation time accrued prior to the Closing Date. Seller and its Affiliates shall have no liability to Transferred Employees for the vacation payments described in this Section 11.3.1. Seller shall pay Transferred Employees any banked vacation on or before the Closing Date. Schedule 11.3.1 to be prepared by Seller and submitted to Buyer on or before the Closing Date shall list the accrued but unused vacation pay, as of the Closing Date, of each Transferred Employee for the calendar year in which the Closing Date occurs. (b) For purposes of determining a Transferred Employee's eligibility for vacation under Buyer's vacation plan, a Transferred Employee shall be credited, as of the first day of the first calendar year that begins after the calendar year in which the Closing Date occurs, with service for the calendar year in which the Closing Date occurs in an amount equal to the aggregate of the Transferred Employee's service with both Seller and Buyer during the calendar year in which the Closing Date occurs. 11.3.2 Transferred Employee Statements. Within sixty (60) days after the Closing Date, Seller shall prepare and distribute to all Transferred Employees an accurate and complete statement of their accrued benefits under Seller's Pension Plans as of the Closing Date and shall 60 provide Buyer with a true and complete copy of the same. Such statements shall be sufficiently detailed to readily permit Buyer and the Transferred Employees to determine the accuracy thereof. 11.4 Employee Rights. Nothing herein expressed or implied shall confer upon any employee of Seller or its Affiliates, or Buyer or its Affiliates, or upon any legal representative of such employee, or upon any collective bargaining agent, any rights or remedies, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever under or by reason of this Agreement. Nothing in this Agreement shall be deemed to confer upon any person (nor any beneficiary thereof) any rights under or with respect to any plan, program, or arrangement described in or contemplated by this Agreement, and each person (and any beneficiary thereof) shall be entitled to look only to the express terms of any such plan, program, or arrangement for his or her rights thereunder. Nothing in this Agreement shall cause Buyer or its Affiliates, nor Seller or its Affiliates to have any obligation to provide employment or any employee benefits to any individual who is not a Transferred Employee or, except as otherwise provided in Section 11.1.2 with respect to employment agreements, to continue to employ any Transferred Employee for any period of time following the Closing Date. 11.5 WARN Act Requirements. On and after the Closing Date, Buyer shall be responsible with respect to Transferred Employees and their beneficiaries for compliance with the Worker Adjustment and Retraining Notification Act of 1988 and any other applicable law, including any requirement to provide for and discharge any and all notifications, benefits, and liabilities to Transferred Employees and government agencies that might be imposed as a result of the consummation of the transactions contemplated by this Agreement or otherwise. 11.6 Indemnification. 11.6.1 Indemnification of Seller. Notwithstanding anything to the contrary in Article 12 of this Agreement, Buyer shall indemnify and hold harmless Seller, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Buyer, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their 61 successors, except as otherwise expressly permitted under this Agreement, to change, reduce contributions to, terminate, fail to continue, fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) on or after the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. 11.6.2 Indemnification of Buyer. Notwithstanding anything to the contrary in Article 12 of the Agreement, Seller shall indemnify and hold harmless Buyer, its Affiliates, and their respective directors, officers, employees, agents, and assigns, and each employee benefit plan or arrangement maintained or contributed to by Buyer or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) and its administrators, fiduciaries, and agents, from and against any and all claims, demands, actions, administrative or other proceedings, causes of action, liability, loss, cost, damage, and expense (including reasonable attorneys' fees) (i) in any way arising out of or incurred as a result of any action by Seller, its Affiliates, their respective directors, officers, employees, or agents, the administrators or fiduciaries of any employee benefit plan maintained or contributed to by Seller or an Affiliate thereof (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA), or any of their successors, to fail to pay benefits under, or fail to manage or administer properly any employee benefit plan or arrangement (whether or not such plan or arrangement is an "employee benefit plan" within the meaning of Section 3(3) of ERISA) before the Closing Date, or (ii) in any way arising out of or incurred as a result of any action that is a breach of any the covenants, representations, warranties, or obligations of any such person under this Agreement. ARTICLE 12 INDEMNIFICATION 12.1 Survival of Representations. Warranties and Covenants. (a) The representations and warranties contained in Sections 8.1.6 and 8.2.6 will survive the Closing and remain in full force and effect indefinitely. Each of the other representations and warranties contained in Article 8 will terminate, without further action, on the date which is fifteen (15) months following the Closing Date (the "Expiration Date"). (b) This Article 12 shall survive any termination of this Agreement and the Ancillary Agreements and the indemnification contained in this Article 12 shall survive the Closing and shall remain in effect (i) indefinitely, with respect to any Indemnifiable Claim related to the breach of any representation or warranty which pursuant to Section 12.1(a) survives indefinitely, (ii) indefinitely or for the applicable period of performance for such covenant (provided that in the case of covenants, the Indemnitee shall have 60 days after the end of such performance period to provide notice to the Indemnifying Party of a claim for indemnification arising during the performance period), with respect to any Indemnifiable Claim arising under Section 12.2(a)(ii)(B) (post closing covenants), (iii) indefinitely, with respect to any Indemnifiable Claim arising under Section 12.2(a)(iii) (Retained Liabilities) or 12.2(b)(iii) (Assumed Liabilities), and (iv) until the Expiration Date for any Indemnifiable Claims that are 62 not specified in any of the preceding clauses. Unless a claim for indemnification with respect to any alleged breach of any representation or warranty is asserted by notice given as herein provided that specifically identifies a particular breach and the underlying facts relating thereto, which notice is given within the applicable period of survival for such representation or warranty, such claim may not be pursued and is irrevocably waived after such time. Without limiting the generality or effect of the foregoing, no claim for indemnification with respect to any representation or warranty will be deemed to have been properly made except (i) to the extent it is based upon a Third Party Claim made or brought prior to the expiration of the survival period for such representation or warranty, or (ii) to the extent based on Indemnifiable Losses actually incurred by an Indemnitee prior to the expiration of the survival period for such representation or warranty. 12.2 Indemnification. (a) Following the Closing and subject to the other sections of this Article 12, Seller will indemnify, defend and hold harmless Buyer and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations and warranties made by Seller in Section 8.1 of this Agreement, (ii) a breach by Seller of any covenant of Seller contained in this Agreement, which covenant requires performance by Seller (A) prior to or at the Closing, or (B) after the Closing, and (iii) any of the Retained Liabilities. (b) Following the Closing and subject to the other sections of this Article 12, Buyer will indemnify, defend and hold harmless Seller and its Affiliates and their respective directors, officers, and agents from and against all Indemnifiable Losses relating to, resulting from or arising out of (i) any inaccuracy in any of the representations or warranties made by Buyer in Section 8.2 of this Agreement, (ii) a breach by Buyer of any covenant of Buyer contained in this Agreement, which covenant requires performance by Buyer prior to, at or after the Closing, and (iii) any of the Assumed Liabilities. (c) Payments made under this Section 12.2 shall be treated by Buyer and Seller as purchase price adjustments and Buyer and Seller shall file all Tax Returns consistent with such treatment. Notwithstanding anything to the contrary contained herein, neither party shall be indemnified or reimbursed for any Tax consequences arising from the receipt or accrual of an indemnity payment hereunder including any Tax consequences arising from adjustments to the basis of any asset resulting from an adjustment to the Purchase Price or any additional or reduced taxes resulting from any such basis adjustment. (d) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(ii), or under both Section 12.2(b)(i) and Section 12.2(b)(ii), then the Indemnitee's rights to pursue its claim under Section 12.2(a)(ii) or Section 12.29b)(ii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). (e) In the event that a claim against an Indemnifying Party arises under both Section 12.2(a)(i) and Section 12.2(a)(iii), or under both Section 12.2(b)(i) and Section 12.2(b)(iii), then the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Sections 12.3(d). 63 (f) In the event a claim against an Indemnifying Party arises under both Section 12.2(a)(ii) and 12.2(a)(iii), or under both Section 12.2(b)(ii) and 12.2(b)(iii), then the Indemnitee's rights to pursue the claim under Section 12.2(a)(iii) or Section 12.2(b)(iii), as applicable, will exist notwithstanding the provisions of Section 12.3(d). 12.3 Limitations on Liability. (a) For purposes of this Agreement, (i) "Indemnification Payment" means any amount of Indemnifiable Losses required to be paid pursuant to this Agreement, (ii) "Indemnitee" means any person or entity entitled to indemnification under this Agreement, (iii) "Indemnifying Party" means any person or entity required to provide indemnification under this Agreement, and (iv) "Indemnifiable Losses" means any losses, liabilities, damages, costs and expenses (including reasonable attorneys' fees and expenses) actually incurred in connection with any actions, suits, demands, assessments, judgments and settlements, in any such case (x) reduced by the amount of insurance proceeds recovered from any person or entity with respect thereto, and (y) excluding any such losses, liabilities damages, costs and expenses to the extent that the underlying liability or obligation is the result of any action taken or omitted to be taken by any Indemnitee. (b) Notwithstanding anything to the contrary contained in this Agreement, if the Closing occurs, (i) no claim for indemnification may be asserted under Section 12.2(a) with respect to any matter discovered by or known to Buyer on or before the date of this Agreement, or after the date of this Agreement and on or before the Closing Date to the extent that Buyer has not provided timely notice to Seller of the existence of such claim in accordance with Section 10.2, and (ii) no claim for indemnification may be asserted under Section 12.2(b) with respect to any matter discovered by or known to Seller on or before the Closing Date. (c) As between Seller and any Affiliate of Seller, on the one hand, and Buyer and any Affiliate of Buyer, on the other hand, the remedies, rights and obligations set forth in this Article 12, Sections 10.1.2, 11.2.2, 11.6, 13.3 and the Ancillary Agreements will be the exclusive remedies, rights and obligations with respect to the liabilities and obligations referred to in Section 12.2 and any breach of the representations, warranties or covenants set forth in this Agreement. Without limiting the foregoing, as a material inducement to entering into this Agreement, to the fullest extent permitted by law, each of the parties waives any claim or cause of action that it otherwise might assert, and any breach of the representations, warranties or covenants set forth in this Agreement, except for claims or causes of action brought under and subject to the terms and conditions of this Article 12 and Sections 10.1.2, 11.6 and 13.3 or any Indemnifiable Losses arising out of actual fraud. (d) Notwithstanding any other provision of this Agreement or of any applicable Law, no Indemnitee will be entitled to make a claim against an Indemnifying Party under Sections 11.2.2, 11.6, 12.2(a)(i) or 12.2(b)(i) until: (i) the aggregate amount of Indemnifiable Losses incurred by the Indemnitee for any individual occurrence or related series of occurrences giving rise to such Indemnifiable Losses exceeds $25,000, and 64 (ii) the aggregate amount of claims that may be asserted for such Indemnifiable Losses pursuant to Section 12.3(d)(i) exceeds an amount equal to 2% of the Purchase Price, but only to the extent such amount, if any, (a) exceeds an amount equal to 2% of the Purchase Price and (b) is less than the amount set forth in Section 12.3(e). (e) Notwithstanding any other provision of this Agreement, the indemnification obligations of Seller under Section 12.2(a) (except with respect to indemnification for inaccuracies of the representations contained in Sections 8.1.1 through 8.1.6) or the indemnification obligation of Buyer under Section 12.2(b) will not exceed the amount of an amount equal to 6.5% of the Purchase Price respectively. (f) No Indemnifying Party shall be liable to or obligated to indemnify any Indemnitee hereunder for any consequential, special, multiple, punitive or exemplary damages including, but not limited to, damages arising from loss or interruption of business, profits, business opportunities or goodwill, loss of use of facilities, loss of capital, claims of customers, or any cost or expense related thereto, except to the extent such damages have been recovered by a third person and are the subject of a Third Party Claim for which indemnification is available under the express terms of this Section 12. (g) Seller and Buyer shall cooperate with each other with respect to resolving any claim or liability with respect to which one party is obligated to indemnify the other party hereunder, including by making commercially reasonable efforts to mitigate or resolve any such claim or liability. 12.4 Defense of Claims. (a) If any Indemnitee receives notice of the assertion of any claim or of the commencement of any action or proceeding by any entity that is not a party to this Agreement or an Affiliate of such a party (a "Third Party Claim") against such Indemnitee, with respect to which an Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnitee will give such Indemnifying Party reasonably prompt written notice thereof, but in any event not later than ten (10) calendar days after receipt of notice of such Third Party Claim; provided, however, that the failure of the Indemnitee to notify the Indemnifying Party shall only relieve the Indemnifying Party from its obligation to indemnify the Indemnitee pursuant to this Article 12 to the extent that the Indemnifying Party is materially prejudiced by such failure (whether as a result of the forfeiture of substantive rights or defenses or otherwise). Upon receipt of notification of a Third Party Claim, the Indemnifying Party shall be entitled, upon written notice to the Indemnitee, to assume the investigation and defense thereof with counsel reasonably satisfactory to the Indemnitee. Whether or not the Indemnifying Party elects to assume the investigation and defense of any Third Party Claim, the Indemnitee shall have the right to employ separate counsel and to participate in the investigation and defense thereof; provided, however, that the Indemnitee shall pay the fees and disbursements of such separate counsel unless (i) the employment of such separate counsel has been specifically authorized in writing by the Indemnifying Party, (ii) the Indemnifying Party has failed to assume the defense of such Third Party Claim within reasonable time after receipt of notice thereof with counsel reasonably satisfactory to such Indemnitee, or (iii) the named parties to the proceeding in which such claim, demand, action or cause of action has been asserted include both the Indemnifying Party and such Indemnitee and, in the reasonable judgment of counsel to such Indemnitee, there exists one or more defenses that may be available to the Indemnitee that are in conflict with those available to the Indemnifying Party. Notwithstanding the foregoing, the Indemnifying Party shall not be liable for the fees and disbursements of more than one counsel for all Indemnified Parties in connection with any one proceeding or any similar or related proceedings arising from the same general allegations or circumstances. Without the prior written consent of the Indemnitee, the Indemnifying Party will not enter into any settlement of any Third Party Claim that would lead to liability or create any financial or other obligation on the part of the Indemnitee unless such settlement includes as an unconditional term thereof the release of the Indemnitee from all liability in respect of such Third Party Claim. If a settlement offer solely for money damages is made by the applicable third party claimant, and the Indemnifying 65 Party notifies the Indemnitee in writing of the Indemnifying Party's willingness to accept the settlement offer and pay the amount called for by such offer without reservation of any rights or defenses against the Indemnitee, the Indemnitee may continue to contest such claim, free of any participation by the Indemnifying Party, and the amount of any ultimate liability with respect to such Third Party Claim that the Indemnifying Party has an obligation to pay hereunder shall be limited to the lesser of (A) the amount of the settlement offer that the Indemnitee declined to accept plus the Losses of the Indemnitee relating to such Third Party Claim through the date of its rejection of the settlement offer or (B) the aggregate Losses of the Indemnitee with respect to such claim. (b) Any claim by an Indemnitee on account of an Indemnifiable Loss that does not result from a Third Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after an Executive Officer of the Indemnitee becomes actually aware of the incurrence thereof, and the Indemnifying Party will have a period of thirty (30) calendar days within which to respond in writing to such Direct Claim. If the Indemnifying Party does not so respond within such thirty (30) calendar day period, the Indemnifying Party will be deemed to have rejected such claim, in which event the Indemnitee will be free to pursue such remedies as may be available to the Indemnitee on the terms and subject to the provisions of this Article 12. (c) If after the making of any Indemnification Payment the amount of the Indemnifiable Loss to which such payment relates is reduced by recovery, settlement or otherwise under any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other entity, the amount of such reduction (less any costs, expenses, premiums or taxes incurred in connection therewith) will promptly be repaid by the Indemnitee to the Indemnifying Party. Upon making any Indemnification Payment, the Indemnifying Party will, to the extent of such Indemnification Payment, be subrogated to all rights of the Indemnitee against any third party that is not an Affiliate of the Indemnitee in respect of the Indemnifiable Loss to which the Indemnification Payment relates; provided that (i) the Indemnifying Party shall then be in compliance with its obligations under this Agreement in respect of such Indemnifiable Loss, and (ii) until the Indemnitee recovers full payment of its Indemnifiable Loss, all claims of the Indemnifying Party against any such third party on account of said Indemnification Payment will be subrogated and subordinated in right of payment to the Indemnitee's rights against such third party. Without limiting the generality or effect of any other provision of this Article 12, each such Indemnitee and Indemnifying Party will duly execute upon request all instruments 66 reasonably necessary to evidence and perfect the above-described subrogation and subordination rights. 12.5 No Indemnifiable Claims Resulting From Governmental Authority Action. Buyer has no indemnifiable or otherwise compensable claim that any of Seller's representations or warranties in Section 8.1 (other than Sections 8.1.4(b), 8.1.15 and 8.1.25) is inaccurate, or that any covenant has been breached, to the extent that such claim is predicated on any action by the FCC or PUC undertaken after Closing or any action the FCC or PUC requires Seller to undertake after Closing. Buyer may only bring such a claim to the extent that its basis is independent of any such FCC or PUC action. ARTICLE 13 TERMINATION 13.1 Termination Rights. This Agreement may be terminated at any time prior to the Closing Date: (a) at any time by mutual written consent of the parties; (b) by Buyer if any of the conditions provided in Section 6.1 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Buyer; (c) by Seller if any of the conditions provided in Section 6.2 of this Agreement have not been met within eighteen (18) months after execution of this Agreement and have not been waived by Seller; (d) by Seller if any obligations of Buyer provided in Article 3 become incapable of being fulfilled; or (e) by either party immediately upon written notice to the other party if any Governmental Authority issues an order forbidding or enjoining the consummation of the transaction contemplated hereby and such order has become final and non-appealable, or if the GTE California Agreement has been terminated. 13.2 Goodfaith Performance. Neither party shall be entitled to exercise any right of termination pursuant to subsection 13.1(b), (c) or (d) above if such party shall not have performed diligently and in good faith the obligations required to be performed by such party hereunder prior to the date of termination. 13.3 Effect of Termination. (a) If this Agreement is terminated as a result of a Material Adverse Effect or Section 13.1(a), this Agreement shall be of no further force and effect and there shall be no further liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives. 67 (b) If this Agreement is terminated by Buyer pursuant to Section 13.1(b), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that no such termination shall relieve Seller of liability for any claims, damages or losses suffered by Buyer as a result of the negligent or willful failure of Seller to perform any obligations required to be performed by it hereunder on or prior to the date of termination. Notwithstanding anything herein to the contrary, in no event shall the any act or omission of Seller in connection with the Merger be deemed to be a breach of the terms and conditions of this Agreement for purposes of this Section 13.3(b). (c) If this Agreement is terminated by Seller pursuant to Section 13.1(c) or (d), this Agreement shall be of no further force and effect and there shall be no further obligations or liability hereunder (except the obligations under the Confidentiality Agreement and the liability for breach of such obligations) on the part of either party or their respective Affiliates, directors, officers, shareholders, agents or other representatives; provided, however, that in the event such termination is the result of the breach by Buyer of any of its obligations required to be performed by it hereunder on or prior to the date of termination, and Buyer has failed to cure such non-performance within a reasonable period after notice from Seller, then Buyer shall pay to Seller liquidated damages in an amount equal to ten (10) percent of the Purchase Price. Such liquidated damages amount is designed to compensate Seller for its lost opportunity costs and reliance damages caused by such termination. Buyer shall promptly pay such amount to Seller in immediately available funds following such termination. (d) Upon any termination of the Agreement, each of the parties shall promptly comply with the obligations of the Confidentiality Agreement regarding return or destruction of Evaluation Material of the other party. (e) Notwithstanding anything to the contrary contained herein, the provisions of this Section 13.3 and of Sections 14.1, 14.2, 14.3, 14.8, 14.11, 14.13 and 14.14, shall survive any termination of this Agreement. ARTICLE 14 MISCELLANEOUS 14.1 Notices. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, will be deemed to have been given when delivered in person or dispatched by electronic facsimile transfer (confirmed in writing by certified mail, concurrently dispatched) or one business day after having been dispatched for next-day delivery by a nationally recognized overnight courier service to the appropriate party at the address specified below: 68 (a) If to Buyer, to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: Donald P. Weinstein Facsimile No.: (203) 614-4625 With a copy to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06905 Attention: L. Russell Mitten, II, Esq. Facsimile No.: (203) 614-4625 Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin, Esq. Facsimile No.: (202) 387-3467 (b) If to Seller, to: William M. Edwards, III Vice President - Property Repositioning 600 Hidden Ridge, HQE02J27 Irving, TX 75038 Facsimile No. (972) 719-7062 With a copy to: Dale R. Chamberlain Legal Counsel - Property Repositioning 600 Hidden Ridge, HQE02J34 Irving, TX 75038 Facsimile No. (972) 719-7162 or to such other address or addresses as any such party may from time to time designate for itself by like notice. 14.2 Information Releases. The parties shall consult with each other (and allow the other party notice, and a reasonable time to comment) in preparing any employee announcement, press release, public announcement, news media response or other form of release of information concerning this Agreement or the transactions contemplated hereby that is intended to provide such information to the employees generally, news media or the public. Neither party shall issue 69 or cause the publication of any press release, public announcement or media response without the prior written consent of the other party; provided, however, that, after allowing the other party notice and a reasonable time to comment prior to issuance, nothing herein will prohibit either party from making an employee announcement, or issuing or causing publication of any press release, public announcement or media response to the extent that such action is required by applicable Law or the rules of any national stock exchange applicable to such party or its Affiliates. 14.3 Expenses. Whether or not the transactions contemplated hereby are consummated and except as otherwise expressly provided herein, each party will pay any expenses (including attorneys' fees) incurred by it incidental to this Agreement and in consummating the transactions provided for herein. 14.4 Successors and Assigns. This Agreement will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but is not assignable or delegable by any party without the prior written consent of the other party; provided, that (a) Seller may assign this Agreement to an Affiliate of Seller without the consent of Buyer including, on and after the closing of the Merger, the ultimate parent entity of the successor corporation to such merger or any entity controlled thereby; and (b) Buyer may assign this Agreement, without the prior written consent of Seller, to any directly or indirectly wholly owned subsidiary of Buyer provided such subsidiary assumes in writing all the duties and obligations of Buyer hereunder. No such assignment by Buyer shall in any way operate to enlarge, alter or change any obligation due to Seller or relieve Buyer of its obligations hereunder if such subsidiary fails to perform such obligations, with the understanding that Buyer shall be jointly and severally liable with such subsidiary for any non-performance of Buyer's obligations hereunder. 14.5 Amendments. This Agreement may be amended or modified only by a subsequent writing signed by authorized representatives of both parties. 14.6 Captions. The captions set forth in this Agreement are for convenience only and shall not be considered as part of this Agreement, nor as in any way limiting or amplifying the terms and provisions hereof. 14.7 Entire Agreement. The term " Agreement" shall mean collectively this document, the Schedules hereto and any agreements expressly incorporated herein. This Agreement supersedes and revokes any prior discussions and representations, other agreements, commitments, arrangements or understandings of any sort whatsoever, whether oral or written, that may have been made or entered into by the parties relating to the matters contemplated hereby. This Agreement, the Confidentiality Agreement and the Ancillary Documents constitute the entire agreement by and among the parties with respect to the subject matter hereof, and there are no representations, warranties, agreements, commitments, arrangements or understandings except as expressly set forth herein. 14.8 Waiver. Except as otherwise expressly provided in this Agreement, neither the failure nor any delay on the part of any party to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any such 70 right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege available to each party at law or in equity. 14.9 Third Parties. Except as expressly provided herein, nothing contained in this Agreement is intended to confer upon any Person, other than the parties hereto and their successors and permitted assigns, any rights or remedies under or by reason of this Agreement. 14.10 Counterparts. This Agreement may be executed in two or more counterparts, any or all of which shall constitute one and the same instrument. 14.11 Governing Law. This Agreement and the Ancillary Agreements shall in all respects be governed by and construed in accordance with the laws of the State of New York (except that no effect shall be given to any conflicts of law principles of the State of New York that would require the application of the laws of any other jurisdiction). The parties irrevocably submit to the exclusive jurisdiction of any New York State Court or any Federal Court located in the borough of Manhattan in the City of New York for purposes of any suit, action or other proceeding arising out of this Agreement, the Ancillary Agreements or any transaction contemplated hereby or thereby. The parties agree that service of process, summons or notice or document by U.S. registered mail to such party's respective address set forth in Section 14.1 shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence. The parties hereto irrevocably and unconditionally waive trial by jury in any legal action or proceeding relating to this Agreement or any other agreement entered into in connection therewith and for any counterclaim with respect thereto. In the event of any breach of the provisions of this Agreement or any other agreement entered into in connection therewith, the non-breaching party shall be entitled to equitable relief, including in the form of injunctions and orders for specific performance, where the applicable legal standards for such relief in such courts are met, in addition to all other remedies available to the non-breaching party with respect thereto at law or in equity. 14.12 Further Assurances. From time to time, as and when requested by one of the parties, the other party will use its commercially reasonable efforts to execute and deliver, or cause to be executed and delivered, all such documents and instruments as may be reasonably necessary or appropriate, in the reasonable opinion of counsel for Seller and Buyer, to consummate and make effective the transactions contemplated by this Agreement. 14.13 Severability. If any provision of this Agreement is determined to be invalid, illegal or unenforceable by any Governmental Authority, the remaining provisions of this Agreement to the extent permitted by Law shall remain in full force and effect provided that the essential terms and conditions of this Agreement for both parties remain valid, binding and enforceable and provided that the economic and legal substance of the transactions contemplated is not affected in any manner materially adverse to any party. In the event of any such determination, the parties agree to negotiate in good faith to modify this Agreement to fulfill as closely as possible the original intents and purposes hereof. To the extent permitted by Law, the parties hereby to the same extent waive any provision of Law that renders any provision hereof prohibited or unenforceable in any respect. 71 14.14 Representation by Counsel; Interpretation. Seller and Buyer each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of Law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of Buyer and Seller. 14.15 Covenants of GTE Northwest. GTE Northwest agrees to cause Seller to perform each of Seller's agreements and covenants contained in this Agreement. GTE Northwest further agrees that to the extent Seller shall sell or otherwise dispose of all or substantially all of its assets, GTE Northwest shall be liable to the same extent as Seller (but only to that extent) for any non-performance of Seller's agreements and covenants contained in this Agreement. 72 IN WITNESS WHEREOF, the parties, acting through their duly authorized agents, have caused this Agreement to be duly executed and delivered as of the date first above written. GTE WEST COAST INCORPORATED CITIZENS UTILITIES COMPANY By: By: ------------------------- ------------------------------- Name: Name: ----------------------- ----------------------------- Title: Title: ---------------------- ---------------------------- By: For the limited purpose of Section ------------------------- 14.15 only: Name: GTE NORTHWEST INCORPORATED ----------------------- Title: By: ---------------------- ------------------------------- Name: ----------------------------- Title: ---------------------------- 73 EX-10.26 7 ASSET PURCHASE AGREEMENTS WITH US WEST EXECUTION COPY - ARIZONA AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $5,839,310 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $145,982,761 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $30,992,400. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $30,992,400 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $14,127,364, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. \ Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area, or (ii) to Seller's Knowledge, situated in a site or study area that is covered by the Environmental Quality Act, Ariz. Rev. Stat., Tit. 49, Ch 281-287, as amended. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By: ------------------------------------ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By: ------------------------------------ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - COLORADO AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $5,839,310 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $145,982,761 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $30,992,400. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $30,992,400 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $14,127,364, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area, or (ii) to Seller's Knowledge, situated in a site or study area that is covered by the Hazardous Waste Sites Act, C.R.S. Sections 25-16-101 et seq., as amended, the Water Quality Control Act, C.R.S. Sections 25-8-101 et seq., or the Hazardous Waste Management Act, C.R.S. Sections 25-12-101 et seq. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 \ INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By:_______________________________________ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By:_______________________________________ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - IDAHO AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $4,916,706 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $122,917,650 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $17,837,100. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $17,837,100 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $11,895,256, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By:_______________________________________ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By:_______________________________________ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - IOWA AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $5,348,887 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $133,722,180 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $25,762,500. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $25,762,500 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $12,940,856, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area, or (ii) to Seller's Knowledge, situated in a site or study area that is covered by the Environmental Quality Control Act, Iowa Code Ch. 381-397 and 455B 423-431, as amended, or the Groundwater Protection Act, Iowa Code Ch. 455E, as amended. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By:_______________________________________ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By:_______________________________________ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - MINNESOTA AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit 1 B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $5,348,887 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $133,722,180 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $25,762,500. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $25,762,500 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $12,940,856, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area, or (ii) to Seller's Knowledge, situated in a site or study area that is covered by the Environmental Quality Control Act, Iowa Code Ch. 381-397 and 455B 423-431, as amended, or the Groundwater Protection Act, Iowa Code Ch. 455E, as amended. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the \ 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By:________________________________________ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By:________________________________________ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - MONTANA AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $1,127,732 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $28,193,295 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $8,054,100. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $8,054,100 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $2,728,383, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means:\ 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area, or (ii) to Seller's Knowledge, situated in a site or study area that is covered by the Comprehensive Environmental Cleanup and Responsibility Act, Mont. Code Ann. Sections 75-10-701 through -738, as amended. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By: ________________________________________ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By: ________________________________________ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - NEBRASKA AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $782,400 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $19,560,000 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $8,013,600. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $8,013,600 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $1,892,903, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is (i) situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area, or (ii) to Seller's Knowledge, situated in a site or study area that is covered by Volume 8, Title 118, Title 119, Title 122 or Title 128 of the Nebraska Administrative Rules and Regulations, as amended. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below:\ "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By:_____________________________________ Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By:_____________________________________ Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY - NORTH DAKOTA AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $1,589,568 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $39,739,200 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $11,191,500. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $11,191,500 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $3,845,729, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no 7 remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By: ---------------------------------- Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By: ---------------------------------- Solomon D. Trujillo President and Chief Executive Officer EXECUTION COPY -- WYOMING AGREEMENT For PURCHASE AND SALE of TELEPHONE EXCHANGES Dated as of June 16, 1999 Between CITIZENS UTILITIES COMPANY And U S WEST COMMUNICATIONS, INC. AGREEMENT FOR PURCHASE AND SALE OF TELEPHONE EXCHANGES This Agreement for Purchase and Sale of Telephone Exchanges is made and entered into as of June 16, 1999 by and between U S WEST Communications, Inc., a Colorado corporation ("Seller"), and Citizens Utilities Company, a Delaware corporation ("Buyer"). A. Seller possesses certain rights to provide and operate wireline telecommunication services pursuant to operating authorities issued by the public utilities commissions or similar authorities of various states, and owns certain assets used to provide such services in the telephone exchanges listed on Exhibit A hereto and in any cross-border communities served by such exchanges (the "Exchanges"). B. Buyer desires to acquire Seller's right to provide and operate wireline telecommunication services and related non-tariffed or non-regulated wireline services and products in the Exchanges (the "Business") and to purchase the Transferred Assets (as defined below), and Seller wishes to sell, assign and transfer such right and assets to Buyer. C. Each defined term used herein shall have the meaning set forth in this Agreement where such term is first used or, if no definition is so set forth, shall have the meaning set forth in Article 10 below. NOW, THEREFORE, for and in consideration of the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE I PURCHASE AND SALE OF EXCHANGES 1.1 Purchase and Sale of Transferred Assets. Upon the terms and subject to the conditions hereinafter set forth, at the Closing described in Article 2, Seller agrees to sell, convey, transfer, assign and deliver all of the Transferred Assets to Buyer, and Buyer agrees to purchase and receive the Transferred Assets from Seller. Except as specifically set forth in Section 1.2 hereof, Seller shall transfer the Transferred Assets to Buyer on the Closing Date free and clear of all Encumbrances, and Buyer shall not, by virtue of its purchase of the Transferred Assets, assume or become responsible for any debts, liabilities or obligations of Seller. 1.2 Assumption of Obligations. Buyer covenants and agrees that, on the Closing Date, it shall execute and deliver to Seller an Assumption Agreement in substantially the form of Exhibit B hereto (the "Assumption Agreement") pursuant to which it will assume and agree to perform and discharge the following liabilities and obligations of Seller to the extent related to the Exchanges (collectively, the "Assumed Liabilities"): (i) All liabilities and obligations of Seller arising under the Operating Contracts, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Operating Contracts occurring or arising or accruing on or prior to the Closing Date; (ii) All liabilities and obligations of Seller related to unperformed service obligations, right-of-way relocation obligations and construction in progress as of the Closing Date; (iii) All liabilities and obligations imposed on Seller by State Regulatory Authorities in connection with the operation of the Exchanges, including without limitation obligations to provide 911 emergency services and to make any investment in the Exchanges required by any Governmental Authority, except that Buyer shall not assume any liabilities or obligations, other than held order or other service obligations, imposed on Seller by State Regulatory Authorities that arise out of Seller's breach of any decision by the State Regulatory Authorities, or any intentional misconduct or material misrepresentation by Seller; (iv) All federal, state, county, municipal, foreign or other taxing jurisdiction sales, use, transfer, gross receipts, consumer levy, privilege or similar taxes, duties, excises or governmental charges, including any penalties and interest thereon, arising out of the sale of the Transferred Assets by Seller to Buyer hereunder, excluding any income tax liability of Seller (collectively, "Transfer Taxes"); and (v) All liabilities and obligations arising under Environmental Laws with respect to the real property included in the Transferred Assets. 1.3 Retained Liabilities. Seller shall retain and shall pay, perform and discharge when due, the following liabilities, responsibilities and obligations of Seller with respect to the Business (collectively, the "Retained Liabilities"): (i) Subject to Section 1.5, all trade payables and other payment obligations of Seller as of the Closing Date; (ii) All long-term debt of Seller and debt of Seller owed to any one or more of its Affiliates; 2 (iii) Subject to Section 1.5, all taxes and assessments relating to the operation of the Business (other than Transfer Taxes) on or before the Closing Date for the use, ownership or operation of the Transferred Assets on or before the Closing Date; (iv) All liabilities and obligations arising on or before the Closing Date with respect to Seller's employees that may be hired by Buyer (the "Hired Employees"), including (a) all liabilities, responsibilities and obligations arising on or before the Closing Date relating to collective bargaining agreements or other union contracts, and (b) any such liabilities or obligations that arise after the Closing Date to the extent that such liabilities and obligations relate to facts, circumstances or conditions arising or occurring on or before the Closing Date with respect to the Hired Employees; (v) All liabilities, responsibilities and obligations arising out of or related to any actions, lawsuits or legal proceedings based on facts, circumstances or conditions arising, existing or occurring on or before the effective time of Closing, regardless of whether known or unknown, asserted or unasserted, as of the Closing, including any liability under any claim (whether made on or before the Closing Date) relating to the period ending on or before the effective time of Closing which, but for the consummation of the transactions contemplated hereby, would have been covered under any insurance policy of Seller, and all liability associated with workers' compensation claims incurred but not reported as of the effective time of Closing and workers' compensation claims reported as of the Closing Date but not then due or payable, but expressly excluding any such liability, responsibility or obligation for litigation or claims of any Governmental Authority relating to liabilities and obligations arising under Environmental Laws with respect to the Fee Realty included in the Transferred Assets, unless such liabilities, responsibilities and obligations result from the actions or omissions of Buyer constituting breaches of this Agreement; (vi) All liabilities and obligations for prior period adjustments of revenues from the Business, for any refunds or bill credits to ratepayers for overbillings or overearnings occurring or relating to the period prior to the effective time of Closing, and for all toll revenues, settlements, pools, separations studies or similar activities relating to the Exchanges for which Seller is responsible, provided that such liabilities and obligations are asserted within four years of the Closing Date; (vii) All liabilities, responsibilities and obligations arising out of or occurring or resulting from the use or ownership of the Transferred Assets on or before the Closing Date; and (viii) All liabilities, responsibilities and obligations with respect to the Excluded Assets. 1.4 Letters of Credit and Purchase Price. 3 1.4.1 Letters of Credit. Within 15 business days of the date hereof, Buyer shall deliver to Seller one or more irrevocable letters of credit issued by financial institutions reasonably acceptable to Seller (the "Letters of Credit") providing for drawings in an aggregate principal amount equal to $713,900 (the "LC Amount"). The Letters of Credit shall be returned to Buyer upon the Closing of the Transactions or upon termination of this Agreement for any reason other than the following: (i) Seller's termination of this Agreement pursuant to Section 6.2.4 or 6.2.5, or (ii) Seller's termination of this Agreement pursuant to Section 6.2.1 because the condition precedent set forth in Section 3.2.1 becomes incapable of satisfaction through no fault of Seller after Buyer has had a reasonable opportunity to cause such condition precedent to be satisfied. In addition, if Seller terminates this Agreement pursuant to Section 6.2.4 as a result of Buyer's breach of Section 4.1.4 for any reason, Buyer and Seller have mutually agreed that in addition to Seller's right to draw down the full amount of the Letters of Credit, Buyer shall be liable to Seller for an additional amount equal to the LC Amount. If Buyer fails to deliver the Letters of Credit within 15 business days of the date hereof, and Seller thereafter terminates this Agreement pursuant to Section 6.2.4 as a result thereof, Buyer shall be liable to Seller for the LC Amount. In the event that Seller terminates this Agreement for any of the foregoing reasons, in view of the difficulty of determining the amount of damages which may result to Seller from such failure to consummate the Transactions, Buyer and Seller have mutually agreed that the proceeds of the Letters of Credit and any other monies payable to Seller in accordance with the foregoing provisions shall be retained by Seller as liquidated damages, and not as a penalty, and this Agreement shall thereafter become null and void except for those provisions which by their terms survive termination of this Agreement. The parties have agreed that the proceeds of the Letters of Credit and such other monies payable to Seller in accordance with the foregoing provisions in such event shall be Seller's exclusive remedy. 1.4.2 Purchase Price. Subject to Section 1.4.4, Buyer shall pay to Seller as consideration for the transfer of Seller's rights with respect to the Business and the sale of the Transferred Assets an aggregate purchase price (the "Purchase Price") consisting of $17,847,494 plus (a) the estimated amount of Exchange Investments, if any, calculated pursuant to Section 1.4.3(a) (the "Estimated Exchange Investments") less (b) the Revenue Adjustment, if any calculated pursuant to Section 1.4.3(b). The Purchase Price shall be paid on the Closing Date by wire transfer of immediately available funds to such bank account(s) as Seller shall designate within a reasonable time prior to Closing and the Letters of Credit shall be returned to Buyer upon payment of the Purchase Price. 1.4.3 Closing Date Purchase Price Adjustments. (a) Estimated Exchange Investments. Seller shall prepare and deliver to Buyer, no less than five business days prior to the Closing, an estimate of the net book value on the Closing Date associated with any investment by Seller in the Exchanges (the "Exchange Investment") prior to Closing required by any Governmental Authority pursuant to an order issued between the date hereof and the Closing Date, other than with respect to investments contemplated by Schedule 5.2.3(iii) or with respect to Seller's efforts to comply with any Governmental Authority's orders issued prior to the date hereof. 4 (b) Revenue Adjustment. The Purchase Price shall be decreased if the product of four times the aggregate revenues from the Business, as reported on the monthly profit and loss statements for the Business for the three full consecutive calendar months most recently completed prior to the Closing Date, less any portion of such revenues attributable to the Excluded Assets (the "Adjusted Annualized Closing Revenues"), are less than $3,878,100. Any decrease in the Purchase Price in accordance with this Section 1.4.3(b) shall be equal to the difference between the Adjusted Annualized Closing Revenues and $3,878,100 multiplied by 400% (the "Revenue Adjustment"); provided, that the Purchase Price shall not be decreased pursuant to this Section 1.4.3(b) to the extent that the Maximum Adjustment Amount shall have been reached. 1.4.4 Post-Closing Purchase Price Adjustment. (a) Actual Exchange Investments. Within 120 days following the Closing Date, Buyer shall prepare and deliver to Seller a written statement (the "Exchange Investment Statement") of the calculation of the actual amount of Exchange Investment. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), to the extent that the actual amount of Exchange Investment as shown on the Exchange Investment Statement differs from the Estimated Exchange Investment, the difference shall be paid within 35 days of delivery of the Exchange Investment Statement (i) by Buyer to Seller in the case of an excess, or (ii) by Seller to Buyer in the case of a deficit. (b) Reinitialization Adjustment. If, on the Closing Date, the Reinitialization has not been effected, the Purchase Price shall be adjusted in accordance with the following: (i) If the Reinitialization occurs after the Closing Date but on or prior to the two year anniversary of the Closing Date, Buyer shall prepare and deliver to Seller, as soon as practicable after the Reinitialization, a written statement (the "Reinitialization Statement") of the calculation of the actual number of interstate switched access minutes of use (the "Interstate Use Minutes") for the Exchanges per month for the period commencing on the Closing Date and ending on the last day of the month in which the Reinitialization occurred. Subject to the dispute resolution mechanism set forth in Section 1.4.4(c), Seller shall pay Buyer within 60 days of delivery of the Reinitialization Statement an amount equal to $0.023 multiplied by the Interstate Use Minutes for the period commencing on the day after the Closing Date and ending on the date of the Reinitialization (pro rated, if necessary, for the first and final month). Seller's failure to make such payment by the 60th day following delivery of the Reinitialization Statement shall be deemed to be an initiation of the dispute resolution mechanism set forth in Section 1.4.4(c). (ii) If the Reinitialization has not occurred by the two year anniversary of the Closing Date, Buyer shall so notify Seller and Seller shall pay Buyer within 60 days after receipt of such notice an amount equal to $1,727,177, plus simple interest at a rate of 8% per annum for the period commencing on the Closing Date through but excluding the date of payment. 5 (c) Dispute Resolution Mechanism. (i) Within 30 days after receipt of the Exchange Investment Statement or 60 days after receipt of the Reinitialization Statement (each, a "Post-Closing Statement"), as the case may be, Seller may, in a written notice to Buyer, describe in reasonable detail any proposed adjustments to the relevant Post-Closing Statement in question and the reasons therefor. If Buyer shall not have received a notice of proposed adjustments within such 30 or 60 day period, as the case may be, Seller will be deemed irrevocably to have accepted such Post-Closing Statement. (ii) If Seller disputes any portion of the Post-Closing Statement, the parties shall calculate the portion of the undisputed amount, if any, and such amount shall be paid by the appropriate party within five business days of the determination of the undisputed amount. Buyer and Seller shall negotiate in good faith to resolve any dispute. If any dispute cannot be resolved within 30 days following Buyer's receipt of the proposed adjustment, Deloitte & Touche or another independent public accounting firm that is nationally recognized in the United States jointly selected by Buyer and Seller shall be engaged to resolve such disputes in accordance with the standards set forth in this Section, which resolution shall be final and binding. The fees and expenses of such accounting firm shall be shared by Buyer and Seller in inverse proportion to the relative amounts of the disputed amount determined to be for the account of Buyer and Seller, respectively. Upon delivery of such public accounting firms's resolution of such dispute to the parties, the party required to make a payment pursuant to such resolution shall promptly, but no later than five business days after such delivery, pay to the other party the amount determined by such public accounting firm to be owed to such party. (d) Any amount paid pursuant to Section 1.4.4(a) shall bear interest from the Closing Date through but excluding the date of payment, at a rate of 8% per annum. Any amount owing pursuant to Section 1.4.4(b)(i) that is not paid within 60 days of delivery of the Reinitialization Statement shall bear interest from the 61st day following delivery of the Reinitialization Statement through but excluding the date of payment, at a rate of 8% per annum. Such interest shall accrue daily on the basis of a year of 365 days and the actual number of days for which due and shall be payable together with the relevant amount payable pursuant to this Section 1.4.4. All amounts payable pursuant to this Section 1.4.4 shall be paid by delivery of immediately available funds in U.S. dollars by wire transfer, in the case of amounts payable by Buyer, to such account of Seller as Seller may designate and, in the case of amounts payable by Seller, to such account of Buyer as Buyer may designate. (e) The Purchase Price shall be deemed to be adjusted by any amounts paid pursuant to this Section 1.4.4. 6 1.5 Prorations. All real and personal property and similar taxes and assessments with respect to the Transferred Assets, all rents, utilities and other periodic charges and expenses arising from the normal operations of the Business shall be prorated as of 11:59 p.m. local time on the Closing Date. Such prorations shall be agreed upon by the parties as of the Closing Date and reflected as an adjustment to the Purchase Price. Following the Closing Date, each party shall thereafter be responsible for the payment of all such amounts for which it is responsible, as determined by such prorations, as they become due. For purposes of the foregoing proration, the parties agree that, with respect to states in which Seller is assessed for real or personal property taxes on a centralized basis or where a tax is imposed in lieu of property tax, Seller shall be responsible for payment of property or other taxes assessed by such state for the entire taxable year in which the Closing occurs and a pro rata portion of such property taxes will be allocated to Buyer as of the Closing Date and paid to Seller on the Closing Date. All prorations pursuant to this Section 1.5 will be final and binding on both parties. Unless otherwise mutually agreed no later than 30 days prior to the Closing Date, the specific date and time for the change of telecommunications service to occur with respect to the Exchanges shall be at 11:59 p.m., local time, on the Closing Date. 1.6 Allocation of the Purchase Price. Prior to the Closing Date, Buyer and Seller shall use their good faith efforts to agree to the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Internal Revenue Code of 1986, as amended (the "Code"). If Buyer and Seller agree to such Allocation prior to Closing, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Governmental Authority or in any judicial proceeding that is in any way inconsistent with such allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation, Buyer and Seller covenant and agree to file, and to cause their respective Affiliates to file, all tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in applicable law. 1.7 Transfer Taxes. Buyer shall be responsible for all Transfer Taxes imposed by any local, state or federal governmental authorities in connection with the sale, transfer or assignment of the Transferred Assets or otherwise on account of the Transactions, regardless of whether Buyer or Seller is assessed therefor. Seller shall be responsible for filing the applicable returns and shall file them in a timely manner. No less than 20 days prior to the due date of any such returns, Seller shall provide Buyer with the proposed amount of Transfer Taxes to be reported and remitted. No less than 10 days prior to the due date of any such returns, Buyer shall either approve the proposed amount or advise Seller of an adjusted amount of Transfer Taxes to be reported and remitted. Seller shall report and remit Transfer Taxes in amounts as approved or adjusted by Buyer. In the event Buyer fails to approve Seller's proposed amount of Transfer Taxes and fails to advise Seller of an adjusted amount of Transfer Taxes within 10 days prior to the due date of such return, Seller shall interpret such inaction on the part of Buyer as direction by Buyer to make no report of and no 7 remittance of Transfer Taxes. Buyer shall remit to Seller on the day prior to the due date of such return, by wire transfer of immediately available funds, the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities. In the event Seller does not receive the agreed upon amount of Transfer Taxes to be remitted to the taxing authorities from Buyer on or before the day prior to the due date of the return, Seller shall interpret such failure of Buyer to provide funds as direction by Buyer to make no report of and no remittance of Transfer Taxes. Buyer warrants that any adjustments by Buyer to Seller's proposed amount of Transfer Taxes or any direction by Buyer to make no report of and no remittance of Transfer Taxes will be based on substantial state and/or local authority that Transfer Taxes are not due and owing. Buyer shall indemnify and hold harmless Seller from and against any and all such Transfer Taxes and any penalties, interest or expenses (including attorneys' fees) incurred by Seller with respect thereto unless such interest and penalties result from the actions or omissions of Seller that are unrelated to any breaches by Buyer of its obligations hereunder. ARTICLE 2 CLOSING 2.1 Closing. The consummation of the purchase and sale of the Transferred Assets (the "Closing") shall take place at Seller's offices in Denver, Colorado, at 10:00 a.m., local time, on the last calendar day of the month in which all the conditions precedent to Closing set forth in Article 3 have been satisfied or waived, or on such other date as the parties mutually agree, but in no event shall the Closing occur later than September 30, 2001 unless the parties shall mutually agree to extend the date of the Closing. The date that the Closing actually occurs is referred to as the "Closing Date." If the Closing is postponed, all references to the Closing Date in this Agreement shall refer to the postponed date of Closing. 2.2 Deliveries by Seller to Buyer. At or prior to the Closing, Seller will deliver to Buyer: 2.2.1 Certified copies of all Seller's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Seller; 2.2.2 a duly executed Bill of Sale, in substantially the form of Exhibit C hereto, and duly executed assignments and other instruments of transfer sufficient to convey to Buyer title to all the personal property included in the Transferred Assets; 2.2.3 A duly executed closing certificate of Seller contemplated by Sections 3.1.1 and 3.1.2; 2.2.4 Releases, satisfactions or terminations of all mortgages, financing statements or other Encumbrances on any of the Transferred Assets or, in the alternative, an indemnity of Seller with respect to such Encumbrances in form and substance reasonably acceptable to Buyer; 8 2.2.5 Special warranty deeds covering the Fee Realty and assignments in customary local form covering the other realty and Interests included in the Transferred Assets, including all rights-of-way which are by their terms assignable; 2.2.6 An affidavit in a form complying with Section 1445 of the Code; and 2.2.7 Such other documents and items as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law, including vehicle transfer documentation. 2.3 Deliveries by Buyer to Seller. At or prior to the Closing, Buyer will deliver to Seller: 2.3.1 The Purchase Price as required by Section 1.4, together with any proration payment required to be paid on the Closing Date pursuant to Section 1.5; 2.3.2 Certified copies of all Buyer's resolutions pertaining to the authorization of this Agreement and the consummation of the Transactions by Buyer; 2.3.3 A duly executed closing certificate of Buyer contemplated by Sections 3.2.1 and 3.2.2; and 2.3.4 The Assumption Agreement and such other certificates and documents as are reasonably necessary or appropriate to effect the consummation of the Transactions or which may be customary under local law. 2.4 Documents to be Delivered by Seller and Buyer to Each Other. Within 30 days after the date of this Agreement, the parties shall negotiate in good faith and enter into a Transition Agreement similar in scope to the agreement attached as Exhibit D hereto. Within 90 days after the date of this Agreement, the parties shall commence to negotiate in good faith the definitive terms of the services agreements for the services that Buyer requests Seller to provide upon Closing and described on Exhibit E hereto. At or prior to the Closing, Buyer and Seller shall execute and deliver such services agreements. The parties acknowledge and agree that the agreements contemplated by this Section 2.4 are an integral part of, and will be entered into as part and parcel to, and in conjunction with, the other transactions and agreements contemplated by this Agreement. 2.5 Further Assurances. Except as otherwise provided herein or in the transition agreements, all instruments of conveyance, assignment or transfer referred to herein, all sums of money, and all records and data to be delivered as specified in this Agreement shall be delivered at or prior to the Closing. The parties agree following the Closing to execute and deliver such further instruments of conveyance, assignment and assumption as may be reasonably necessary to give effect to the transfer of the Transferred Assets and the assumption of the Assumed Liabilities. In addition, in the event of an inadvertent transfer of Excluded Assets, Buyer shall upon request by Seller execute and deliver such instruments of conveyance, assignment and transfer as may be 9 reasonably necessary to reconvey such Excluded Assets to Seller and shall promptly return such Excluded Assets to Seller. ARTICLE 3 CONDITIONS 3.1 Conditions to Buyer's Obligations. The obligation of Buyer to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Buyer: 3.1.1 Representations and Warranties. All representations and warranties of Seller made in this Agreement shall be true and correct on and as of the Closing Date as though made at such time, other than inaccuracies in such representations and warranties that in the aggregate do not have a material adverse effect on the Business or changes approved by Buyer in writing, and Seller shall have delivered to Buyer a certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.2 Covenants. Seller shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Seller shall have delivered to Buyer a Certificate of Seller to that effect, dated as of the Closing Date, signed by an authorized officer of Seller. 3.1.3 Governmental Approvals. The State Regulatory Approvals and the FCC Approval (collectively, "Governmental Approvals") shall have been obtained and shall be in full force and effect and shall not contain any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. 3.1.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.1.5 Hart-Scott-Rodino Act. All filings required to be made under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "H-S-R Act"), shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 10 3.1.6 Certificates and Other Documents. Seller shall have executed and delivered the certificates and other documents required by Sections 2.2 and 2.4. 3.1.7 Absence of Material Adverse Change. Since December 31, 1998, there shall have occurred no casualty or other event or change, not subsequently cured by Seller, that has resulted in a material adverse effect on the Business, unless such event has resulted in an amendment to this Agreement as contemplated by Section 6.1.2. 3.1.8 Material Third Party Consents. Buyer shall have received evidence, in form and substance reasonably satisfactory to it, that the required third party consents listed on Schedule 3.1.8 have been obtained and remain in full force and effect on the Closing Date. 3.1.9 Delivery of Financial Information. Seller shall have delivered the Required Financial Statements and representation letters, in each case as and when required by Section 5.2.7. 3.1.10 Environmental Inspections. If it is determined pursuant to Section 5.3.7 that remediation of potential material liabilities under Environmental Laws is required, then (i) Seller shall have completed the remediation to Buyer's reasonable satisfaction, (ii) if Seller elects to exclude a parcel of Fee Realty, and Buyer so elects, Seller and Buyer shall have entered into a long-term, low-cost lease, in form and substance reasonably satisfactory to Buyer, for Buyer's use of such parcel after Closing, or (iii) if Seller elects to exclude the parcel or the Exchange to which such parcel relates, and if such parcel alone has been excluded and Buyer has not elected to lease such parcel, Seller and Buyer shall have agreed in good faith to a reduction in the Purchase Price. In no event shall Seller be responsible for any other environmental remediation. 3.1.11 Title Matters. If the aggregate estimated costs and expenses reasonably necessary to remedy all Encumbrances pursuant to Section 5.3.9 exceeds $10,000 (the "Title Threshold"), Seller shall have removed the Excessive Encumbrances. "Excessive Encumbrances" means one or more Encumbrances selected by Seller, the removal of which will bring the aggregate estimated costs and expenses reasonably necessary to remedy the remaining Encumbrances below the Title Threshold. Seller shall have removed the Excessive Encumbrances by either (i) causing the title company to agree to delete such Excessive Encumbrances as an exception in the Title Commitment or, with the prior written consent of Buyer, shall have insured over such Excessive Encumbrances by endorsement, or (ii) if acceptable to Buyer and Seller in each of its reasonable discretion, the parties shall have entered into a written agreement containing Seller's commitment to remedy such Excessive Encumbrances on terms reasonably satisfactory to Buyer. In no event shall Seller have any obligation to cure or remove any Encumbrance that is not an Excessive Encumbrance. 3.1.12 Billing Conversion. The Steering Committee established pursuant to the Transition Services Agreement shall have concluded at least thirty days prior to Closing that the billing system conversion will be completed by Closing. 11 3.2 Conditions to Seller's Obligations. The obligation of Seller to consummate the Transactions shall be subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller: 3.2.1 Representations and Warranties. All representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects on and as of the Closing Date as though made at such time, other than changes approved by Seller in writing, and Buyer shall have delivered to Seller a certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.2 Covenants. Buyer shall have performed and complied in all material respects with all covenants and agreements required or contemplated by the Transaction Documents to be performed by it on or prior to the Closing Date, and Buyer shall have delivered to Seller a Certificate of Buyer to that effect, dated as of the Closing Date, signed by an authorized officer of Buyer. 3.2.3 Governmental Approvals. All Governmental Approvals shall have been obtained and shall be in full force and effect. All such approvals and consents shall be deemed to have been obtained after the grant thereof has become a Final Order. The terms and conditions of the Governmental Approvals shall be acceptable in all material respects to Seller in its reasonable discretion. 3.2.4 No Injunction or Governmental Proceedings. No preliminary or permanent injunction by any Governmental Authority shall have been issued and remain in effect which prevents or delays the Transactions, nor shall any Governmental Authority have instituted any action or proceeding challenging the acquisition by Buyer or the transfer and sale by Seller of the Transferred Assets or otherwise seeking to restrain or prohibit the consummation of the Transactions. 3.2.5 H-S-R Act. All filings required to be made under the H-S-R Act shall have been made, and the waiting period thereunder shall have expired or early termination thereof shall have been granted. 3.2.6 Certificates and Other Documents. Buyer shall have delivered the certificates and other documents required under Sections 2.3 and 2.4. 12 ARTICLE 4 REPRESENTATIONS AND WARRANTIES 4.1 Buyer's Representations and Warranties. Buyer represents and warrants to Seller that: 4.1.1 Organization. Buyer is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Buyer has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.1.2 Corporate Authority. This Agreement has been, and when executed by Buyer each of the other Transaction Documents will be, duly and validly executed and delivered by Buyer. This Agreement constitutes, and when executed by Buyer each of the other Transaction Documents will constitute, the valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.1.3 Governmental Authorizations. Except as contemplated by this Agreement or as set forth in Schedule 4.1.3, neither Buyer's execution and delivery of the Transaction Documents nor Buyer's consummation of the Transactions require authorization or approval of, or filing with, any Governmental Authority. 4.1.4 Funds. On the Closing Date, Buyer shall have sufficient funds available to pay the Purchase Price, any proration payment required to be paid on the Closing Date pursuant to Section 1.4, the amount of any Transfer Taxes to be paid by Seller as provided in Section 1.6 and to consummate the Transactions. 4.1.5 Litigation. There are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Buyer's knowledge threatened) involving Buyer or any of its properties or assets that (i) question the validity of any of the Transaction Documents or the Transactions; or (ii) seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Buyer under the Transaction Documents. 4.1.6 Investigation. Buyer, through its accountants, attorneys, agents, employees, and others, has made or will have made prior to the Closing such investigations of the Exchanges and Transferred Assets and of the factual, legal and other condition and location of the Exchanges and Transferred Assets that it deems necessary or advisable with respect to the Transactions. Buyer 13 has not received from the Seller, or from anyone acting or claiming to act on behalf of the Seller, any accounting, tax, legal or other similar advice with respect to the Transactions, and Buyer is relying solely on advice of its own accounting, tax, legal, and other advisors for such advice. Buyer has based its decision to acquire the Transferred Assets solely on the results of such investigations and the representations, warranties and covenants of Seller set forth herein, and not based on any other information (including without limitation information contained in Seller's descriptive memorandum) provided to Buyer by Seller, its Affiliates, employees, agents, representatives or advisors. 4.2 Seller's Representations and Warranties. BUYER UNDERSTANDS THAT, EXCEPT AS SET FORTH IN THIS SECTION 4.2, SELLER MAKES NO REPRESENTATIONS, WARRANTIES OR GUARANTEES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND, NATURE OR TYPE WHATSOEVER WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES OF MERCHANTABILITY, WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, AND WARRANTIES AS TO THE APPURTENANCES, FACILITIES AND IMPROVEMENTS THEREON, OR THE VALUE, MARKETABILITY, FEASIBILITY, DESIRABILITY OR ADAPTABILITY THEREOF. Seller represents and warrants to Buyer that: 4.2.1 Organization. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Colorado with full corporate power and authority to execute and deliver the Transaction Documents, to consummate the Transactions and to perform all of its obligations under the Transaction Documents. Seller has obtained all corporate approvals necessary to consummate the Transactions and authorize the execution, delivery and performance of the Transaction Documents. 4.2.2 Authorization, Execution and Delivery. This Agreement has been, and when executed by Seller each of the other Transaction Documents will be, duly and validly executed and delivered by Seller. This Agreement constitutes, and when executed by Seller each of the other Transaction Documents will constitute, the valid, legal and binding agreement of Seller enforceable against Seller in accordance with its terms, except to the extent that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws relating to creditors' rights generally and by principles of equity. 4.2.3 Transferred Assets. Except with respect to Fee Realty, the Transferred Assets are, and at the time of Closing will be, owned by Seller and conveyed, transferred and assigned to Buyer free and clear of all Encumbrances. The Transferred Assets (i) are in a normal state of repair (except for ordinary wear and tear), (ii) are sufficient, both in number and condition, to comply with applicable requirements of State Regulatory Authorities and the manufacturer's specifications, except for non-compliances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date, and (iii) will include all assets of every type, nature and description that relate to, arise from, are used or held by Seller primarily in the operation of the Business as presently operated by Seller (including vehicles and related vehicle stock, portable 14 office equipment, test equipment, generators, materials, supplies, tools, maintenance radio equipment and antennas normally located within the Exchanges or primarily used in connection with the Business), except for the Excluded Assets. Assuming the receipt of all required third-party consents, the instruments and documents to be executed and/or delivered by Seller to Buyer pursuant to Section 2.2 hereof at or following the Closing Date shall be adequate and sufficient to vest in Buyer all of Seller's right, title and interest in or to the Transferred Assets. To Seller's Knowledge, Seller enjoys peaceful, undisturbed possession under all leases included in the Material Contracts and rights-of-way and easements with respect thereto and with respect to the Fee Realty. Notwithstanding the foregoing to the contrary, with respect to all Fee Realty included in the Transferred Assets, Seller makes no representations or warranties as to the ownership or Encumbrances thereon, it being the express agreement of the parties that such matters shall be the subject of the arrangements set forth in Sections 3.1.11 and 5.3.9. 4.2.4 Governmental Authorization. Except as contemplated by this Agreement and except for such of the following the absence of which would not have a material adverse effect on the Business, no authorization or approval of, or filing with, any Governmental Authority will be required in connection with Seller's execution and delivery of the Transaction Documents or Seller's consummation of the Transactions. 4.2.5 Litigation. As of the date hereof there are no actions, suits, proceedings, claims, arbitrations or investigations, either at law or in equity, of any kind now pending (or to the best of Seller's Knowledge threatened) against Seller (i) in which an adverse determination would have a material adverse effect on the Business; (ii) that question the validity of any of the Transaction Documents or the Transactions; or (iii) that seek to delay, prohibit or restrict in any manner any actions taken or contemplated to be taken by Seller under the Transaction Documents. 4.2.6 Tax Matters. All taxes and assessments, including interest and penalties thereon, of any kind whatsoever accrued with respect to the Business through the Closing Date (other than Transfer Taxes and taxes subject to proration at Closing pursuant to Section 1.4) have been or will be paid in full by Seller. There are no liens for federal, state or local taxes upon the Transferred Assets, except for statutory liens for taxes or assessments not yet delinquent or the validity of which is being contested in good faith by Seller in appropriate proceedings, the ultimate liability for which shall remain the obligation of Seller, and Seller shall indemnify Buyer against all such liabilities. Seller has timely filed, or will cause to be timely filed, all federal, state and local tax returns and reports of any kind (including, without limitation, income, franchise, sales, use, excise, employment and real and personal property) which Seller is obligated to file with respect to the Business for all periods up to and including the Closing Date. 4.2.7 No Breach. The execution and delivery by Seller of the Transaction Documents and the consummation by Seller of the Transactions will not: (i) violate any provision of the Articles of Incorporation or Bylaws (or comparable governing documents or instruments) of Seller; (ii) violate any applicable law, statute, ordinance, rule, regulation, code, license, certificate, franchise, permit, writ, ruling award, executive order, directive, requirement, injunction (whether 15 temporary, preliminary or permanent), judgment, decree or other order (collectively "Applicable Laws") issued, enacted, entered or deemed applicable by any Governmental Authorities having jurisdiction over Seller or any of the Transferred Assets; (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give another party any rights of termination, cancellation or acceleration) under any of the terms, conditions or provisions of the Operating Contracts; or (iv) result in the creation or imposition of any Encumbrance on any of the Transferred Assets, excluding from the foregoing clauses those violations, breaches or defaults which individually or in the aggregate would not reasonably be expected to have a material adverse effect upon the operation of the Business by Buyer after the Closing. 4.2.8 Compliance with Laws. Except as set forth on Schedule 4.2.18(a), the Business has been operated and the Exchanges are in compliance with all requirements of the Authorities and all Applicable Laws, except where Seller's non-compliance would not have a material adverse effect on the Business. Seller has not received any notice of (and to Seller's Knowledge there is no reason to anticipate) any material violation of any Applicable Laws. Notwithstanding the foregoing, except as specifically provided in Section 5.3.7, Seller hereby disclaims all warranties, whether express or implied, with regard to the presence of Hazardous Materials in the Transferred Assets or compliance of the Business with Environmental Laws. Buyer understands and agrees that, other than as specifically provided in Section 5.3.7, any responsibility for compliance with Environmental Laws applicable to the ownership or use of the Transferred Assets following the Closing Date, including the costs of any remediation or cleanup associated with the Transferred Assets, or environmental claim or liability associated with the Transferred Assets, irrespective of when contamination occurred, is assumed by Buyer on the Closing Date. 4.2.9 Operating Contracts. Schedule 4.2.9(a) sets forth all of the Operating Contracts of the type described below (the "Material Contracts") that Seller, after using commercially reasonable efforts, has been able to gather for Buyer's review. No Operating Contract described in (i) below will be entered into after the date of this Agreement and no Operating Contract described in (ii) - (ix) will be entered into after the date of this Agreement other than in the ordinary course of business: (i) an agreement containing a non-compete agreement or other non-compete covenant that in either case would by its terms limit the freedom of Buyer following the Closing to compete in any respect with respect to the Business with any third party; (ii) an agreement granting an Encumbrance on Property other than Fee Realty; (iii) an agreement for the sale of any material Transferred Assets or grant of any preferential rights to purchase any material Transferred Assets; (iv) a land development agreement or other similar construction agreement; (v) a lease of real property; 16 (vi) an agreement with respect to 911 services or E911 services; (vii) an agreement between Seller and a third party for the construction of mutual transmission facilities between various switching points included in the Exchanges; (viii) an agreement that relates to arrangements and commitments between Seller and a third party for the third party's location of equipment in facilities included in the Transferred Assets except to the extent set forth in a separate interconnection agreement; or (ix) an agreement other than as set forth above with respect to which the aggregate amount to be received or paid thereunder attributable to the Exchanges with respect to calendar year 1999 or any subsequent calendar year is expected to exceed $50,000 based on the terms of such agreement or on the payments which have been made under such agreement with respect to calendar year 1998, to the extent applicable. Schedule 4.2.9(b) identifies (i) each interconnection agreement between Seller and a third party or an Affiliate of Seller that is applicable to the Exchanges, (ii) each agreement that relates to arrangements and commitments between Seller and an Affiliate of Seller for such Affiliate's co-location of equipment in facilities included in the Transferred Assets that Seller, using commercially reasonable efforts, has been able to identify, and (iii) each Exchange where a third party has physically co-located equipment or, to Seller's Knowledge, where a third party has made a written request to co-locate equipment located in the Exchanges. All of the Operating Contracts were made in the ordinary course of business and are in all material respects valid, binding and currently in full force and effect. Seller is not in default in any material respect under any of the Operating Contracts, and to Seller's Knowledge no event has occurred which, through the passage of time or the giving of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, cause the acceleration of an obligation of Seller, or result in the creation of any Encumbrance upon any of the Transferred Assets. To Seller's Knowledge, no other party is in default under any of the Operating Contracts, nor has any event occurred which, through the passage of time or the giving, of notice, or both, would constitute a default or give rise to a right of termination or cancellation under any of the Operating Contracts, or cause the acceleration of any obligation owed to Seller. Complete and correct copies of all the Material Contracts in Seller's possession, together with all modifications and amendments thereto to date of this Agreement in Seller's possession, have been made available to Buyer or its representatives. Schedule 4.2.9(a) also specifically identifies each lease that requires the consent, approval or waiver of the other party thereto for the assignment thereof. 4.2.10 Realty. (i) To Seller's Knowledge, the legal descriptions to be delivered by Seller to the title insurance company shall be complete and accurate in all material respects; (ii) as of the date hereof, there are no deferred property taxes or assessments payable by Seller with respect to the Fee Realty which may or will become due and payable as a result of the consummation of the 17 Transactions, other than Transfer Taxes; (iii) there are no condemnation proceedings pending or to Seller's knowledge threatened with respect to all or any part of any parcel of Fee Realty; and (iv) Seller is not a foreign person within the meaning of Section 1445 of the Code. 4.2.11 Reports. Seller has filed all reports relating to the Business required by all Applicable Laws to be filed, and it has duly paid or accrued on its books of account all applicable duties and charges due or assessed against it pursuant to such reports. 4.2.12 Year 2000 Matters. (a) Year 2000 Compliance. Seller warrants and represents that to the best of its knowledge and belief following an effort of commercially reasonable diligence by Seller, all of its business assets, including but not limited to information technology and non-information technology systems and facilities and those of its external suppliers utilized by Seller in the Business and included in the Transferred Assets ("Business Assets"), are or will be "Year 2000 Compliant" (defined below) on or before the Closing Date. For purposes of this Agreement, the following definitions apply: (i) "Date Data" means any data, formula, algorithm, process, input or output which includes, calculates or represents a date, a reference to a date or a representation of a date; (ii) "Year 2000 Compliant" means: 1. the functions, calculations, and other computing processes of the Business Assets (collectively, "Processes") perform in a consistent manner regardless of the date in time on which the Processes are actually performed and regardless of the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000 and whether or not the Date Data is affected by leap year; 2. the Business Assets accept, calculate, compare, sort, extract, sequence, and otherwise process all Date Data, and returns and displays all Date Data, in a consistent manner regardless of the dates used in such Date Data, whether before, on, during or after January 1, 2000. 3. the Business Assets will function without interruptions caused by the date in time on which the Processes are actually performed or by the Date Data inputs to the Business Assets, whether before, on, during or after January 1, 2000; 4. the Business Assets store and display all Date Data in ways that are unambiguous as to the determination of the century; 18 5. no Date Data will cause one or more Business Assets to perform an abnormally ending routine or function within the Processes or generate incorrect values or invalid results; and 6. each of the Business Assets will properly exchange Date Data with all other Business Assets that it may interact or inter-operate with. (b) Year 2000 Testing. Seller warrants that the Business Assets have been tested by Seller and/or Seller's suppliers of Business Assets to determine whether each of the Business Assets is Year 2000 Compliant. Seller's suppliers of Business Assets have represented to Seller that the Business Assets provided by them are Year 2000 Compliant and/or have been tested by those suppliers to determine whether such Business Assets are Year 2000 Compliant. Seller will notify Buyer immediately of the results of any test or any claim or other information that indicates any Business Asset is not Year 2000 Compliant. (c) Year 2000 Remedies. In the event that Buyer encounters a Business Asset that is not Year 2000 Compliant, within a commercially reasonable period after receipt from Buyer of written notice thereof, Seller shall at its expense cause the identified non-compliant Business Asset to be repaired or replaced. 4.2.13 Correct Records. The financial records, ledgers, account books and other accounting records of Seller relating to the Business are current, correct and complete and, if required by applicable law, conform with the rules and regulations of the FCC and the State Regulatory Authorities, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date and except for the Continuing Property Records for the Exchanges, which are dealt with specifically elsewhere in this Agreement. Seller has retained substantially all original cost documentation relating to the regulated Business regarding the expenditures made by Seller within the period required by Applicable Law that relate to the Property, and such original cost documents are correct and complete in all respects, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 4.2.14 Tribal and Federal Consents. (a) To Seller's Knowledge, all easements, rights-of-way, franchises, licenses, permits, consents, approvals, certificates and other authorizations of tribal authorities and the United States Bureau of Indian Affairs (the "BIA")(collectively, "Tribal Authorizations") held by Seller and relating to any Purchased Property located, or any operations of the Business conducts, on Native American reservations are in full force and effect, Seller is not in material default thereunder, and there are no other Tribal Authorizations required to be obtained by Seller from, or filings required to be made by Seller with, any tribal authority or the BIA with respect to any such Purchased Property or any such operations of the Business, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. 19 (b) Except as set forth on Schedule 4.2.14(b), to Seller's Knowledge no consent, approval or waiver from, or filing with, any tribal authority or the BIA is required to be obtained or made in connection with the execution and delivery by Seller of this Agreement, or Seller's fulfillment of its obligations under this Agreement, except for instances that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. (c) If during the period between the date of this Agreement and the Closing Date the representation and warranty set forth in this Section 4.2.14 proves to be untrue with respect to one or more parcels of Realty and Buyer and Seller in good faith have been unable to remedy the circumstances that causes such representation and warranty to be untrue with respect to such parcel, at the election of either Buyer or Seller such parcel shall be excluded from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. 4.2.15 Financial Statements. Within 15 business days of the date hereof, Seller shall deliver to Buyer a copy of financial statements relating to the Business, consisting of a balance sheet and income statement and statements of cash flow and changes in equity for the Business as of and for the respective periods ended December 31, 1996, December 31, 1997, and December 31, 1998, together with the auditor's report thereon (the "Financial Statements"). The Financial Statements were prepared based upon the books and records of Seller, fairly present in all material respects the financial condition of the business as of the appropriate periods and the results of operations for the year then ended, in each case in conformity with GAAP. 4.2.16 Loss of Major Customer. Except as set forth on Schedule 4.2.16, since June 1, 1997, Seller has not suffered the loss of any customer of the Business that had billings in any year in excess of $25,000. 4.2.17 CPRs; Vehicles. Seller has provided Buyer with its Continuing Property Records ("CPRs") for the Exchanges. Schedule 4.2.17 contains a true and complete list and description (including vehicle identification numbers) as of June 1, 1999 of the vehicles that are included in the Transferred Assets. 4.2.18 Tariffs and Authorities. (a) The regulatory tariffs applicable to the Business stand in full force and effect on the date of this Agreement in accordance with all terms, and there is no outstanding notice of cancellation or termination or, to Seller's Knowledge, any threatened cancellation or termination in connection therewith, nor is Seller subject to any restrictions or conditions applicable to its regulatory tariffs that limit or would limit the operation of the Business (other than restrictions or conditions generally applicable to tariffs of that type). Each such tariff has been duly and validly approved by Seller's regulatory agency. Seller is not in material default under the terms and conditions of any such tariff and there is no basis for any claim of default by Seller in any material 20 respect under any such tariff. Schedule 4.2.18(a) sets forth all applications by Seller or complaints or petitions by others or proceedings pending or, to Seller's Knowledge, threatened before the state regulatory authority relating to the Business or its operations or the regulatory tariffs that Seller, after using commercially reasonable efforts, has been able to identify. To Seller's Knowledge, there are no material violations by subscribers or others under any such tariff. A true and correct copy of each tariff applicable to the Business has been delivered or made available to Buyer. (b) Listed on Schedule 4.2.18(b) are the material Authorities held by Seller and used in the operation of the Business. Each of such Authorities is in full force and effect of the date of this Agreement in accordance with its terms, and there is no outstanding notice of cancellation or termination or, to Seller's knowledge, any threatened cancellation or termination in connection therewith, nor are any of such Authorities subject to any restrictions or conditions that limit the operation of the Business (other than restrictions or conditions generally applicable to licenses or permits of that type). Subject to the Communications Act of 1934, as amended, and the regulations thereunder, the FCC licenses included in the Authorities are free from all security interests, liens, claims or encumbrances of any nature whatsoever. Except as disclosed on Schedule 4.2.18(c), there are no applications by Seller or complaints or petitions by others or proceedings pending or threatened before the FCC relating to the Business or the FCC licenses that would reasonably be expected to have a material adverse impact on the Business. 4.2.19 Environmental Matters. (a) Schedule 4.2.19(a) accurately describes each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $100,000. Except as will be set forth on Schedule 4.2.19(d), no environmental remediation is occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets nor has Seller or any Affiliate of Seller issued a request for proposal or otherwise asked an environmental remediation contractor to begin plans for environmental remediation. (b) Schedule 4.2.19(b) sets forth a true and accurate list of all underground storage tanks ("USTs") and aboveground storage tanks ("ASTs") located on the Fee Realty and the leased real property included in the Transferred Assets that are in use. (c) Except as set forth in Schedule 4.2.19(c) and, to the extent such information is unavailable on the date of execution of this Agreement, as set forth and supplemented on Schedule 4.2.19(d), none of the Fee Realty or leased real property is situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal "Superfund" study area. 21 (d) Within 30 days from the date of this Agreement, Seller will prepare and deliver to Buyer Schedule 4.2.19(d), which schedule will list (i) all environmental remediation occurring on any parcel of Fee Realty or leased real property included in the Transferred Assets, (ii) any requests for proposals for remediation, (iii) any requests by Seller or any Affiliate of Seller to begin plans for environmental remediation, (iv) all USTs and ASTs located on the Fee Realty and the leased real property included in the Transferred Assets that, to Seller's Knowledge, have been abandoned in place, and (v) each incident known to Seller and arising since December 31, 1996, involving violation of or noncompliance with Environmental Laws in connection with Seller's operation of the Business or the use or ownership of the Transferred Assets with respect to which the fines exceed $10,000. In addition, within such period, Seller shall deliver to Buyer complete copies of letters of non-compliance with respect to each incident listed in subsection (v) above, copies of AST and UST closure letters contained in the files and records of Seller, copies of all No Further Action letters contained in the files and records of Seller, and a description of the status of any existing fuel tank remediation. 4.2.20 Employee Benefits. (a) Schedule 4.2.20(a) lists each Employee Benefit Plan and Other Plan maintained or contributed to by Seller or its affiliates for the benefit of any employee employed by, or associated with, the Business (hereinafter, an "employee of the Business"). Seller has provided Buyer with full and complete copies (including all amendments) of all of such Employee Benefit Plans and Other Plans. (b) To Seller's Knowledge, each such Pension Plan, Welfare Plan and Other Plan maintained by Seller has been operated in accordance with its terms and in accordance with applicable law, to the extent that the failure to do so would have material adverse effect on the Business or its assets. (c) Except as otherwise set forth on Schedule 4.2.20(c), no Employee Benefit Plan or Other Plan provides benefits for persons who are not active employees of Seller. (d) Except as set forth on Schedule 4.2.20(g), there are no actions, suits or claims pending or threatened (other than routine claims for benefits) relating to any Employee Benefit Plan or Other Plan identified in Schedule 4.2.20(a) except for actions, suits or claims that are not in the aggregate reasonably likely to have a material adverse effect on the Business following the Closing Date. (e) Seller does not maintain any Employee Benefit Plan or Other Plan under which it would be obligated to pay benefits because of the consummation of the transaction contemplated by this Agreement, which could become an obligation of the Buyer. (f) Seller has used its best efforts to maintain each trust forming a part of any Pension Plan identified in Schedule 4.2.20(a) which is not exempt from Part 2, 3 and 4 of Title I of 22 ERISA to meet all requirements for qualification under Sections 401 and 501 of the Internal Revenue Code, and all applicable related rules and final regulations. (g) Schedule 4.2.20(g) sets forth all the exceptions to the following statements that Seller, after using commercially reasonable efforts, has been able to identify: (i) Seller is not subject to any collective bargaining agreement covering any employees of the Business; (ii) there are no current, or to Seller' Knowledge, any pending or threatened strikes, slowdowns, picketing, work stoppages or lock-outs affecting the Business; (iii) to Seller's knowledge, there is no pending or threatened organized activity or petition for certification of a collective bargaining representative involving employees of the Business; (iv) to Seller's Knowledge, there is no pending or threatened charge, action, complaint, or proceeding of any nature against Seller relating to the violation of any applicable state and federal labor or employment law or regulation in connection with the Business, nor is there any other pending or threatened labor or employment dispute against or affecting Seller in connection with the Business ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date; and (v) with respect to employees of the Business, Seller has complied in all respects with the laws relating to employment, equal employment opportunity, nondiscrimination, collective bargaining, wages, hours of work, employee benefits, occupation safety and health, immigration, and plant closings ,except for items that in the aggregate are not reasonably likely to have a material adverse effect on the Business following the Closing Date. Seller has delivered to Buyer accurate and complete copies of all collective bargaining agreements affecting any of the employees in the Exchanges. "Employee Benefit Plan" means any Pension Plan and Welfare Plan within the meaning of Section 3(3) of ERISA. "Other Plan" means any employment, noncompetition, management, agency or consulting arrangement, bonus, profit sharing, deferred compensation, incentive, stock option, stock ownership or stock purchase plan, severance or unemployment arrangement, vacation pay, fringe benefit or other similar plan, policy or arrangement, whether or not in written form, which does not constitute an Employee Benefit Plan and which is not listed on Schedule 4.2.20(a). "Pension Plan" means any employee pension plan within the meaning of Section 3(2) of ERISA. "Welfare Plan" means any employee welfare benefit plan within the meaning of the Section 3(1) of ERISA. 4.2.21 Accuracy of Information Furnished. (a) To Seller's Knowledge: 23 (i) Seller made a good faith effort, given the voluminous nature of the material available with respect to the Transferred Assets, the necessity to present in many cases representative documents or descriptions of documents, and Seller's need to maintain certain competitive information confidential, to include in the due diligence notebooks contained in the Data Room located in Seller's offices in Denver, Colorado all documents or appropriate descriptions of all documents that, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision; and (ii) Seller did not intentionally and consciously decide to (1) exclude from the due diligence notebooks (2) withhold from Buyer in response to Buyer's requests for additional information or (3) not make available for review by Buyer or its agents at Seller's offices in Denver, Colorado any document relating to the operation of the Business as currently conducted which, in Seller's reasonable opinion, a reasonable prospective acquiror of the Transferred Assets would deem to be material in its decision to acquire the Transferred Assets. 4.2.22 No Material Adverse Change. Since December 31, 1998 there has not occurred (i) any event or condition that would have a material adverse effect on the Business, (ii) any increase in compensation payable or to become payable by Seller to any of its Hired Employees or agents, other than normal merit or promotional increases and pursuant to any collective bargaining agreements, (iii) any amendment or termination of, or delivery of written notice to amend or terminate, any Material Contract, except any amendment or termination in the ordinary course of business or (iv) any change in any accounting method, practice or policy of Seller with respect to the Business. ARTICLE 5 COVENANTS 5.1 Covenants of Buyer. Buyer hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.1.1 Continued Efforts. Buyer will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Buyer; (ii) cause to be performed all of the actions required of Buyer at or prior to the Closing; and (iii) take such steps and do all such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. Without limiting the foregoing, Buyer agrees if requested by Seller to apply for or otherwise seek any required third-party consents on a joint basis. 5.1.2 Cooperation. Buyer agrees to cooperate with Seller with respect to (i) Seller's assignment to Buyer and Buyer's assumption of the Transferred Assets hereunder, and (ii) Seller's structuring of the Transactions to comply with the requirements of a like-kind exchange under Section 1031 of the Code (a "1031 Transaction") at no additional expense to Buyer, such 24 cooperation to include, without limitation, purchase of the Transferred Assets from a "qualified intermediary" (as defined in Section 1031) of Seller's choice and execution of such documents in connection with the Transactions as Seller may reasonably request. If Seller elects to pursue the Transactions as a 1031 Transaction, then (i) notwithstanding anything in this Agreement to the contrary, Seller shall fully indemnify, defend and hold Buyer harmless from and against any and all liabilities resulting therefrom, including, but not limited to, any tax impacts on Buyer or the Transferred Assets, and (ii) Seller shall remain directly and primarily bound by all other conditions, representations, warranties and covenants contained herein and remedies related thereto. 5.1.3 Employee Matters. (a) Buyer agrees that, during the period between the date hereof and the Closing Date and for a period of 18 months thereafter, without the prior written consent of Seller, Buyer will not actively solicit for employment any employee of Seller other than those persons identified by Seller to Buyer in writing as provided in this Section 5.1.3 or who respond to a general solicitation of employment made by Buyer. (b) As soon as practicable following the date hereof and as permitted by applicable law and collective bargaining agreements, Seller shall provide to Buyer a list of all employees whose services are primarily related to the Exchange (the employees on such list being referred to as "Prospective Hires"). Buyer shall have the right to audit such list to determine that it contains an accurate and complete listing of all Prospective Hires, and Seller shall cooperate in providing Buyer with such information as Buyer may reasonably request to assist in such audit. Within 90 days following the date of this Agreement, and consistent with applicable law and any collective bargaining agreement, Seller shall provide Buyer with a definitive list of Prospective Hires, such list to contain the name, job classification, position, title, date of hire, current salary or wage, bargaining unit, primary exchange(s), work location, telephone number and last known address of each Prospective Hire. (c) Buyer may, but shall have no obligation to, employ or offer employment to any Prospective Hire. Seller shall cooperate in all reasonable respects with Buyer to allow Buyer to evaluate and interview the Prospective Hires to make hiring decisions. At least 60 days before the scheduled Closing Date, Buyer shall provide to Seller in writing a list of the Prospective Hires that Buyer intends to offer employment. At least 45 days before the scheduled Closing Date, Buyer shall notify those Prospective Hires whom Buyer intends to hire on the Closing Date; the form and manner of such notification shall be reasonably satisfactory to and approved in advance by Seller. Buyer shall be permitted to conduct appropriate pre-hire investigations of such named Prospective Hires and make any offer of employment for such Prospective Hires conditional upon receiving results of such investigations as are satisfactory to Buyer. (d) As of the Closing Date, Seller shall separate from its payroll the employment of all of the Prospective Hires to whom Buyer has made offers of employment other than any such Prospective Hire who has been offered employment by Buyer and who is on leave status, including 25 employees receiving Workers' Compensation Benefits, as of the Closing Date (each, an "Employee on Leave Status"). Buyer shall employ any Employee on Leave Status (i) who is on approved leave under the Family and Medical Leave Act on the Closing Date only when such Employee on Leave Status returns to work from such approved leave under the Family and Medical Leave Act or (b) who is receiving Workers' Compensation Benefits on the Closing Date only when such Employee on Leave Status is released to return to work but only if such release occurs within sixteen weeks after the date of initial eligibility for Workers' Compensation Benefits, in each case subject to Buyer's right to conduct appropriate pre-hire investigations of such Employee on Leave Status and to Buyer's receipt of results of such investigations that are satisfactory to Buyer. (e) Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any Prospective Hire who is employed by Seller as of the Closing Date, including salaries, commissions, bonuses, deferred compensation, severance, insurance, vacation, and other compensation or benefits to which they are entitled for periods prior to the Closing (and for Employee on Leave Status, until their employment by Buyer, as set forth in Section 5.1.3(d) hereof), including all amounts (if any) payable on account of the termination of such Prospective Hires. (f) Seller will be responsible for maintenance and distribution of benefits accrued under any Employee Benefit Plan maintained by Seller pursuant to such plan and any legal requirements. Buyer will not assume any obligation or liability for any such accrued benefits under any employee benefit plans maintained by Seller. (g) Nothing in this Section 5.1.3 or elsewhere in this Agreement shall be deemed to make any Prospective Hire a third party beneficiary of this Agreement. (h) Seller acknowledges and agrees that Buyer has not agreed to be bound, and will not be bound, by any provision of any collective bargaining agreement or similar contract with any labor organization to which Seller or any of its Affiliates is or may become bound. (i) Seller shall provide employees of the Business with any required notices under any federal, state, or municipal law or regulation concerning the termination of their employment with Seller. 5.1.4 Directory Publishing Rights. Buyer will enter into good faith negotiations with U S WEST Dex, Inc. ("Dex"), an Affiliate of Seller (or its successor so long as such successor remains an Affiliate of Seller), concerning an agreement whereby either (i) Dex will publish all subscriber listings corresponding to the Exchanges on behalf of Buyer in satisfaction of Buyer's regulatory obligations to publish such listings, or (ii) Buyer will license such listings to Dex in accordance with Buyer's regulatory obligations to provide such listings in the event that Buyer elects to publish or arrange with a third party to publish such listings. 26 5.1.5 911 Emergency Services. Buyer will obtain or contract for the appropriate 911 emergency data bases in order to commence providing 911 emergency services in connection with the operation of the Business as of the Closing Date. 5.2 Covenants of Seller. Seller hereby covenants and agrees that, from the execution date hereof to the Closing Date: 5.2.1 Access to Information and Facilities. Seller will afford Buyer and its representatives, at Buyer's sole expense, reasonable access during normal business hours to all Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business in Seller's possession or control. Seller shall exercise commercially reasonable efforts to furnish or cause to be furnished to Buyer and its representatives all data and information in Seller's possession concerning the Exchanges as shall reasonably be requested by Buyer. Seller shall exercise commercially reasonable efforts to gather additional Material Contracts for Buyer's review. Seller acknowledges and agrees that Buyer's ongoing review, examination and investigation of the Business and the Transferred Assets, facilities, properties, books, accounts, records, contracts and documents of or relating to the Business contemplated in the immediately preceding sentence is necessary to facilitate the assimilation of the Business into Buyer's operations, the transfer of the ownership and use of the Transferred Assets from Seller to Buyer and other reasonable business purposes, and may include the following activities: (i) review of the Operating Contracts and Authorities, the performance of which after Closing is an Assumed Liability (e.g., land development agreements, 911 and E911 service agreements and customer prepaid maintenance agreements) in order, among other things, to identify those that require third party consent to assign to Buyer, those that expire prior to or soon after the Closing and those that may require special documentation to transfer to Buyer; (ii) investigation of the third party arrangements included among the Excluded Assets that Buyer will need to replicate or replace, including interconnection agreements and national account agreements that affect any Exchange. (iii) examination of various assets included in the Property in order, among other things, to determine what changes Buyer may need to make to such assets after the Closing Date; (iv) investigation of miscellaneous underwriting data, including an insurance claims history of Seller relating to the operation of the Business and the ownership or use of the Transferred Assets, the current surety bonds and certificates of insurance relating to the Transferred Assets, and Seller's policies and practices relating to pertinent environmental, health, safety and property protection issues, in order for Buyer to arrange appropriate 27 insurance coverage by Closing with respect to Buyer's operation of the Business and ownership and use of the Transferred Assets after the Closing Date; (v) investigation of the location and organization of the Records, including the original cost documents and outside plant maps relating to the Property, in order for the parties to arrange for appropriate delivery (including via electronic transfer) or retention by Seller upon the Closing; (vi) review of the appropriate financial and accounting records of Seller relating to the operation of the Business in order, among other things, for Buyer to analyze the current balances and writeoff history of the materials and supplies inventory included in the Transferred Assets, the aging and write-off history of Accounts Receivable, and the manner in which the Seller historically has allocated costs to the Purchased Exchanges; (vii) review of the ongoing State Regulatory Authorities and FCC reporting obligations of Seller and Buyer relating to the Exchanges, including responsibility for filing "form M" financial information, FCC Report No. 43-04, Armis Joint Cost Report, and FCC Report No. 43-8, Armis Operating Data Report, for the Exchanges for the year in which the Closing Date occurs; (viii) investigation of the construction and plant upgrade activities of Seller between the date of execution of this Agreement and the Closing Date, including a review of the construction work in progress, in order, among other things, to enable Buyer to make appropriate arrangements for the continuation of such activities after the Closing Date; and (ix) investigation of other regulatory issues, including with respect to regulatory mandates and matters relating to the National Exchange Carrier Association (including the Universal Service Fund, Local Switching Support, and Telecommunications Relay Services funds) and corresponding funds established by the State Regulatory Authorities. The parties agree to cooperate and to negotiate in good faith regarding resolution, on commercially reasonable terms and conditions, of issues and concerns raised by either party in connection with such activities. Each party's cooperation will include making appropriate subject matter experts and other knowledgeable personnel available to meet with the appropriate representatives of the other party and facilitating Buyer's contacts with the appropriate Governmental Authorities (including the State Regulatory Authorities). 5.2.2 Continued Efforts. Seller will use commercially reasonable efforts to: (i) cause to be fulfilled and satisfied all of the conditions to the Closing to be performed or satisfied by Seller; (ii) cause to be performed all of the actions required of Seller at or prior to the Closing; and (iii) take such steps and do such acts as may be necessary to make all of its warranties and representations true and correct as of the Closing Date with the same effect as if the same had been made as of the Closing Date. 28 5.2.3 Maintenance of Business. Seller shall carry on the Business in the usual and ordinary course and substantially in the same manner as heretofore conducted. Accordingly, Seller shall (i) maintain its books and records in the normal and usual manner, (ii) keep the Transferred Assets in a normal state of repair (except for ordinary wear and tear) and operating efficiency to permit the conduct of the Business as it is currently being conducted; (iii) use its commercially reasonable efforts to undertake or complete capital projects as budgeted on Schedule 5.2.3(iii) and any capital projects required by Applicable Laws or any Governmental Authority to be undertaken by the Closing Date (it being understood and agreed that Seller shall have no obligation for any capital spending other than in connection with such capital projects and as required to comply with the provisions of this Section 5.2.3 and provided that Seller shall be entitled to the Purchase Price adjustment (to the extent applicable) pursuant to Section 1.4.3(a)); (iv) not increase the benefit provided under any plans concerning employee benefits or increase the general rates of compensation of its employees in the Exchanges, except (a) as required by Applicable Law, (b) pursuant to any contracts existing on the date hereof and listed on Schedule 5.2.3(iv) to which Seller is a party, (c) increases in base pay or bonuses in the ordinary course of business of Seller and in amounts consistent with the recent past practices of Seller, or (d) as listed or described on Schedule 5.2.3(iv); and (v) not amend, modify or terminate any contract identified on Schedule 4.2.9 or permit any of the foregoing to occur other than in the ordinary course of business. 5.2.4 Consent to Assignment. Seller will transfer to Buyer all Operating Contracts and permits that are by their terms assignable. Seller shall also request assignment to Buyer of those Operating Contracts and permits that are not by their terms assignable. To the extent that the assignment of any Operating Contract or any permit shall require the consent of another person, this Agreement shall not constitute an agreement to assign the Operating Contract or permit if an attempted assignment would constitute a breach thereof. Seller shall use commercially reasonable efforts (excluding the payment of money) to obtain the consent of any other party to the assignment of such Operating Contracts or permits to Buyer. If any such consent is not obtained, to the extent permitted by Applicable Law, this Agreement shall constitute an equitable assignment by Seller to Buyer of all of Seller's right, title, and interest in and to such Operating Contracts and permits, and Buyer shall be deemed Seller's agent for the sole purposes of completing, fulfilling and discharging all of Seller's rights and obligations arising after the Closing Date under such assigned Operating Contracts and permits. 5.2.5 Payment and Performance of Obligations. Seller will timely pay and discharge all invoices, bills and other monetary obligations (other than obligations which are contested by Seller in good faith) and shall not knowingly perform or fail to perform any act which will cause a material breach of any of the Operating Contracts. 5.2.6 Restrictions on Sale of Transferred Assets. Seller shall not sell, assign, transfer, lease, sublease, pledge or otherwise encumber or dispose of any of the Transferred Assets except in the ordinary course of the Business. 29 5.2.7 Audit or Review of Financial Statements. To the extent Buyer reasonably requires audited or reviewed financial statements with respect to the Business in order to comply with the reporting requirements of the Securities and Exchange Commission (the "SEC") set forth in Regulations S-K and S-X, Seller will cooperate with the independent auditors chosen by Buyer in connection with their audit of any annual financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K, and their review of any interim quarterly financial statements that Buyer reasonably requires to comply with Regulations S-X and S-K. If Closing has not occurred prior to March 31, 2000, then as soon as practicable but in any event by May 15, 2000. Seller will provide for audit a balance sheet as of December 31, 1999, and an income statement and statement of cash flows and changes in equity for the year ending December 31, 1999. The financial statements to be audited or reviewed pursuant to this Section 5.2.7, are hereinafter referred to as the "Required Financial Statements." Seller's cooperation will include (i) such access to Seller's employees who were responsible for preparing the Required Financial Statements and to workpapers and other supporting documents used in the preparation of the Required Financial Statements as may be reasonably required by such auditors to perform an audit in accordance with generally accepted auditing standards, (ii) delivery of any Required Financial Statements within 45 days after Buyer's request for the same (except as otherwise provided in the second sentence of this Section 5.2.7) and in the form required by Regulations S-X and S-K, and (iii) delivery of one or more representation letters from Seller to such auditors that are requested by Buyer to allow such auditors to complete the audit (or review of any interim quarterly financials), and to issue an opinion acceptable to the SEC with respect to the audit or review of those Required Financial Statements. Seller will bear the cost of preparation of the Required Financial Statements. Buyer and Seller will share equally the cost of the audit or review. 5.2.8 [Intentionally Deleted] 5.2.9 Interconnection Agreements. Seller shall furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with Buyer's replacement of the interconnection agreements relating to the Exchanges, including supplying to Buyer copies of such interconnection agreements to the extent permissible and, to the extent requested by Buyer and in compliance with applicable law, contacting the other party to such interconnection agreements to notify such party that its interconnection agreement will not apply to the Buyer and the Exchanges after Closing. Buyer acknowledges its obligation to negotiate interconnection agreements with third parties that have ongoing interconnection activities related to the Exchanges with the expectation that interconnection agreements between Buyer and such third partes will be entered into effective as of the Closing Date. If such agreements are not entered into or, if required, approved by appropriate Governmental Authorities, Buyer will offer to provide interconnection to such third parties according to the terms of the Seller's interconnection agreements with such third parties until the Buyer's new agreements with such third parties are entered into or, if required, approved by appropriate Governmental Authorities. 5.2.10 State Regulatory Authority/FCC Filings. Seller shall make all necessary filings with the State Regulatory Authorities, the FCC or any other Governmental Authority between 30 the date of this Agreement and the Closing Date. Seller shall notify Buyer of any significant proposed changes in the rates, charges, standards of service or accounting of the Exchanges from those in effect on the date of this Agreement prior to making any filing with the State Regulatory Authorities, FCC or any other Governmental Authority (or any amendment thereto), or effecting with any Governmental Authority any agreement, commitment, arrangement or consent, whether written or oral, formal or informal, with respect thereto. Between the date of this Agreement and the Closing Date, Seller shall use commercially reasonable efforts to notify Buyer before Seller files any application, petition, motion, brief, testimony, settlement agreement or other pleading in any proceeding before the State Regulatory Authorities, FCC or any other Governmental Authority or appeals related thereto with respect to which Buyer or an Affiliate of Buyer has or reasonably could be expected to take a contrary position that reasonably could be expected to have any adverse effect on the revenue, earnings, or business of Buyer. Seller will give or cause to be given to Buyer, as promptly as reasonably practicable, copies of all correspondence (including notices, complaints, and pleadings) with any Governmental Authority relating to any such proceeding or other rate regulatory matter that is sent or received by Seller after the date of this Agreement. 5.2.11 Missing Plant. (a) If, between the period commencing on execution date of the Agreement and ending six months after the effective time of Closing, Buyer notifies Seller in writing regarding items of Property (other than items that have been fully depreciated on the books and records of Seller, items that are no longer used in or necessary to the Business, and items covered by Section 5.2.11(b)) that are included in the CPRs relating to the Exchanges but that Buyer, using commercially reasonable efforts, cannot locate in the Exchanges or that have been sold, transferred or removed from the Exchanges by Seller or an Affiliate of Seller, then Seller, at its option, either (i) shall pay to Buyer (or reduce the Purchase Price by) an amount equal to the net book value of such items as reflected on the books and records of Seller or (ii) deliver to Buyer such items or replacement items that have reasonably comparable (or superior) value, vintage and functionality; provided, however, that Seller shall have no obligation under this Section 5.2.11(a) until the aggregate net book value of all such items, together with the aggregate net book value of all such similar items identified in Section 5.2.11 of each of the Multi-State Exchange Purchase Agreements, exceeds $400,000, at which time Seller shall become obligated under this Section 5.2.11(a) with respect to all items so identified by Buyer in all notices delivered to Seller on or before the date that is six months after the effective time of Closing; and provided, further that Seller shall have no obligation under this Section 5.2.11(a) to the extent that the Maximum Adjustment Amount shall have been reached. (b) At Closing, Seller shall cause the Transferred Assets to include all vehicles listed on Schedule 4.2.17 except to the extent any such vehicle has been replaced with items of reasonably comparable (or superior) value, vintage and functionality, in which event Seller shall cause such replacement items to be included in the Transferred Assets. 31 5.2.12 Third Party Software Licenses. To the extent that the transfer of Transferred Assets by Seller to Buyer under this Agreement results in the transfer of third party software that was rightfully used by Seller prior to the Closing Date in the normal course operation of the Business pursuant to contracts with the owners or licensors of such software ("Third Party Intellectual Property Contracts"), then effective as of the Closing and provided that no payments to any person are thereby required (except with respect to payments relating to the transfer of switch software, which will be shared equally by Buyer and Seller), at Closing Seller shall assign to Buyer, to the extent permitted by the Third Party Intellectual Property Contracts, and Buyer shall accept all rights and licenses if any to possess and use such software pursuant to such Third Party Intellectual Property Contracts. Buyer agrees that the acceptance by Buyer of such assignment of the Third Party Intellectual Property Contracts includes the assumption by Buyer of obligations under such Third Party Intellectual Property Contracts, including all obligations necessary or incidental to the transfer of such rights and licenses. 5.3 Mutual Covenants. 5.3.1 Confidentiality. Each party to this Agreement agrees to hold in strict confidence all Confidential Information received from the other party, whether received before or after entering into this Agreement, and to use such information solely for the purposes of this Agreement. Each party agrees to make no more copies of such Confidential Information than is reasonably necessary for such purposes. Each party agrees that it will not make disclosure of any such Confidential Information received from the other party to anyone except as specifically permitted by this Agreement and as required by law. Each party may disclose Confidential Information to its employees and agents to whom disclosure is necessary for the purposes set forth above, provided that disclosing party shall notify each such employee and agent that disclosure is made in confidence and instruct such employees and agents that such Confidential Information shall be kept in confidence by such employee and agent in accordance with this Agreement. If the Transactions are not consummated for any reason, each party agrees to return to the other party all such Confidential Information, including all copies thereof, immediately on request. The obligations arising under this section shall survive any termination or abandonment of this Agreement. This Agreement will be filed on a confidential basis with the State Regulatory Authorities. The provisions of the existing Confidentiality Agreement between Buyer and Seller dated January 15, 1999 are incorporated herein by reference. 5.3.2 Public Announcements. No public announcement with respect to this Agreement or the transactions contemplated hereby shall be made before the Closing without the mutual prior approval of both Seller and Buyer, which approval shall not be unreasonably withheld; provided, however, that each party shall be permitted to make such disclosure to its lenders or to any Governmental Authority, including but not limited to the Securities and Exchange Commission or similar state securities authorities, necessary to comply with any applicable laws and to obtain all required Governmental Approvals necessary to consummate the Transactions, or to any stock exchange upon which such party has a class of securities listed. Notwithstanding the foregoing, the disclosing party shall give the non-disclosing party reasonable advance notice of any permitted 32 disclosure to third parties under this Section 5.3.2 and shall provide the non-disclosing party with a reasonable opportunity to review and comment on such disclosure. 5.3.3 Cooperation. Each party covenants to use all commercially reasonable efforts to take or cause to be taken all actions, and to do or cause to be done all things, that are necessary, proper or advisable under applicable laws and regulations, expeditiously and practicably to consummate and make effective the Transactions, including but not limited to (i) using its commercially reasonable efforts to resolve any disagreements between Buyer and Seller with respect to any applications for governmental or regulatory approval prior to application for such approval, (ii) facilitating the regulatory approval process by agreeing that Buyer will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date for a period of at least six months following the Closing Date, provided that such tariffs of Seller are substantially similar to the tariffs of Seller in effect on the date of this Agreement except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges, (iii) obtaining all necessary actions, waivers, consents and approvals from third parties or Governmental Authorities, and (iv) effecting all necessary filings with Governmental Authorities, and to consummate the agreements referred to in Section 2.4. 5.3.4 State Regulatory Filings. Seller and Buyer agree to promptly file after execution of this Agreement any required applications and to take such reasonable actions as may be necessary or helpful (including, but not limited to, making available witnesses, information, documents, and data requested by the State Regulatory Authorities) to apply for and receive approval by the State Regulatory Authorities for the transfer of the Transferred Assets and Authorities to Buyer. To the maximum extent practicable, all communications with the State Regulatory Authorities shall be made jointly by Buyer and Seller. In connection with making such required applications to the State Regulatory Authorities, Buyer agrees to cooperate with Seller in appropriate public relations activities, including participation in "town hall" meetings with citizens, contacts with civic and business leaders, legislators and government officials, and other activities designed to establish Buyer's presence in and commitment to the communities in which the Exchanges are located. In the event any state legislature proposes to enact legislation after the date of this Agreement which would have an adverse impact on the consummation of the Transactions or would impose a material liability on either Seller or Buyer in connection with the transfer of the Transferred Assets, Seller and Buyer agree to use commercially reasonable efforts to oppose such legislation at their own expense. 5.3.5 FCC Filings. The parties agree to promptly file after execution of this Agreement such applications and to take such reasonable actions as may be necessary or helpful to apply for and receive approval by the FCC for the transfer of the Transferred Assets and the Authorities to Buyer and the change in the provider of telecommunications services in the Exchanges to Buyer. Buyer shall file an application for study area waivers and the reinitialization of the PCI with respect to at least one of the transactions contemplated by the Multi-State Exchange Purchase 33 Agreements with the FCC within 120 days of the date hereof. Further, Buyer shall use its best efforts to obtain the FCC's approval of (i) study area waivers for the Exchanges and (ii) the Reinitialization. 5.3.6 H-S-R Filing. The parties agree to make all required filings under the H-S-R Act no later that 90 days prior to the anticipated date of Closing and to request early termination of all applicable waiting periods thereunder, and thereafter to promptly respond to all requests for additional information from the Federal Trade Commission or the United States Department of Justice thereunder. 5.3.7 Environmental Inspections. Within 30 days following the execution of this Agreement, Seller and Buyer shall select Environmental Strategies Corporation (or another qualified environmental consultant reasonably satisfactory to Buyer and Seller) to conduct a Transaction Screen with respect to each parcel of Fee Realty included in the Transferred Assets (except for any parcel designated by Buyer not to receive a Transaction Screen), which review shall be conducted in accordance with ASTM standards and shall be completed within 90 days following the execution of this Agreement. Upon completion of such Transaction Screen, such consultant shall deliver to Buyer and Seller a written report with respect thereto. Each party shall notify the other party in writing (the "Remediation Notice") within 10 days of learning of any potential material liabilities under any Environmental Laws with respect to a parcel of Fee Realty included in the Transferred Assets, but in no event later than the 10th day following receipt of the related Transaction Screen. Thereafter, Buyer shall determine whether to conduct additional environmental due diligence, including a Phase I Environmental Report, which shall be completed within 60 days of delivery of the Remediation Notice. If the estimated costs of remediation of such potential liabilities on such parcel (the "Remediation Costs") will exceed $400,000, Seller shall either effect such remediation or may instead elect to exclude either such parcel of Fee Realty or the Exchange to which such parcel of Fee Realty relates from the Transferred Assets, and Buyer and Seller shall in good faith reduce the Purchase Price accordingly. If, pursuant to the preceding sentence, Seller elects to exclude the parcel of Fee Realty, then, at Buyer's request, Seller shall grant to Buyer a long-term lease at an annual rental rate of $1.00 and otherwise in form and substance reasonably satisfactory to Buyer, for the use of such parcel (and Seller shall have no obligation to effect any remediation with respect to such parcel); provided that if Buyer is required to pay a higher rental rate for such leased parcel pursuant to or in connection with the granting of any Governmental Approval, the Purchase Price shall be decreased by the net present value of the aggregate lease payments, discounted at a rate of 8% per annum. If the environmental consultant conducting Buyer's additional environmental due diligence ("Buyer's Consultant") estimates that the Remediation Costs will exceed $400,000, Seller may elect to conduct its own additional environmental due diligence during the 60 day period following completion of Buyer's additional environmental due diligence, and if the environmental consultant conducting Seller's additional environmental due diligence ("Seller's Consultant") estimates that the Remediation Costs will be less than $400,000, Seller shall not be required to so remediate or exclude such parcel of Fee Realty or such Exchange unless Buyer elects to pursue an arbitration conducted as contemplated by Article 8 and the arbitrator estimates that the Remediation Costs will exceed $400,000. 34 The costs of the Transaction Screens required by this Section shall be borne equally by Buyer and Seller, and the costs of any additional environmental due diligence (the scope of which shall be reasonably acceptable to Seller) shall be borne by the party conducting such additional due diligence. Buyer shall indemnify Seller for any liabilities or losses incurred by Seller as a result of any additional environmental due diligence conducted by Buyer. 5.3.8. Cost Studies/NECA Matters. (a) Prior to Closing. Seller agrees that, with respect to all revenues, settlements, pools, separations studies or similar activities, Seller shall be responsible for (and shall receive the benefit or suffer the burden of) any adjustments to contributions, or receipt of funds, by Seller resulting from any such activities that are related to the operation of the Business or the ownership or operation of the Transferred Assets prior to the Closing Date. Specifically, this paragraph shall apply, but shall not be limited to, any maters related to the National Exchange Carrier Association ("NECA") including the Universal Service Fund ("USF"), Local Switching Support ("LSS") and Telecommunications Relay Services funds. (b) From and After Closing. (i) Buyer shall receive a pro rata share of USF funds received by Seller, under Seller's methodology of computing USF, pursuant to FCC rules and regulations. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date times a per-line amount of USF support received by Seller for the study area containing the Exchanges prior to the Closing Date. The resulting Buyer's annual USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Beginning July 1, 1999 or a date thereafter determined by the FCC, non-rural carriers shall not receive USF pursuant to Part 36 and Part 54, but will receive support in accordance with guidelines using forward-looking economic cost. Except as contemplated by clause (i) below, after the Closing Date, Buyer shall make its own filing in accordance with applicable FCC rules and regulations. Within a reasonable time after Buyer's written request and in any event at least 30 days prior to the NECA filing date, Seller shall furnish to Buyer such necessary information regarding Seller's ownership of the Transferred Assets during the partial calendar year prior to the Closing Date and the prior calendar year and such reasonable assistance, at Buyer's expense, as required in connection with Buyer's preparation of necessary filings or submissions. (ii) If Closing occurs within 30 days before the NECA filing date for the USF to be received in the subsequent calendar year, then Seller will include the Exchanges in its NECA filing for the subsequent calendar year. Buyer shall receive, in the subsequent calendar year, a pro rata share of USF Funds received by Seller, under Seller's methodology of computing USF, pursuant to applicable FCC rules and regulations; provided that in no event shall such sharing continue for more than 18 months after the Closing Date. The USF Funds due to Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date 35 times the per-line amount of USF support received by Seller for the study area containing the Exchanges in the full calendar year subsequent to the Closing Date. (iii) Notwithstanding the foregoing, Buyer's right to receive a pro rata share of USF is conditioned upon Buyer's payment, from and after the Closing Date, of a pro rata share of the annual universal service contribution liability assessed by the Universal Service Administrative Company (the "USAC") based on end-user retail revenues for the previous year generated by the Transferred Assets. The resulting Buyer's annual USF obligation for the Transferred Assets shall be prorated in proportion to the number of months in the year from and after the Closing Date. (c) State USF. If Seller is entitled to receive any State USF Funds as of the Closing Date that include State USF Funds relating to the Exchanges, then Buyer shall receive a pro rata share of such State USF Funds received by Seller, under Seller's methodology of computing such State USF Funds, pursuant to the applicable State USF rules and regulations. The State USF Funds due Buyer shall be determined by multiplying the number of Access Lines served by the Exchanges on the Closing Date time the per-line amount of USF support received by Seller for the appropriate period. The resulting Buyer's annual State USF amount shall be prorated in proportion to the number of months in the year from and after the Closing Date. Such sharing of Seller's State USF Funds shall discontinue upon commencement of the first period for which Buyer is permitted to make its own State USF filings, and in no event shall such sharing continue for more than 18 months after the Closing Date. Seller shall cooperate with Buyer and provide such reasonable assistance, at Buyer's expense, as may be required in connection with Buyer's preparation of necessary State USF filings or submissions. 5.3.9 Owned Real Property Transfers. Within 60 days of the date of this Agreement, Seller shall deliver to Buyer copies of all existing title insurance policies covering Fee Realty. No later than 150 days following the date hereof, Seller shall deliver a preliminary title binder (on a standard form) to Buyer issued by a title insurance company reasonably acceptable to Buyer and a certified current survey (collectively, the "Title Commitment") with respect to all Fee Realty included in the Transferred Assets. Buyer shall, within 45 days following receipt of the Title Commitment for a parcel, deliver to Seller, in writing, any objections to any matters affecting any of the Fee Realty. In the event that Buyer fails to notify Seller as set forth above, such objections shall be deemed waived. If the Title Commitment indicates the existence of an Excessive Encumbrance, Seller shall, at its expense, cause such Excessive Encumbrance to be removed on or before the Closing Date or, with the prior written consent of Buyer, cause the title company to insure over each such Excessive Encumbrance. Seller shall provide the title company with such instructions, authorizations and affidavits at no cost to Seller as may be reasonably necessary for the title company to issue title policies, based on the most recent assessed value, to Buyer, dated as of the Closing Date, for all of the Fee Realty with so-called non-imputation endorsements. Buyer and Seller shall share equally the costs of the Title Commitments and the title policies. By no later than 45 days after the Closing Date, Seller shall deliver to Buyer a final title insurance policy covering the Fee Realty included in the Title Commitment. 36 5.3.10 IntraLATA Tolls. Buyer and Seller will use their best efforts to negotiate appropriate agreements and arrangements in order to satisfy the requirements of Section 7.1.9 at Closing. ARTICLE 6 TERMINATION 6.1 Termination By Buyer. 6.1.1 If any condition precedent to Buyer's obligation to effect the Closing set forth in Section 3.1 shall become incapable of satisfaction through no fault of Buyer and such condition is not waived by Buyer, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller. 6.1.2 If any Governmental Approval contains any special term, condition, restriction, imposed liability or other provision that is reasonably likely to have a material adverse effect on the Business following the Closing Date, but only after Buyer has entered into good faith negotiations with Seller to amend this Agreement in light of such terms or conditions and no such amendment could be agreed upon, Buyer shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Seller; provided, however, that Buyer shall not be entitled to terminate this Agreement based on (x) Buyer's failure to obtain increases in intrastate tariff rates above those then in effect, or (y) Buyer's being deemed a "successor" to Seller for any regulatory purposes. 6.1.3 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Seller, and such misrepresentation or breach has not been cured within 30 days of Seller's receipt of Buyer's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Buyer, provided it is not in material breach hereof, may terminate this Agreement by written notice to Seller. 6.2 Termination By Seller. 6.2.1 If any condition precedent to Seller's obligation to effect the Closing set forth in Section 3.2 shall become incapable of satisfaction through no fault of Seller and such condition is not waived by Seller, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.2 If any Governmental Approval contains terms or conditions unacceptable to Seller, in Seller's reasonable discretion, but only after Seller has entered into good faith negotiations with Buyer to amend this Agreement in light of such terms or conditions and no such amendment 37 could be agreed upon, Seller shall not be obligated to effect the Closing and may terminate this Agreement by written notice to Buyer. 6.2.3 If Buyer does not deliver the Letters of Credit within 15 business days of the date hereof or the Letters of Credit, in whole or in part, have been withdrawn or are no longer irrevocable. 6.2.4 If there has been a material misrepresentation, breach of covenant or breach of warranty on the part of Buyer, and such misrepresentation or breach has not been cured within 30 days of Buyer's receipt of Seller's notice of the same (or significant efforts have not been commenced to cure such misrepresentation or breach if it is not capable of being cured within such 30 days), Seller, provided it is not in material breach hereof, may terminate this Agreement by written notice to Buyer. 6.2.5 If Buyer does not make the FCC filing described in the second to last sentence of Section 5.3.5 within 120 days of the date hereof. 6.3 Termination By Buyer or Seller. If (i) a final, non-appealable order is issued by any Governmental Authority to restrain, enjoin or prohibit the consummation of the Transactions, (ii) the Closing shall not have occurred on or before September 30, 2001 through no fault of the terminating party, then either party may terminate this Agreement by written notice to the other. 6.4 Effect of Termination. In the event of the termination of this Agreement pursuant to Sections 6.1, 6.2 or 6.3, this Agreement shall thereafter become void, except as set forth in Section 1.4.1 and for the provisions of Sections 5.3.1 and 5.3.2 and Article 9, and there shall be no further liability on the part of any party hereto or its respective shareholders, directors, officers or employees in respect thereof, except as follows: (i) nothing herein shall relieve any party from liability for any breach of this Agreement, and (ii) the obligations of the parties hereto set forth in Section 11.6 shall not be affected by a termination of this Agreement. ARTICLE 7 POST CLOSING MATTERS 7.1 Post Closing. In order to effectuate an orderly transition in the provision of telecommunications services to customers in the Exchanges, Buyer and Seller agree to utilize the measures set forth below: 7.1.1 Notice to Customers. Seller shall provide written notification, which notification shall be reasonably acceptable to Buyer, in its final bill to each customer affected by this Agreement, that Seller is no longer the customer's telecommunications provider and advising the 38 customer of the name, address and telephone number of Buyer. Seller and Buyer shall agree upon appropriate service cut-off dates with respect to the Exchanges. 7.1.2 Customer Deposits. The disposition of customer deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be delegated to a transition team. The intent of the parties to be carried out by the transition team is that, to the extent practicable and subject to the rules and orders of the State Regulatory Authorities, Seller shall retain all deposits for delinquent customers and the remaining deposits and advance payments for future services made to Seller by residential and business customers in the Exchanges shall be transferred to Buyer. Notwithstanding the foregoing, all deposits and advance payments for future services held by Seller under land development contracts or other similar construction arrangements as of the Closing Date shall be credited to Buyer at Closing. 7.1.3 Customer Records. To the extent not previously provided to Buyer, Seller shall use commercially reasonable efforts to make available, upon reasonable request from Buyer, all readily available billing and service records for goods sold or services provided to customers of the Exchanges prior to Closing for so long as such records are required to be maintained by applicable law. 7.1.4 Operator Services and Directory Assistance. Buyer acknowledges and agrees that, following the Closing, Buyer shall provide all subscriber list information gathered in its capacity as a provider of local exchange service on a timely and unbundled basis, under nondiscriminatory and reasonable rates, terms and conditions, to any person requesting such information for any lawful purpose in any format, including but not limited to Seller and its Affiliates. Buyer's listing information will be treated the same as Seller's end user listings for purposes of additional listings and dissemination of listings to directory publishers, directory assistance providers, or other third parties. Seller will incorporate listings information in all existing and future directory assistance applications developed by Seller. Buyer authorizes Seller to sell and otherwise make listings available to directory publishers, directory assistance providers, and other third parties. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. Seller will not charge for updating and maintaining the listings database. 7.1.5 Directory Publishing and 911 Emergency Services. Buyer shall continue to comply with the covenants set forth in Sections 5.1.4 and 5.1.5 following the Closing Date, as appropriate, to the extent necessary to accomplish the intent of such covenants. 7.1.6 911 Emergency Services. In the event that Seller becomes obligated after the Closing Date to provide 911 emergency services with respect to any portion of the Business, Buyer shall provide Seller (at no cost to Seller) complete access to and use of the 911 Assets related to such 911 emergency services and shall enter into such agreements as Seller reasonably requests in order to facilitate the provision by Seller of such 911 emergency services and to provide for compensation to Seller at prevailing rates. 39 7.1.7 Tariffs. Buyer agrees that for the six month period following the Closing Date it will adopt and maintain intrastate tariffs similar in all material respects to Seller's intrastate tariffs in effect for the Exchanges on the Closing Date, provided that such tariffs of Seller are substantially similar to Seller's tariffs in effect on the date of execution of this Agreement, except that Buyer's tariffs will reflect rate changes by Seller (x) made prior to Closing as required by an order of a State Regulatory Authority that has been issued prior to the date of this Agreement or (y) made prior to Closing to the extent such changes are substantially revenue neutral to the Exchanges. 7.1.8 Access to Books and Records. (a) After the Closing, Seller will retain all books and records related to the Excluded Assets for so long as required by applicable law. (b) Subject to the terms of Section 7.1.3, after the Closing, upon reasonable notice, the parties will give to the representatives, employees, counsel and accountants of the other, access during normal business hours, to books and records relating to the Business and the Transferred Assets, and will permit such persons to examine and copy such records (including any tax returns and related information, but not attorney or accountants work product), audits, legal proceedings, governmental investigations and other business purposes (including such financial information and any receipts evidencing payment of taxes as may be reasonably requested by Seller to substantiate any claim for tax credits or refunds); provided, however, that nothing herein will obligate any party to take actions that would unreasonably disrupt the normal course of its business or violate the terms of any contract to which it is a party or to which it or any of its assets is subject. Seller and Buyer will cooperate with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to the Business (or the income therefrom or assets thereof) with respect to any tax and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section 7.1.8. 7.1.9 IntraLATA Toll. Buyer will (i) assume the retail toll carrier role and obligations for any end users in the Exchanges that are picked or defaulted to Seller for IntraLATA toll services or (ii) enter into agreements with other inter-exchange carriers to assume this role or to resell the toll services of an inter-exchange carrier to fulfill these obligations. Buyer will execute intraLATA toll access agreements with Seller establishing the process for the purchase of toll access from Seller by Buyer at the rates contained in Seller's access tariffs. Seller agrees that it will need to establish its own agreements with other telecommunications carriers for the purchase of toll access that may be routed over joint Seller/Buyer transport or tandem switch facilities (transit traffic). Buyer will cooperate with Seller and other carriers to measure and share data required to facilitate billing for such traffic. Buyer and Seller will establish a process by which Buyer will bill Seller for terminating IntraLATA toll access based on actual termination of Seller toll services to the Exchanges. Buyer and Seller will enter into a billing and collection agreement for the billing and collection of casual toll at a rate not to exceed $0.12 per message. Buyer and Seller shall establish meet point percentages for jointly provided toll access and file such meet points as required with Governmental Authorities. 40 7.1.10 Extended Area Service. Buyer and Seller will enter into extended area service agreements as necessary. 7.1.11 Transiting Toll Facilities. Concurrently with the Closing, Buyer shall grant to Seller the irrevocable right to use or Buyer shall lease to Seller, in either case for a term of 99 years, the portion of the transiting toll facilities, network facilities and associated electronic equipment included in the Property and relating to the Exchanges listed on Schedule 7.1.11 that is required by Seller for the conduct of any business conducted by Seller other than the Business. The consideration for such grant or lease shall be $1.00 and other consideration including the mutual covenants and agreements set forth in this Agreement. Within 90 days after the execution of this Agreement, Buyer and Seller shall apportion and assign the total capacity of such facilities and equipment for each Exchange listed on Schedule 7.1.11. The parties shall review such apportionment on an annual basis and make such changes to assignments as may be required. If any transiting toll facilities, network facilities and related electronic equipment that are Excluded Assets are located in any rights-of-way that are used in connection with the operation of the Business, then concurrently with the Closing, Buyer shall, to the extent possible, assign to Seller the right to use such right-of-way jointly with Buyer and appropriate joint use agreements in recordable form and otherwise reasonably acceptable to the parties shall be entered into at the Closing. 7.1.12 Reinitialization Period. If the Reinitialization has not been approved at the time of the Closing, Buyer shall use its best efforts to obtain the Reinitialization. ARTICLE 8 ARBITRATION 8.1 Arbitrability. All claims, except and only to the extent such claims are those over which the State Regulatory Authorities have primary jurisdiction, by either party against the other arising out of or related in any manner to this Agreement or any of the Transferred Assets or the Transactions shall be resolved by arbitration as prescribed herein; provided, however, that either party shall be entitled to seek temporary or permanent injunction against any actual or threatened breach of Section 5.3.1 by the other party in any court of competent jurisdiction without the necessity for showing any actual damages. The Federal Arbitration Act and not state law will govern the arbitrability of all claims. Failure of either party to assert or pursue a mandatory claim or defense that must be asserted in litigation to avoid the loss of the right to assert such claim or defense shall not preclude that party from asserting any such claim or defense in arbitration proceedings hereunder. 8.2 Rules. A single arbitrator engaged in the practice of law, who is knowledgeable about the telecommunications industry and telecommunications law, shall conduct the arbitration under the then-current commercial arbitration rules of the American Arbitration Association 41 ("AAA"), unless otherwise provided herein. The arbitrator shall be selected in accordance with AAA procedures. The arbitration shall be conducted in the AAA office in Denver, Colorado. 8.3 Discovery; Damages; Expenses. Buyer and Seller shall allow and participate in discovery in accordance with the Federal Rules of Civil Procedure. The arbitrator shall rule on unresolved discovery disputes. The arbitrator shall have authority to award only actual damages and shall not have the authority to award consequential, compensatory, punitive or exemplary damages or any other form of relief. Each party shall bear its own costs and attorneys' fees. The arbitrator's decision and award shall be final and binding, and judgment upon the award rendered by the arbitrator may be entered in any court having personal jurisdiction. The non-prevailing party to the arbitration shall pay all of the fees and expenses of the arbitrator and the AAA, provided, however, that if the arbitrator deems Buyer and Seller to be equally prevailing or non-prevailing on the matters at issue, then the parties shall each pay one-half of the fees and expenses of the arbitrator and the AAA. 8.4 Judicial or Administrative Action. If any party files a judicial or administrative action asserting claims properly subject to arbitration as prescribed herein, and the other party successfully stays such action and/or compels arbitration of said claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. ARTICLE 9 INDEMNIFICATION Section 9.1 Indemnification by Seller. From and after Closing, Seller shall indemnify and hold harmless Buyer from and against any and all claims, losses, liabilities, damages, penalties, costs and expenses, including reasonable counsel fees and costs and expenses ("Losses") arising out of or resulting from: (a) any representations and warranties made by Seller in the Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed upon or prior to the Closing; (c) any breach or default by Seller in the performance of its covenants, agreements or obligations under this Agreement required to be performed after the Closing; and (d) all liabilities and obligations arising out of or relating to the operation of the Exchanges prior to the Closing, including without limitation the Retained Liabilities. 42 Section 9.2 Indemnification by Buyer. From and after Closing, Buyer shall indemnify and hold harmless Seller from and against any and all Losses arising out of or resulting from: (a) any representations and warranties made by Buyer in this Agreement not being true and accurate when made or when required by this Agreement to be true and accurate; (b) any breach or default by Buyer in the performance of its covenants, agreements or obligations under this Agreement; (c) all liabilities and obligations arising out of or relating to the operation of the Exchanges after the Closing, including without limitation the Assumed Liabilities; (d) without limitation of the foregoing, violation of Environmental Laws, to the extent such liability is an Assumed Liability or arises out of or relates to the operation of the Exchanges after the Closing; and (e) liability of Seller arising after Closing with respect to Buyer's failure to enter into or perform interconnection agreements in or directly related to the Exchanges. Section 9.3 Indemnified Third Party Claim. (a) If any person (including State Regulatory Authorities) not a party to this Agreement ("Person") shall make any demand or claim or file or threaten to file or continue any action, suit or proceeding of any kind ("Third Party Claim") with respect to which Buyer or Seller is entitled to indemnification pursuant to Sections 9.1 or 9.2, respectively, then within ten days after notice (the "Notice") by the party entitled to such indemnification (the "Indemnitee") to the other (the "Indemnitor") of such litigation, the Indemnitor shall have the option, at its sole cost and expense, to retain counsel for the Indemnitee (which counsel shall be reasonably satisfactory to the Indemnitee) to defend any such litigation. Thereafter, the Indemnitee shall be permitted to participate in such defense at its own expense, provided that, if the named parties to any such litigation (including any impleaded parties) include both the Indemnitor and the Indemnitee or, if the Indemnitor proposes that the same counsel represent both the Indemnitee and the Indemnitor and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interest between them, then the Indemnitee shall have the right to retain its own counsel at the cost and expense of the Indemnitor, unless the Indemnitor shall acknowledge in writing its indemnity obligation, in which event the retention by Indemnitee of its own counsel shall be at its cost and expense. If the Indemnitor shall fail to respond within ten days after receipt of the Notice, the Indemnitee may retain counsel and conduct the defense of such litigation as it may in its sole discretion deem proper, at the sole cost and expense of the Indemnitor. (b) The Indemnitee shall provide reasonable assistance to the Indemnitor and provide such access to its books, records and personnel as the Indemnitor reasonably requests in connection with the investigation or defense of the indemnified Losses. The Indemnitor shall 43 promptly upon receipt of reasonable supporting documentation reimburse the Indemnitee for out-of-pocket costs and expenses incurred by the later in providing the requested assistance. (c) With regard to litigation with any Person for which Buyer or Seller is entitled to indemnification under Sections 9.1 or 9.2, such indemnification shall be paid by the Indemnitor upon: (i) the entry of any judgment, writ, order, injunction, award or decree of any court, the FCC or any State Regulatory Authorities ("Judgment") against the Indemnitee and the expiration of any applicable appeal period; (ii) the entry of an unappealable Judgment or final appellate Judgment against the Indemnitee; or (iii) a settlement with the consent of the Indemnitor, which consent shall not be unreasonably withheld, provided that no such consent need be obtained if the Indemnitor fails to respond to the Notice as provided in Section 9.3(a). Section 9.4 Determination of Indemnification Amounts and Related Matters. (a) Neither Buyer nor Seller will be entitled to make a claim against the other under Section 9.1(a) or (b) or 9.2(a) or (b) until (i) the aggregate amount of Losses incurred by the Indemnitee for any individual occurrence (or related series of occurrences) exceeds $50,000 and (ii) in the case of Losses under Section 9.1(a) (except for Losses due to a breach of the representations of Seller contained in Section 4.2.15) or 9.1(b) the aggregate amount of claims that may be asserted for such Losses, together with all other claims for Losses asserted under Section 9.1(a) or 9.1(b) under each of the Multi-State Exchange Purchase Agreements, exceed an amount equal to 1% of the aggregate of the Purchase Prices (as defined in each Multi-State Exchange Purchase Agreement) for the transactions contemplated by the Multi-State Exchange Purchase Agreements, to the extent actually paid to Seller, but only to the extent such amount exceeds such aggregate of the Purchase Prices. (b) Notwithstanding any other provision of this Agreement, (i) Seller shall not be required to make any payments pursuant to Section 9.1(a), (b) or (c) to the extent that the Maximum Adjustment Amount shall have been reached, and (ii) Buyer shall not be required to make any payments pursuant to Article 9 in excess of an amount equal to 3% of the Purchase Price. (c) Subject to Section 9.3, all amounts payable by the Indemnitor to the Indemnitee in respect of any Losses under Sections 9.1 and 9.2 shall be payable by the Indemnitor as incurred by the Indemnitee and will include interest at the rate of 8% per annum from the date that the related Losses were incurred through but not including the date the payment is made. Section 9.5 Time and Manner of Certain Claims. Except as otherwise provided herein, the representations and warranties of Buyer and Seller, and the covenants to be performed by them on or prior to the Closing Date, in this Agreement shall survive Closing for a period of one year, except that the representations of Seller contained in Section 4.2.15 shall survive Closing for a period of 15 months and the representations and warranties contained in the first sentence of Section 4.2.3 shall survive Closing indefinitely (the "Survival Period"). Neither Seller nor Buyer shall have any liability under Sections 9.1 or 9.2, respectively, unless a claim for Losses for which 44 indemnification is sought thereunder is asserted by the party seeking indemnification by written notice to the party from whom indemnification is sought within the Survival Period. ARTICLE 10 CERTAIN DEFINITIONS 10.1 Defined Terms. For purposes of this Agreement, certain terms used in this Agreement and not otherwise defined herein shall have the meanings designated below: "Access Line" means a telephone line operating on the public switched telephone network that runs from a central office to a customer's premises. "Accounts Receivable" means all end user accounts receivable with respect to goods sold and/or services provided by Seller on or prior to the Closing Date. "Affiliate" of a specified entity means any legal entity directly or indirectly controlling, controlled by, or under the common control with the specified entity. The term "control" (including "controlling", "controlled by" and "under common control with") of an entity means the possession, directly or indirectly, of the power to (i) vote 50% of more of the voting securities or other voting interests of such person, or (ii) direct or cause the direction of the management and policies of such entity, whether through the ownership of voting shares, by contract or otherwise. "Aggregate Adjustment Amount" means the aggregate amount that Seller has paid or spent, or committed to pay or spend, pursuant to (i) purchase price decreases pursuant to section 1.4.3(b) of each of the Multi-State Exchange Purchase Agreements, (ii) payments or purchases pursuant to section 5.2.11(a) of each of the Multi-State Exchange Purchase Agreements, and (iii) payments with respect to indemnification claims under Section 9.1(a), (b) or (c) of each of the Multi-State Exchange Purchase Agreements. "Agreement" means this Agreement for Purchase and Sale of Telephone Exchanges, together with all Schedules and Exhibits thereto, as any of the foregoing may be amended, modified or supplemented in writing from time to time. "Authorities" means (i) the construction permits, licenses or authorizations granted by the FCC to Seller and used to develop and operate the Systems; and (ii) the licenses or certificates of convenience and necessity granted by the State Regulatory Authorities to operate the Systems. "Communications Act" means the Federal Communications Act of 1934, as amended, and all rules and regulations promulgated thereunder, which are in effect at the date of this Agreement. 45 "Confidential Information" means any and all technical, business or financial information, in whatever form or medium, furnished or disclosed by or on behalf of one party to the other or its representatives, irrespective of the form of communication, including but not limited to, product and service specifications, prototypes, computer programs, models, drawings, marketing plans, financial data and personnel statistics, and shall also include notes, analyses, compilations, studies, interpretations or other documents prepared by it or its representatives that contain, reflect or are based upon, in whole or in part, other Confidential Information. For purposes of this Agreement, any technical or business information of a third person furnished or disclosed by one party to the other shall be deemed Confidential Information of the disclosing party unless otherwise specifically indicated in writing to the contrary. "Encumbrances" means any and all security interests, liens, charges or similar restrictions, except for (i) liens for taxes not yet due and payable or that are being contested in good faith, (ii) liens of workers, carriers or materialmen or similar liens arising by operation of law in the ordinary course of the Business in respect of obligations that are not yet due and payable or that are being contested in good faith, (iii) governmental conditions and restrictions under the Authorities, (iv) with respect to Realty, recorded easements, restrictions, reservations, rights-of-way, covenants, conditions and similar encumbrances of record and matters that would be shown by an accurate survey or inspection of such property, and other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of such Realty to which such defect or irregularity in title relates, and (v) with respect to the Transferred Assets other than Realty, other minor defects and irregularities in title that in the aggregate do not interfere in any material respect with the conduct of the Business or the value, use or marketability of the Transferred Assets to which such defect or irregularity in title relates. "Environmental Laws" means all federal, state and local laws, statutes, rules, regulations and ordinances (including common law), and all court or administrative decisions, orders, policies or guidelines, now or hereafter in effect relating to the environment, public health (including fire or building safety), occupational safety, industrial hygiene, or the generation, disposal, manufacture, release, storage, transportation or presence of Hazardous Materials, including without limitation the National Environmental Policy Act and mandated environmental assessments, Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act of 1975, the Toxic Substances Control Act, the Clean Air Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Clean Water Act, the Toxic Substances Control Act of 1976, the Occupational Safety and Health Act, and the regulations promulgated under any such acts or any permits issued thereunder. "Excessive Encumbrance" has the meaning set forth in Section 3.1.11. "Excluded Assets" means (a) all cash, cash-equivalents, Accounts Receivable and carrier access bills to interexchange carriers for minutes, messages and other applicable charges through the 46 Closing Date; (b) any insurance policy, bond, letter of credit or other similar item, and any cash surrender value in regard thereto; (c) all books and records that Seller is required by law to retain or that relate primarily to internal corporate matters; (d) all claims, rights and interests in and to any refunds of Federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date; (e) any pension, profit sharing or employee benefit plans; (f) any assets, interests or property of Seller used in the operation of any business conducted by Seller other than the Business, those including shared data processing, billing and collections systems and related software; (g) the name U S WEST and all similar names and related marks and logos used or owned by Seller or its Affiliates and any other names, marks and logos not specifically identified as being included in the Transferred Assets; (h) all portable office equipment, test equipment and generators other than included in the Transferred Assets; (i) all motor vehicles used in the operation of any business conducted by Seller other than the Business and associated motor vehicle general stock; (j) all materials, supplies and tools other than those included in the Transferred Assets; (k) all FCC licenses for air-to-ground, cellular or paging services held by Seller or any Affiliate of Seller other than those FCC radio licenses necessary to operate the Business; (l) all maintenance radio equipment and antennas other than those included in the Transferred Assets; (m) all assets relating to Yellow Pages or classified directory advertising activities of Seller or any Affiliate of Seller, (n) all transiting toll facilities, network facilities and associated electronic equipment used in their entirety by Seller solely in the operations of any business conducted by Seller other than the Business and containing no capacity for use in the conduct of the Business and related rights-of-way; and (o) all rights of Seller or any Affiliate of Seller under the Transaction Agreements. "Final Order" means action by any governmental or regulatory authority as to which (i) no request for stay by any Governmental Authority, as applicable, of the action is pending, no such stay is in effect, and, if any deadline for any such request is designated by statute or regulation, such deadline has passed; (ii) no petition for rehearing or reconsideration of the action has been granted by a governmental or regulatory authority; (iii) the governmental or regulatory authority does not have the action under reconsideration on its own motion and the time for such reconsideration has passed; and (iv) no appeal by a third party to a court, or a request to stay by a court, of any material provision of the Governmental Authority's action, as applicable, is pending or in effect and, if any deadline for filing any such appeal or request is designated by statute or rule, it has passed. "FCC" means the Federal Communications Commission or any other Federal agency which succeeds in whole or in part to its jurisdiction so far as the subject matter of this Agreement is concerned. "FCC Approval" means the issuance on the release date of the FCC public notice of the FCC's grant of consent to the assignment of the FCC Authorities and the grant of any study area waiver request submitted by Buyer related thereto, but excluding the Reinitialization. "Fee Realty" means all real property owned by Seller in fee simple and located inside the boundaries of the Exchanges, including without limitation tower sites or antenna sites. 47 "Governmental Authority" means any United States, state, or local governmental entity or municipality or subdivision thereof or any authority, department, commission, board, bureau, agency, court or instrumentality thereof. "Hazardous Material" means (a) all chemicals, materials and substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous wastes," "restricted hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants" or words or similar import under any Environmental Law, and (b) any other chemicals, materials or substances, including without limitation any polychlorinated biphenyl, petroleum or any chemical fraction thereof, asbestos, formaldehyde, flammables, explosives, and PCBs which could presently or at any time in the future cause a detriment to or impair the value or beneficial use of any of the Transferred Assets, or constitute or cause a health, safety or environmental hazard to the any of the Transferred Assets or to any person or require remediation at the behest of any state or local governmental agency under any Environmental Law. "Interests" means all rights, privileges, benefits and interests under all contracts, agreements, consents, licenses, permits or certificates (except those included as Authorities and Realty), including agreements, permits, leases and arrangements with respect to intangible or personal property or interests therein; equipment leases; agreements with suppliers, customers and subscribers; business licenses; prepaid expenses; and any sales agent or sales affiliate agreements, in each case, used or owned primarily in connection with the Business. "Maximum Adjustment Amount" means an Aggregate Adjustment Amount equal to the product of (i) the aggregate number of access lines in the telephone exchanges purchased pursuant to the Multi-State Exchange Purchase Agreements on the closing date of each purchase thereunder multiplied by (ii) $50.00, it being understood and agreed by the parties that (x) the Maximum Adjustment Amount shall be preliminarily calculated at the Closing assuming that any Multi-State Exchange Purchase Agreement that has not closed or been terminated on or before the Closing Date shall, for purposes of such preliminary calculation, be deemed to have closed on the Closing Date, and (y) on the date of closing or termination of the last of Multi-State Exchange Purchase Agreement to have been closed or terminated, the Maximum Adjustment Amount shall be finally calculated and any resulting payments required to be made by Seller or refunds required to be made by Buyer shall be taken into account in determining the amount of funds to be paid by Seller at such Closing or to be paid by Seller or refunded by Buyer upon such termination, as the case may be. "Multi-State Exchange Purchase Agreements" means the Agreements for Purchase and Sale, including this Agreement, entered into between Buyer, or any Affiliate of Buyer, and Seller with respect to the purchase of Seller's rights to provide and operate wireline telecommunications and related non-tariffed or non-regulated wireline services and related assets in the following states: Arizona, Colorado, Nebraska, North Dakota, Minnesota, Iowa, Idaho, Montana and Wyoming. "911 Assets" means all circuits, facilities and customer information used by Seller in providing 911 emergency services in connection with the operation of the Business. 48 "Operating Contracts" means all contracts, agreements and instruments (and all amendments and modifications thereto) entered into by Seller in the ordinary course of the Business prior to the date hereof, including without limitation all real property leases, documentation related to the Interests and interconnection agreements to the extent that Buyer is required to perform such obligations by applicable law or as a condition to obtaining any Governmental Approvals, and all such contracts, agreements and instruments entered into by Seller in the ordinary course of the Business between the date of this Agreement and the Closing Date. "Property" means all of Seller's physical facilities and other tangible assets used primarily in the Business that are in Seller's plant in service accounts in accordance with Part 32 of the FCC Uniform System of Accounts, including all transiting toll facilities, network facilities and associated electronic equipment located within the boundaries of an Exchange and not included as Excluded Assets, which facilities and equipment shall be subject to the arrangements set forth in Section 7.1.11. "Reinitialization" means the implementation of the interstate access rates pursuant to the reinitialization of the Price Cap Index ("PCI") applicable to the approved new study area to reflect the underlying cost structure associated with the Exchanges. "Realty" means the Fee Realty together with all rights, privileges and appurtenances owned by Seller inside the boundaries of the Exchanges that are a burden upon, a benefit of, or otherwise related to the Fee Realty, including without limitation all structures, buildings, easements, servitudes, licenses, leasehold improvements, building improvements, fixtures, rights-of-way and other similar interests owned by Seller and used in the Business. "Records" means all records, including copies (or the originals at Seller's election) of all outside plant records, all central office equipment records, all open end-user customer account records, all service records kept in the ordinary course of the Business which identify and describe the customers being served by Seller in the Exchanges, the service that is being provided to such customers, and those records which identify and describe the physical property (including but not limited to cables, wires and central office equipment) included in the Transferred Assets. "Seller's Knowledge" means the actual knowledge of Paul Lit after due inquiry and any senior manager specifically charged with operational responsibility for the Exchanges concerning information about which Seller is making a representation in this Agreement. "State Regulatory Approvals" means the issuance of the required consents or approvals of the State Regulatory Authorities with respect to the assignment of the Authorities to Buyer and the designation of Buyer as an eligible telecommunications carrier for the Exchange. "State Regulatory Authorities" means the public utility commissions or similar state governmental authorities in the states in which the Exchanges are located and, where applicable, municipal authorities that have granted operating authorities with respect to the Exchanges. 49 "Systems" means, as the context requires, Seller's service delivery components in the Exchanges, including without limitation all equipment, facilities, assets, properties, licenses, permits, certificates of public convenience and necessity and other rights and authorities and related technical knowledge and information, used in the conduct of the Business within the particular Exchange. "Transactions" means the purchase and sale of the Transferred Assets as contemplated by the Agreement and all other transactions contemplated by the Transaction Documents. "Transaction Documents" means this Agreement and each document to be executed in connection with the Closing of the Transactions. When used with respect to Seller or Buyer, "Transaction Documents" means this Agreement and such documents as are required to be executed by such party with respect to the Closing of the Transactions. "Transferred Assets" means all of Seller's right, title and interest in and to the Authorities, the Interests, the 911 Assets, the Property, the Realty, the Records and all goodwill associated with the Business as existing on the Closing Date, but excluding the Excluded Assets. ARTICLE 11 GENERAL 11.1 Notices. All notices hereunder will be in writing and served by certified mail, return receipt requested, courier or facsimile. Notice shall be deemed to have been duly given on (i) the earlier of the date received or the fifth business day following the date mailed by the notifying party using first class mail, postage prepaid or (ii) if delivered by courier service or facsimile, upon actual receipt as evidenced by the appropriate confirmation sheet. Notices shall be sent as follows: If to Seller: U S WEST Communications, Inc. 1801 California Street, Suite 5100 Denver, Colorado 80202 Attention: Law Department, Strategic Transactions Group Facsimile: (303) 308-0835 with a copy (which shall not constitute notice) to: Brownstein Hyatt & Farber, P.C. 410 Seventeenth Street, Suite 2200 Denver, Colorado 80202 Attention: Jeffrey M. Knetsch Facsimile: (303) 223-1111 50 If to Buyer: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: Donald P. Weinstein Facsimile: (203) 614-4625 with a copy (which shall not constitute notice) to: Citizens Utilities Company High Ridge Park Stamford, Connecticut 06906 Attention: L. Russell Mitten, II., Esq. Facsimile: (203) 614-4651 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Sixth Floor Washington, DC 20036 Attention: Jeffry L. Hardin Facsimile: (202) 387-3467 11.2 Waivers. No failure of a party to enforce a provision of this Agreement will be construed as a general or a specific waiver of that provision, or of a party's right to enforce that provision, or of a party's right to enforce any other provision of this Agreement. No waiver of any breach of any covenant or other provision herein contained shall be deemed to be a waiver of any preceding or succeeding breach, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed to be an extension of the time for performance of any other obligation or act. 11.3 Commissions. Each party represents and warrants that no broker or other person is entitled to any commission or finder's fee in connection with the consummation of the Transactions based on arrangements made by such party for which the other party could have any liability. 11.4 Payment of Expenses. Except as otherwise provided herein, each of the parties shall pay all costs and expenses incurred or to be incurred by it in the negotiation and preparation of this Agreement and in consummating and carrying out the Transactions, whether or not the Transactions are consummated. Notwithstanding the foregoing, all transfer fees payable in connection with the assignment of permits or rights-of-way shall be borne by Buyer. 51 11.5 Headings. The subject headings of the sections and subsections of this Agreement are included only for purposes of convenience, and shall not affect the construction or interpretation of any of its provisions. 11.6 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and, when each of the parties hereto has executed and delivered a counterpart to the other party, this Agreement shall be binding and effective even though no single counterpart has been executed by both of the parties. 11.7 Successors and Assigns. This Agreement shall be binding on and shall inure to the benefit of the parties hereto and their permitted successors and assigns; provided, however, that no assignment shall be permitted except as provided for in this Agreement. 11.8 Assignment. The rights and obligations of the parties to this Agreement or any interest in this Agreement shall not be assigned, transferred, hypothecated, pledged or otherwise disposed of without the prior written consent of the nonassigning party, which consent may be withheld in such party's sole discretion; provided, however, that (i) Buyer may, without the prior consent of Seller but without relieving Buyer of its obligations hereunder, assign its rights under this Agreement to any Affiliate or lender, and (ii) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the Transactions as a 1031 Transaction. 11.9 Additional Instruments and Assistance. Each party hereto shall from time to time execute and deliver such further instruments, provide additional information and render such further assistance as the other party or its counsel may reasonably request in order to complete and perfect the Transactions. 11.10 Seller's Control Over Authorized Facilities. No provision of this Agreement shall be construed to abrogate Seller's control of and responsibility for the operation of the authorized facilities of the Business prior to the actual transfer of control of those facilities hereunder to the Buyer as approved by the FCC and the State Regulatory Authorities. 11.11 Governing Law. This Agreement shall be construed in accordance with the laws of the State of Colorado. 11.12 Severability. If any term or provision of this Agreement is held or deemed to be invalid or unenforceable when applied to any person or circumstance, the remaining provisions of this Agreement and the enforcement of such provision to other persons or circumstances shall not be affected thereby, and each provision of this Agreement shall be enforced to the fullest extent allowed by law. 52 11.13 Amendments. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waived by a party, except by written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. 11.14 No Construction Against the Drafting Party. Each party hereto acknowledges that such party and its counsel have reviewed this Agreement and participated in its drafting. This Agreement shall not be construed against either party for having prepared it. 11.15 Integration. This Agreement, including all schedules and exhibits attached hereto, constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, and there are no agreements, understandings, warranties or representations between the parties with respect to such subject matter except as set forth or noted herein. Except as provided in Section 5.1.4 hereof, this Agreement is not made for the benefit of any person, firm, corporation or association other than the parties hereto. Except as provided in Section 5.1.5 hereof, the parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. * * * * * 53 IN WITNESS WHEREOF, the parties to this Agreement have executed it as of the date first above written. BUYER: CITIZENS UTILITIES COMPANY By: -------------------------------- Leonard Tow Chairman and Chief Executive Officer SELLER: U S WEST COMMUNICATIONS, INC. By: --------------------------------- Solomon D. Trujillo President and Chief Executive Officer EX-10.27 8 ASSET PURCHASE AGREEMENTS WITH AMERICAN WATER Arizona EXECUTION COPY ASSET PURCHASE AGREEMENT among CITIZENS UTILITIES COMPANY AND CERTAIN OF ITS AFFILIATES AND AMERICAN WATER WORKS COMPANY, INC. AND ARIZONA-AMERICAN WATER COMPANY Dated as of October 15, 1999 Arizona TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS ................................................... 1 1.1 Certain Definitions ........................................... 1 ARTICLE 2 THE TRANSACTION ............................................... 10 2.1 Sale and Purchase of Assets ................................... 10 2.2 Excluded Assets ............................................... 10 2.3 Assumption of Certain Liabilities ............................. 11 2.4 Consent of Third Parties ...................................... 14 2.5 Closing ....................................................... 14 2.6 Purchase Price ................................................ 15 2.6.1 Purchase Price .......................................... 15 2.6.2 Payment of Initial Cash Payment ......................... 15 2.6.3 Estimated Closing Statement ............................. 15 2.6.4 Post-Closing Adjustment to Purchase Price ............... 16 2.6.5 Adjustment for Certain Liabilities ...................... 17 2.7 Deliveries and Proceedings at Closing ......................... 18 2.7.1 Deliveries to Buyer ..................................... 18 2.7.2 Deliveries By Buyer to the Seller Parties ............... 19 2.8 Allocation of Consideration ................................... 19 2.9 Prorations .................................................... 19 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER ..................... 20 3.1 Qualification; No Interest in Other Entities .................. 20 3.2 Authorization and Enforceability .............................. 20 3.3 No Violation of Laws or Agreements ............................ 21 3.4 Financial Statements .......................................... 21 3.5 No Changes .................................................... 22 3.6 Contracts ..................................................... 22 3.7 Permits and Compliance With Laws Generally .................... 23 3.8 Environmental Matters ......................................... 23 3.9 Consents ...................................................... 26 3.10 Title ......................................................... 26 3.11 Real Estate ................................................... 26 3.12 Taxes ......................................................... 27 3.13 Patents and Intellectual Property Rights ...................... 27 3.14 Accounts Receivable ........................................... 27 3.15 Labor Relations ............................................... 27 3.16 Employee Benefit Plans ........................................ 28 3.17 Absence of Undisclosed Liabilities ............................ 29 3.18 No Pending Litigation or Proceedings .......................... 30 3.19 Supply of Utilities ........................................... 30 3.20 Insurance ..................................................... 30 3.21 Relationship with Customers ................................... 30 Arizona 3.22 WARN Act ...................................................... 30 3.23 Condition of Assets ........................................... 31 3.24 Brokerage ..................................................... 31 3.25 All Assets .................................................... 31 3.26 Year 2000 Matters ............................................. 31 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER ............ 32 4.1 Organization and Good Standing ................................ 32 4.2 Authorization and Enforceability .............................. 32 4.3 No Violation of Laws or Agreements ............................ 32 4.4 Consents ...................................................... 33 4.5 Financing ..................................................... 33 4.6 Brokerage ..................................................... 33 4.7 Insurance ..................................................... 33 ARTICLE 5 ADDITIONAL COVENANTS .......................................... 34 5.1 Conduct of Business ........................................... 34 5.2 Negotiations .................................................. 35 5.3 Disclosure Schedules .......................................... 35 5.4 Mutual Covenants .............................................. 36 5.5 Filings and Authorizations .................................... 36 5.6 Public Announcement ........................................... 37 5.7 Further Assurances ............................................ 37 5.8 Cooperation ................................................... 38 5.9 Employees; Employee Benefits .................................. 39 5.10 Employee Pension Plan ......................................... 41 5.11 Employee Savings Plan ......................................... 41 5.12 Welfare Benefits .............................................. 42 5.13 Taxes ......................................................... 43 5.14 Intentionally Omitted ......................................... 43 5.15 Citizens' Guarantees and Surety Instruments ................... 44 5.16 Assumption of Seller Debt ..................................... 44 5.17 Schedule of Permits ........................................... 47 5.18 Title Information ............................................. 47 5.19 Transaction with Related Parties .......................... 47 5.20 Approval by Citizens .......................................... 47 5.21 Supplemental Information ...................................... 47 5.22 Non-Competition ............................................... 48 5.23 Intentionally Omitted ......................................... 48 5.24 IDRB Obligations .............................................. 48 5.25 Cooperation with Respect to Like-Kind Exchange ................ 49 5.26 Transition Plan ............................................... 49 5.27 Procedures regarding Refunds of Advances ...................... 50 5.28 Title Insurance ............................................... 50 Arizona ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION ............................. 50 6.1 Conditions Precedent to Obligations of Buyer and Parent ....... 50 6.1.1 Performance of Agreements; Representations and Warranties 50 6.1.2 Opinion of Counsel ...................................... 51 6.1.3 HSR Act ................................................. 51 6.1.4 Required PUC and Other Consents ......................... 51 6.1.5 Injunction; Litigation .................................. 52 6.1.6 Documents ............................................... 52 6.1.7 Related Closings ........................................ 52 6.2 Conditions Precedent to Obligations of Seller Parties ......... 52 6.2.1 Performance of Agreements; Representations and Warranties 52 6.2.2 Opinion of Counsel ...................................... 53 6.2.3 HSR Act ................................................. 53 6.2.4 Required PUC and Other Consents ......................... 53 6.2.5 Injunction; Litigation .................................. 53 6.2.6 Documents ............................................... 53 6.2.7 Related Closings ........................................ 54 6.3 Termination ................................................... 54 ARTICLE 7 CERTAIN ADDITIONAL COVENANTS .................................. 54 7.1 Certain Taxes and Expenses .................................... 54 7.2 Maintenance of Books and Records .............................. 55 7.3 Survival ...................................................... 55 7.4 Indemnification ............................................... 58 7.4.1 General Indemnification Obligations ..................... 58 7.4.2 General Indemnification Procedures ...................... 59 7.4.3 Indemnification for Negligence .......................... 62 7.5 UCC Matters ................................................... 62 7.6 Financial Statements .......................................... 62 7.7 Collection of Receivables ..................................... 63 ARTICLE 8 MISCELLANEOUS ................................................. 63 8.1 Construction .................................................. 63 8.2 Notices ....................................................... 63 8.3 Successors and Assigns ........................................ 65 8.4 Exhibits and Schedules ........................................ 65 8.5 Governing Law ................................................. 65 8.6 Dispute Resolution ............................................ 66 8.7 Severability .................................................. 67 8.8 No Third Party Beneficiaries .................................. 67 8.9 Entire Agreement .............................................. 67 8.10 Amendment and Waiver .......................................... 67 8.11 Counterparts .................................................. 68 8.12 Headings ...................................................... 68 8.13 Definitions ................................................... 68 8.14 No Implied Representation ..................................... 68 Arizona 8.15 Construction of Certain Provisions ............................ 68 8.16 Bulk Sales .................................................... 69 Arizona List of Schedules Schedule 1.1.1(a) ..................................................Real Estate Schedule 1.1.10 ...........................................Assumed Indebtedness Schedule 1.1.52 .................................................IDRB Documents Schedule 2.2.12 ................................................Excluded Assets Schedule 3.3 ................................No Violation of Laws or Agreements Schedule 3.4 ..............................................Financial Statements Schedule 3.5 ........................................................No Changes Schedule 3.6 .........................................................Contracts Schedule 3.7 ........................Permits and Compliance with Laws Generally Schedule 3.8 .................................Environmental Matters - Generally Schedule 3.8.10 ................................Compliance with Water Standards Schedule 3.8.11 ...............................................Deed Restriction Schedule 3.9 ..........................................Seller Parties' Consents Schedule 3.10 ............................................................Title Schedule 3.11 ..........................................Real Estate Proceedings Schedule 3.12 ............................................................Taxes Schedule 3.15 ..................................................Labor Relations Schedule 3.16.1 .........................................Employee Benefit Plans Schedule 3.16.4 ............................Employee Benefit Plans - Compliance Schedule 3.16.9 ................Employee Benefit Plans - Extraordinary Benefits Schedule 3.17 ...............................Absence of Undisclosed Liabilities Schedule 3.18 .............................No Pending Litigation or Proceedings Schedule 3.19 ..............................................Supply of Utilities Schedule 3.20 ...............................................Seller's Insurance Schedule 3.22 .........................................................WARN Act Schedule 3.23 ..............................................Condition of Assets Schedule 3.25 .......................................................All Assets Schedule 3.27 ................................................Product Liability Schedule 4.7 .................................................Buyer's Insurance Schedule 5.1 ...............................................Conduct of Business Schedule 5.9.1 .......................................................Employees Schedule 5.9.2 ................................Collective Bargaining Agreements Schedule 5.12 .................................................Former Employees Schedule 5.15 .............................................Citizens' Guarantees Schedule 5.16 ..............................................Schedule of Permits Schedule 6.1.7 .....................................Related Purchase Agreements Arizona TABLE OF EXHIBITS Exhibit A - Form of Assumption Agreement Exhibit B - Form of Assignment and Bill of Sale Exhibit C - Form of Maricopa IDA Agreement Exhibit D - Form of Retained IDRB Obligations Agreement Exhibit E - Form of Seller's Opinion of Counsel Exhibit F - Form of Buyer's Opinion of Counsel Arizona ASSET PURCHASE AGREEMENT THIS IS AN ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of October 15, 1999, by and among Citizens Utilities Company, a Delaware corporation ("Citizens"), and each of the wholly-owned subsidiaries of Citizens named on the signature page hereof (collectively with Citizens, "Seller" or the "Seller Parties"), and American Water Works Company, Inc., a Delaware corporation ("Parent"), and Arizona-American Water Company, an Arizona corporation ("Buyer"). Background 1. Citizens, directly and indirectly through the other Seller Parties, is a public utility engaged, among other things, in the business of storing, supplying, distributing and selling water to the public, wholesale water transmission, wastewater treatment, and related services and activities in the State of Arizona (the "Business"). 2. Parent is a holding company which desires to cause the Buyer to purchase substantially all of the assets, properties and rights of the Seller Parties relating to the Business, and Seller desires to sell, and to cause the sale of, such assets, properties and rights, on the terms and subject to the conditions set forth in this Agreement. Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: 1.1.1 "Acquired Assets" means, subject to Section 2.2, all of each Seller Party's right, title, and interest in, under and to all of the assets, properties and rights exclusively used in the Business (including those owned or held directly by Citizens and exclusively used in the Business as engaged in by Citizens through the Agua Fria Water and Mohave Water divisions of Citizens) as a going concern of every kind, nature and description existing on the Closing Date, wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the assets, properties and rights exclusively relating to the Business enumerated below: Arizona (a) all real property described in Schedule 1.1.1(a), together with all fixtures, fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, railroad crossing agreements, hereditaments, tenements, privileges and other appurtenances thereto or otherwise exclusively related to the Business (such as appurtenant rights in and to public streets) (the "Real Estate"); (b) to the extent not included in clause (a) above, all water tanks, reservoirs, water works, plant and systems, purification and filtration systems, pumping stations, pumps, wells, mains, water pipes, hydrants, equipment, machinery, vehicles, tools, dies, spare parts, materials, water supplies, fixtures and improvements, construction in progress, jigs, molds, patterns, gauges and production fixtures and other tangible personal property, in transit or otherwise, used exclusively in the Business (the "Equipment and Other Tangible Personal Property"); (c) notwithstanding the provisions of Section 2.2 but subject to Section 2.4, all of Seller's water appropriation and flowage rights to the extent not transferred to Buyer upon assignment of the Contracts and Permits to Buyer; (d) all notes receivable, accounts receivable, accrued utility revenues, materials and supplies (at average cost net of reserve for obsolescence) and prepayments attributable in each case exclusively to the Business; (e) all unamortized debt expense related to the Assumed Indebtedness, deferred CAP water costs and capital costs, and other deferred charges (excluding deferred taxes collectable) attributable exclusively to the Business of which recovery in future rates is probable; (f) Intellectual Property and goodwill, licenses and sublicenses granted and obtained with respect thereto; (g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements and instruments relating to the sale of any assets, services, properties, materials or products, including all customer contracts, operating contracts and distribution contracts relating exclusively to the conduct of the Business; (ii) orders, contracts, supply agreements and other agreements relating exclusively to the purchase of any assets, services, properties, materials, or products for the Business; (iii) all leases of Real Estate exclusively related to the Business; (iv) all other contracts, agreements and instruments related exclusively to the Business (other than contracts, agreements and instruments included in the definition of Real Estate or Permits); and (v) any such contracts, agreements and other instruments referred to in clauses (i) - (iv) inclusive, entered into between the date hereof and the Closing Date which are consistent with the terms of this Agreement and are entered into in the ordinary course of business consistent with past practice, and including in the case of clauses (i) - (iv) all such contracts, agreements and instruments more specifically listed or described in Schedule 3.6 (but specifically excluding any contract, agreement and instrument listed or described on Schedule 2.2.12) (the "Contracts"); 2 Arizona (h) subject to Section 2.4 hereof, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority relating exclusively to the conduct of the Business and all pending applications therefor (the "Permits"); (i) books, records, ledgers, files, documents (including originally executed copies of written Contracts, to the extent available, and copies to the extent not available), correspondence, Tax returns relating exclusively to the Business, memoranda, forms, lists, plats, architectural plans, drawings, and specifications, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the Transferred Employees (to the extent such transfer is not prohibited by law), photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent exclusively relating to the Business, the Acquired Assets or the Transferred Employees; (j) all rights or choses in action arising out of occurrences before or after the Closing Date and exclusively related to any of the Acquired Assets, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Seller; provided, however, that (notwithstanding the foregoing provisions of this Section 1.1.1(j)), to the extent that Seller pays or discharges a liability related to the Business or any of the Acquired Assets and related to such right or chose in action (whether by reason of indemnification under this Agreement or otherwise), Buyer will reassign or reconvey to Seller such right or chose in action to the extent that such right or chose in action relates to a recovery of amounts paid to Buyer; and (k) all rights to insurance and condemnation proceeds (i) to the extent relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing but only to the extent that the proceeds exceed the amount of the write-down of the net book value of such Acquired Assets on the books and records of Seller as a result of such damage, destruction, taking or other impairment, (ii) to the extent they relate to amounts paid by Buyer for Damages to the extent Buyer does not receive payment pursuant to Section 7.4.1(a), but only to the extent Buyer is entitled to indemnification by Seller pursuant to Sections 7.3 and 7.4, and (iii) as provided in Section 4 of the agreement attached as Exhibit D hereto. 1.1.2. "Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.3. "Affected Participant" has the meaning set forth as Section 5.11.1 hereof. 3 Arizona 1.1.4. "Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. 1.1.5. "Agreement" has the meaning set forth in the introduction hereof. 1.1.6. "American Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.7. "American Savings Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof 1.1.9 "Assumed Benefit Liabilities" has the meaning set forth in Section 3.16.6 hereof. 1.1.10 "Assumed Indebtedness" means the liabilities and obligations from and after the Closing Date (except as set forth below) with respect to the IDRB Financings and IDRB Documents set forth on Schedule 1.1.10. For purposes of clarity, except as set forth in the next sentence below, "Assumed Indebtedness" shall not include any liability or obligation to the extent accrued prior to the Closing Date or to the extent arising out of or relating to an event, circumstance or occurrence prior to the Closing Date. "Assumed Indebtedness" shall include the outstanding principal amount and the accrued but unpaid interest owed by Seller on the debt obligations set forth in the first sentence of this definition. 1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2 hereof. 1.1.13 "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof). 1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under a Benefit Plan. 1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof. 4 Arizona 1.1.17 "Bonds" means any of the bonds issued pursuant to the Indentures of Trust, the proceeds from the issuance of which were advanced to Seller pursuant to any of the IDRB Documents. 1.1.18 "Business" has the meaning set forth in the Background section hereof. 1.1.19 Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. 1.1.20 "Buyer" has the meaning set forth in the introduction hereof. 1.1.21 "Buyer's IDRB Obligations" means the obligations of Parent and Buyer set forth in Section 5.24 (a) and in the instruments to be executed and delivered by Parent and Buyer on or prior to the Closing Date in accordance with Section 5.24 (a). 1.1.22 "Buyer's Accountants" means PricewaterhouseCoopers LLP or any firm of independent public accountants hereafter designated by Buyer for purposes of this Agreement. 1.1.23 Intentionally omitted 1.1.24 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.25 "CERCLA" has the meaning set forth in Section 3.8.2 hereof. 1.1.26 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof. 1.1.27 "Citizens" has the meaning set forth in the introduction hereof. 1.1.28 "Closing" has the meaning set forth in Section 2.5 hereof. 1.1.29 "Closing Date" has the meaning set forth in Section 2.5 hereof. 1.1.30 "Closing Statement of Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.31 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.32 Intentionally Omitted. 1.1.33 "Competing Transaction" has the meaning set forth in Section 5.2. 1.1.34 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof. 5 Arizona 1.1.35 "Control" with respect to any Person means the ownership, directly or indirectly, of at least a majority of the voting power of each class of capital stock of such Person entitled to vote in the election of directors of such Person generally. 1.1.36 "Damages" has the meaning set forth in Section 7.4.1 hereof. 1.1.37 "Disclosure Schedules" means the Schedules referenced in Articles 3, 4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3. 1.1.38 "Dispute" has the meaning set forth in Section 8.6. 1.1.39 "Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.40 "Environmental Laws" has the meaning set forth in Section 3.8 hereof. 1.1.41 "Equipment and Other Tangible Personal Property" has the meaning set forth in Section 1.1.1(b) hereof. 1.1.42 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.43 "ERISA Affiliate" means (a) any corporation included with any of the Seller Parties in a controlled group of corporations within the meaning of Section 414(b) of the Code; (b) any trade or business (whether or not incorporated) which is under common control with any of the Seller Parties within the meaning of Section 414 of the Code; any member of an affiliated service group of which any of the Seller Parties is a member within the meaning of Section 414(m) of the Code; or (d) any other person or entity treated as an affiliate of any of the Seller Parties under Section 414(o) of the Code. 1.1.44 "Excluded Assets" has the meaning set forth in Section 2.2 hereof. 1.1.45 "Financial Statements" has the meaning set forth in Section 3.4 hereof. 1.1.46 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof. 1.1.47 "Former Employees" means all salaried and hourly employees once employed by Seller or any of its Affiliates, but who are no longer so employed on the Closing Date. 1.1.48 "FTC" has the meaning set forth in Section 5.5 hereof. 1.1.49 "GAAP" has the meaning set forth in Section 3.4 hereof. 6 Arizona 1.1.50 "Hazardous Substance" has the meaning set forth in Section 3.8 hereof. 1.1.51 "HSR Act" has the meaning set forth in Section 3.9 hereof. 1.1.52 "IDRB Documents" shall mean the Loan Agreements, the Tax Regulatory Agreements, the Project Tax Certificates, and the other Contracts related thereto to which Citizens is a party and which are listed on Schedule 1.1.52. 1.1.53 "IDRB Financings" shall mean the indebtedness arising under the Loan Agreements included among the IDRB Documents. 1.1.54 "Indemnified Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.55 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.56 "Intellectual Property" means the trademarks, patents, trade names and copyrights and applications therefor, inventions, trade secrets, and confidential business information (including know-how, formulas, water filtration, purification and pumping processes and techniques, technical data, designs, drawings, customer and supplier lists, and business and marketing plans and proposals), all computer software (including data and related documentation and object and source codes), whether in magnetic format or hard copy, and tangible embodiments thereof (in whatever form or medium) of Seller, in each case, utilized exclusively in the Business. 1.1.57 "Interim Statement of Net Assets" means the Citizens Water Resources Statement of Net Assets - Arizona, June 30, 1999, which is attached hereto as Schedule 3.4. 1.1.58 "Interim Statement of Net Assets Date" means June 30, 1999. 1.1.59 "IRS" has the meaning set forth in Section 3.16.2 hereof. 1.1.60 "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). 1.1.61 "Material Adverse Effect" means a change or effect (or series of related changes or effects) which has or is reasonably likely to have a material adverse change in or effect upon the business, assets, condition (financial or otherwise), or results of operations of the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets 7 Arizona being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. For purpose of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect (a) if it arises from general business, economic or financial market conditions, from conditions generally effecting the industries in which Seller competes, or from the transactions contemplated by this Agreement, or (b) solely with respect to matters arising prior to Closing, to the extent that either (i) Seller realizes the benefit of insurance maintained by Citizens on or prior to the Closing Date and Buyer receives the cash proceeds of such insurance to the extent required by Section 1.1.1(k), or (ii) Seller arranges for Buyer to recover payments in respect of such occurrence or condition from any other source (whether in a lump sum or stream of payments), it being understood and agreed that a Material Adverse Effect may have occurred irrespective of such insurance recovery if the occurrence or condition giving rise to such recovery also causes a non-monetary material adverse change in or effect upon the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. 1.1.62 "Mortgage Indenture" means Indenture of Mortgage and Deed of Trust between BNY Western Trust Company (successor in interest to Wells Fargo Bank, N.A.) and First Interstate Bank of California (as successor trustee to Marine Midland, N.A., formerly the Marine Midland Trust Company of New York). 1.1.63 "OSHA" has the meaning set forth in Section 3.7.1 hereof. 1.1.64 "PCBs" has the meaning set forth in Section 3.8.6 hereof. 1.1.65 "Permits" has the meaning set forth in Section 1.1.1(h) hereof. 1.1.66 "Permitted Exceptions" has the meaning set forth in Section 3.10 hereof; provided, however, that from and after the Closing, Permitted Exceptions shall not include any Lien arising under or resulting from the Mortgage Indenture. 1.1.67 "Person" means an individual, a corporation, a partnership, an association, an Authority, a trustor other entity or organization. 1.1.68 "Pre-Existing Conditions" has the meaning set forth in Section 2.3.1(d). 1.1.69 "Prime Rate" means the rate per annum announced from time to time during the reference period by Citibank N.A. as its United States prime, reference or base rate for commercial loans. 1.1.70 "PUC" has the meaning set forth in Section 5.5 hereof. 1.1.71 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 8 Arizona 1.1.72 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof. 1.1.73 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof. 1.1.74 "Related Purchase Agreements" as the meaning set forth in Section 6.1.7 hereof. 1.1.75 "Release" or "Released" has the meaning set forth in Section 3.8 hereof. 1.1.76 "Remedial Action" has the meaning set forth in Section 3.8 hereof. 1.1.77 "Retained IDRB Indebtedness" means the indebtedness of the Seller owing to the issuers of the Bonds and arising under the Loan Agreements included among the IDRB Documents but only to the extent not included in the Assumed Indebtedness. 1.1.78 "Retained Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.79 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.80 "SEC" means the U.S. Securities and Exchange Commission. 1.1.81 "Securities Filings" has the meaning set forth in Section 5.8.2 hereof. 1.1.82 "Seller" and "Seller Parties" have the respective meaning set forth in the introduction hereof. 1.1.83 "Seller's Accountants" means KPMG LLP or any other firm of independent public accountants hereafter designated by Seller for purposes of this Agreement. 1.1.84 "Seller's Adjusted Amount" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.85 "Seller's Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.86 "Seller's 401(k) Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.87 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f) hereof. 1.1.88 "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall 9 Arizona profits, social security (or similar unemployment), disability, transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise and other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 1.1.89 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.90 "Threshold Amount" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.91 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i) hereof. 1.1.92 "Transferred Accounts" has the meaning set forth in Section 5.11.2 hereof. 1.1.93 "Transaction Documents" has the meaning set forth in Section 3.2 hereof. 1.1.94 "Transferred Employees" has the meaning set forth in Section 5.9.2 hereof. 1.1.95 "Union Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.96 "VEBAs" has the meaning set forth in Section 5.12 hereof. 1.1.97 "WARN Act" means the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. section 2102- 2109, as amended. ARTICLE 2 THE TRANSACTION 2.1 Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 2.5 below, Citizens shall, and shall cause the other Seller Parties to, sell, assign, transfer, deliver and convey to Buyer, and Parent shall cause Buyer to purchase, the Acquired Assets for the Purchase Price specified in Section 2.6. 2.2 Excluded Assets. The following assets of Seller shall be excluded from the Acquired Assets (the "Excluded Assets"): 2.2.1. assets of the Seller used in both the Business and in Citizens' gas, electric or communications businesses, the material items of which are described on Schedule 2.2.12; 10 Arizona 2.2.2. cash and cash equivalents in transit, in hand or in bank accounts. 2.2.3. except as otherwise set forth herein, assets attributable or related to any Benefit Plan; 2.2.4. the stock record and minute books of Seller; 2.2.5.Acquired Assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; 2.2.6. except to the extent set forth in Sections 2.9, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member, and which are treated as Retained Liabilities under Section 2.3.3(b) below. 2.2.7. customer and other deposits held in Seller's accounts; 2.2.8. accounts owing by and among Seller and its Affiliates; 2.2.9. notes receivable and other receivables (other than note and accounts receivable attributable exclusively to the Business); 2.2.10. all deferred tax assets or collectibles; 2.2.11. duplicate copies of all books and records transferred to Buyer; and 2.2.12. those certain items listed on Schedule 2.2.12. 2.3 Assumption of Certain Liabilities. 2.3.1.Buyer shall not assume any liabilities of Citizens or Seller or any of their Affiliates, except that Buyer shall assume the following specific liabilities and obligations: (a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; (b) except as set forth in Section 2.3.3(b), all liabilities and obligations of Seller in respect of the Contracts and Permits assigned or transferred to Buyer pursuant to this Agreement in accordance with the respective terms thereof, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (c) the Assumed Indebtedness and the Buyer's IDRB Obligations; 11 Arizona (d) any liability, obligation or responsibility of Seller for conditions at the Real Estate, whether based on statutory or common law, now or hereafter in effect, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment at the Real Estate or into or from any building, structure, pipeline or other facility at the Real Estate, or from violation of any law relating to the foregoing, including without limitation, any CERCLA or similar liability under any federal or state law or regulation, except to the extent Buyer has given written notice of a claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to the expiration of the claims period set forth in Section 7.3.2(a) or (b) (and if Buyer has given written notice prior to the expiration of such claims period, to the extent that such claim is not entitled to indemnification under Sections 7.3 and 7.4) (the foregoing, the "Pre-Existing Conditions"); (e) all liabilities and obligations of Seller related to unperformed service obligations, easement and right-of-way relocation obligations, and construction work in progress, and all engineering and construction required to complete scheduled construction and other capital projects for the Business, in each case relating to the Business and outstanding on or arising after the Closing Date except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (f) liability for accrued but unused vacation pay for the Transferred Employees to the extent provided in Section 5.9.2; (g) any liability, obligation or responsibility relating to customer deposits held by Seller on the Closing Date and relating to the Business; and (h) all liabilities and obligations imposed on Buyer by any PUC in connection with the operation of the Business or the ownership of the Acquired Assets, including with respect to any liability of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the financial statements of Seller. 2.3.2.Any liabilities or obligations which are assumed by Buyer pursuant to Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities. " At the Closing, Parent shall cause Buyer to execute and deliver to Seller an assumption agreement, in substantially the form of the Assumption Agreement attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which Buyer shall assume the Assumed Liabilities. Each of Parent and Buyer hereby irrevocably and unconditionally waives and releases the Seller Parties from all Assumed Liabilities and all liabilities or obligations exclusively relating to the Business or the Acquired Assets to the extent arising from events or occurrences after the Closing or to the extent otherwise relating to the period after the Closing, including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any 12 Arizona claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). 2.3.3. Buyer shall not assume any liabilities, commitments or obligations (contingent or absolute and whether or not determinable as of the Closing) of any of the Seller Parties or any of their Affiliates except for the Assumed Liabilities as specifically and expressly provided for above, whether such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Buyer hereunder as Assumed Liabilities are being retained by the Seller Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby irrevocably and unconditionally waives and releases Buyer from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Without limitation to the foregoing, all of the following shall be considered Retained Liabilities and not Assumed Liabilities (except as specified below) for the purposes of this Agreement: (a) any product liability, toxic tort or similar claim for injury to person or property, regardless of when made or asserted, to the extent that it arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any of the Seller Parties or any of their Affiliates prior to Closing, or alleged to have been made by any of such Persons, or to the extent that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product distributed or sold by or on behalf of any of the Seller Parties or any of their Affiliates prior to Closing, including any claim referred to above in this Section 2.3.3(a) relating to water quality standards, any claim relating to any product delivered in connection with the performance of services provided by Seller and any claim seeking recovery for consequential damages, lost revenue or income; (b) all refund obligations relating to the advances existing on the Closing Date for construction of facilities relating to the Business; (c) except to the extent set forth in Section 2.9, any federal, state, foreign or local income or other Tax payable with respect to the business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member. (d) any liability or obligation associated with or in connection with any common plant assets of Seller (other than the liabilities and obligations exclusively related to any common plant assets included among the Acquired Assets); (e) except as provided in Section 2.3.1 above, any liability or obligation with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any of the Seller Parties or any of their Affiliates, whether or 13 Arizona not employed by Buyer after the Closing, that arises out of or relates to events or conditions to the extent occurring before the Closing Date; (f) except to the extent set forth in Section 2.3.1(d), any liability, obligation or responsibility of any of the Seller Parties, or any of their Affiliates or predecessors, whether based on statutory or common law, but only as any such law is interpreted, amended and in effect on the Closing Date, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment or into or from any building, structure, pipeline or other facility or relating to or arising from the generation, use, storage, treatment, disposal, transport or other handling of Hazardous Substances or sale or product containing Hazardous Substances from violation of any law relating to the foregoing (but only as such law is interpreted, amended and in effect on the Closing Date) including without limitation, any (A) CERCLA or similar liability under any federal or state law or regulation as interpreted, amended and in effect on the Closing Date or (B) any such liability associated with businesses or assets of the Seller Parties other than the Business or the Acquired Assets; (g) liabilities and obligations relating to the Business to the extent arising prior to Closing (unless otherwise constituting Assumed Liabilities) arising by operation of law under any common law or statutory doctrine (including successor liability or de facto merger); (h) any obligation or liability arising under any contract, commitment, instrument or agreement (1) except for Buyer's IDRB Obligations and subject to the penultimate sentence of Section 2.4, that is not transferred to Buyer as part of the Acquired Assets, or (2) that relates to any breach or default (or to the extent that it relates to an event which would, with the passing of time or the giving of notice, or both, constitute a default) under any Contract, instrument or agreement or to any services to be provided by Seller under any such Contract, instrument or agreement to the extent that such services were performed or were required to have been performed on or prior to the Closing Date; (i) any liability or obligation in respect of the Excluded Assets; (j) any liability or obligation of any of the Seller Parties or any of their Affiliates existing as a result of any act, failure to act or other state of facts or occurrence which constitutes a breach or violation of any of Seller's representations, warranties, covenants or agreements contained in this Agreement, except to the extent set forth in Section 7.4; or (k) except for the Assumed Liabilities as specifically and expressly set forth herein, any liability to the extent arising out of or relating to the ownership or operation of the Acquired Assets or the Business prior to the Closing Date (including any predecessor operations), any claims, obligations or litigation to the extent arising out of or relating to events or conditions occurring before the Closing Date, and any liability associated with any business other than the Business. 14 Arizona 2.4 Consent of Third Parties. On the Closing Date, Citizens shall cause Seller to assign to Buyer, and Parent shall cause Buyer to assume, the Contracts and the Permits which are to be transferred to Buyer as provided in this Agreement by means of the Assumption Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent (or result in a breach or violation thereof) of the other party thereto or any other third party, and such consent shall not be obtained prior to Closing, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets. In order, however, to provide Buyer the full realization and value of every Contract of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Buyer, in the name of Seller or otherwise as Buyer shall specify, take all reasonable actions (including without limitation the appointment of Buyer as attorney-in-fact for Seller to proceed at Buyer's sole cost and expense) and do or cause to be done all such things as shall in the reasonable opinion of Buyer be necessary (a) to assure that the rights of Seller or its Affiliates under such Contracts shall be preserved for the benefit of Buyer and (b) to facilitate receipt of the consideration to be received by Seller or its Affiliates in and under every such Contract. To the extent that Buyer does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract "assigned or transferred to Buyer pursuant to this Agreement" within the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in any way diminish the obligations of Seller to obtain consents and approvals under this Agreement. 2.5 Closing. Subject to the terms and conditions of this Agreement, the closing of the sale and purchase of the Acquired Assets (the "Closing") shall take place at 10 a.m., East Coast time, on a date mutually satisfactory to Buyer and Seller which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in Sections 6.1 and 6.2 hereof (other than those conditions which require the delivery of any documents or the taking of other action, at the Closing) at the offices of Fleischman and Walsh, LLP, 1400 Sixteenth Street, N.W., Washington, D.C. 20036, or on such other date and at such other time or place as may be mutually agreed upon by the parties hereto (the "Closing Date"). Upon payment of the Initial Cash Payment by Buyer and confirmed receipt thereof by Seller or the Escrow Agent pursuant to Section 2.6.2 below, Seller shall operate the Business at the direction of and under the control of Buyer. Notwithstanding the foregoing, the Closing shall be deemed to be effective as of 11:59 p.m. on the Closing Date for all purposes. 2.6 Purchase Price. 2.6.1. Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price be paid by Buyer for the purchase of the Acquired Assets (the "Purchase Price") shall be: (i) $231,310,000 in cash (the "Base Cash Purchase Price," the Base Cash Purchase Price as adjusted in accordance with Section 2.6.3 and Section 2.6.5 is referred to as the "Initial Cash Payment"), subject to adjustment pursuant to the provisions of this Agreement (including Section 2.6.3, Section 2.6.4, Section 2.6.5 and Section 2.9 of this Agreement) and (ii) the assumption by Buyer of the Assumed Liabilities. 15 Arizona 2.6.2. Payment of Initial Cash Payment. Subject to the terms and conditions of this Agreement, the Initial Cash Payment shall be paid by Buyer on the Closing Date by federal other wire transfer of immediately available funds to the account designated by Seller in writing at least two (2) Business Days prior to the Closing Date. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Buyer shall deliver the Initial Cash Payment to Buyer's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. Upon receipt, the Escrow Agent shall invest the Initial Cash Payment in an interest-bearing account mutually agreed upon by Seller and Buyer. At Closing, Parent shall sign and deliver to Citizens a statement which confirms that the Closing has occurred and which instructs the Escrow Agent to transfer to Citizens the funds representing the Initial Cash Payment, plus an amount representing the interest earned after the Closing Date until the date the funds are transferred, to an account that Citizens shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to Buyer. The fees and expenses of Escrow Agent shall be paid by Buyer. 2.6.3. Estimated Closing Statement. At least five (5) business days prior to the Closing Date, Citizens shall deliver to Parent and Buyer a statement of net assets (the "Estimated Statement of Net Assets") reflecting its good faith calculation of the Acquired Assets of the Business as of the last day of the latest calendar month for which financial statements of Seller are available (the "Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall be prepared in the same manner and utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999). The Base Cash Purchase Price shall be increased or decreased on a dollar for dollar basis by the amount, if any, by which the Estimated Adjusted Net Assets is greater than or less than $160,180,848 (such increase or decrease, as the case may be, is referred to herein as the "Estimated Net Asset Adjustment"). 2.6.4 Post-Closing Adjustment to Purchase Price. (a) Within 90 days after the Closing, Citizens shall prepare and deliver to Parent and Buyer a Statement of Net Assets (the "Closing Statement of Net Assets") which reflects the Acquired Assets as of 11:59 p.m. on the Closing Date, based on actual financial performance and calculated in the same manner, utilizing the same accounting principles, policies and methods utilized in preparing the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999), together with (A) an audit report of Seller's Accountants stating that the Closing Statement of Net Assets has been prepared utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets and (B) a calculation of Citizens' determination of the amount of increase or decrease in the amount of the Acquired Assets of the Business from the Interim Statement of Net Assets Date to the Closing Date which is derived from the Closing Statement of Net Assets ("Seller's Adjustment Amount"). The Closing Statement of Net Assets shall not give effect to any purchase accounting treatment arising from Buyer's purchase of the Acquired Assets. Buyer shall pay the fees and expenses of Seller's Accountants incurred in connection with this Section 2.6.4. 16 Arizona Buyer agrees to cooperate, and agrees to cause Buyer's Accountants to cooperate, with Citizens and Seller's Accountants in connection with the preparation of the Closing Statement of Net Assets, and related information, and shall provide to Citizens and Seller's Accountants such books, records and information as may be reasonably requested from time to time, including the work papers of Buyer's Accountants. Citizens will give Buyer and its representatives access during the normal business hours of Citizens to the personnel, books and records of Citizens and the work papers of Seller's Accountants to assist Buyer in the review of the Closing Statement of Net Assets and related matters. Buyer agrees that, following the Closing through the date on which the Closing Statement of Net Assets is delivered, it will not take any actions with respect to any accounting books, records, policies or procedures on which the Closing Statement of Net Assets is to be based that would make it impossible or impracticable to calculate the Acquired Assets in the manner and utilizing the methods required hereby. Without limiting the generality of the foregoing, no changes shall be made in any reserve or other account existing as of the date of the Interim Statement of Net Assets except in the ordinary course or as a result of events occurring after the date of the Interim Statement of Net Assets and, in such event, only in a manner consistent with past practices of Seller. (b) Parent or Buyer may dispute any amounts reflected on the Closing Statement of Net Assets, in the Seller's Adjustment Amount or in the Statement of Certain Assumed Liabilities, provided, however, that Buyer shall notify Citizens in writing of each disputed amount, and specify the amount thereof in dispute and the basis of such dispute, within 30 days of the Buyer's receipt of the Closing Statement of Net Assets and the Seller's Adjustment Amount (such 30 day period hereinafter referred to as the "Review Period"). In the event of a dispute with respect to the Closing Statement of Net Assets, the Seller's Adjustment Amount or the Statement of Certain Assumed Liabilities, Buyer and Seller shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Buyer and Seller are unable to reach a resolution of such differences within 30 days of receipt of Buyer's written notice of dispute to Seller, Buyer and Seller shall submit the amounts remaining in dispute (together with any amounts remaining in dispute pursuant to Section 2.6.4(b) of each of the Related Purchase Agreements) for resolution to an independent accountant firm of national reputation mutually appointed by Seller and Buyer (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall be requested to determine and report to the parties, within 30 days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Buyer and the Seller Parties so that the Seller Parties' share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to the Third Accounting Firm that is unsuccessfully disputed by Buyer (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed amounts so submitted by Buyer to the Third Accounting Firm. Buyer shall pay the fees and expenses of Buyer's Accountants incurred in connection with this Section 2.6.4(b). Seller's Adjustment Amount, if there are no disputes with respect thereto, or Seller's Adjustment Amount as adjusted after the resolution of all disputes with respect thereto in accordance herewith, shall be referred to as the "Final Net Asset Adjustment." 17 Arizona (c) If the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment exceeds the Initial Cash Payment, then within five (5) business days after final determination thereof Buyer shall pay Seller the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. If the Initial Cash Payment exceeds the sum of the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment, then within five (5) business days after final determination thereof Seller shall pay Buyer the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. 2.6.5. Adjustment for Certain Liabilities. Concurrent with the delivery of the Estimated Statement of Net Assets, Citizens also shall deliver to Parent and Buyer a statement reflecting (i) the customer and other deposits held by Seller on the Closing Date and relating to the Business, (ii) the total amount of the Assumed Indebtedness that will be outstanding immediately after the Closing Date, (iii) the items specified in Section 2.9 to the extent set forth therein, and (iv) without duplications of any amount included in clause (i) above and except as provided in Section 5.15, any payments received by Seller under the Contracts and Permits for obligations not performed as of the Closing Date (the "Statement of Certain Assumed Liabilities"). The Statement of Certain Assumed Liabilities shall reflect Citizens' good faith calculation of such liabilities as of the Closing Date. The Base Cash Purchase Price shall be decreased by the net amount set forth in the Statement of Certain Assumed Liabilities. Concurrent with the delivery of the Closing Statement of Net Assets, Citizens also shall deliver to Parent a statement showing any adjustments to the Statement of Certain Assumed Liabilities and the Base Cash Purchase Price shall be further adjusted to give effect to any such adjustments to the Statement of Certain Assumed Liabilities. 2.7 Deliveries and Proceedings at Closing. Subject to the terms and conditions of this Agreement, at the Closing: 2.7.1. Deliveries to Buyer. Citizens shall, and shall cause Seller to deliver to Buyer: (a) bills of sale and instruments of assignment to the Acquired Assets, duly executed by Seller, substantially in the form of Exhibit B hereto and; (b) the consents to transfer, of all transferable or assignable Contracts, Intellectual Property, Permits (including Environmental Permits), to the extent specifically required hereunder; (c) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Seller (together with any other transfer forms necessary to transfer title to such vehicles); 18 Arizona (d) special warranty deeds of conveyance with respect to the parcels of Real Estate owned in fee simple by Seller (or, with respect to any such parcel which was acquired by Seller (or its predecessor in interest, in cases involving mergers) by deed without covenant or warranty of title, a quit claim deed without covenant or warranty of title) to Buyer, duly executed and acknowledged by Seller and in recordable form; (e) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Real Estate, duly executed by the Seller Parties (the "FIRPTA Affidavit"); (f) the certificates, opinions and other documents required to be delivered by the Seller Parties pursuant to Section 6.1 hereof and certified resolutions evidencing the authority of the Seller Parties as set forth in Section 3.2 hereof; (g) all agreements and other documents required by this Agreement; (h) a receipt for the payment of the Initial Cash Payment duly executed by Citizens; (i) all such other instruments of conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer to Buyer the Acquired Assets in accordance with this Agreement and where necessary or desirable, in recordable form; and (j) if requested by Buyer at least sixty (60) days before Closing, a lease of that portion of Citizens' Bullhead City, Arizona office building used exclusively by Seller in connection with the Business, on commercially reasonable terms reasonably acceptable to Buyer and Seller. 2.7.2. Deliveries By Buyer to the Seller Parties. Parent shall, and shall cause Buyer to deliver to the Seller Parties: (a) wire transfer of immediately available funds in an amount equal to the Initial Cash Payment; (b) the Assumption Agreement, duly executed by Buyer; (c) the certificates, opinions and other documents required to be delivered by Buyer pursuant to Section 6.2 hereof; (d) all of the instruments contemplated by Section 5.24(a) to the extent not previously executed and delivered by Parent; and 19 Arizona (e) all such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Parent and Buyer to assume the Assumed Liabilities in accordance with this Agreement. 2.8 Allocation of Consideration. Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Authority or in any proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in any legal requirement. 2.9 Prorations. The parties hereto agree that the following expenses shall be calculated and pro rated as of the Closing Date, with Seller responsible for such expenses and to receive the benefit for the same for the period through and including the Closing Date, and Buyer to be responsible for and to receive the benefit of the same after the Closing Date: 2.9.1. personal and real property taxes (on the basis on which the same were assessed and paid) and sales, occupation and use taxes, in each case, to the extent relating to the Business and except as otherwise provided in Section 7.1; 2.9.2. electric, fuel, gas, telephone, sewer and utility charges, in each case, to the extent relating to the Business; 2.9.3. rentals and other charges under Contracts to be assumed by Buyer pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h)); and 2.9.4. charges under maintenance and service contracts and other Contracts (except to the extent provided in Section 2.3.3(h)), and fees under Permits to be transferred to Buyer as part of the Acquired Assets; 2.9.5. water, sewer and other similar types of taxes, and installments on special benefit assessments; and 2.9.6. payroll expenses, payroll taxes, reimbursable employee business expenses and the financial cost of the accrued vacation of each Transferred Employee. 20 Arizona ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Each of the Seller Parties jointly and severally represent and warrant to Parent and Buyer as follows: 3.1 Qualification; No Interest in Other Entities. 3.1.1 Each of the Seller Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as presently being conducted. Each of the Seller Parties is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of the business conducted by it or such Seller Party's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of the Seller Parties do not have a Material Adverse Effect. 3.1.2. No shares of any corporation or any ownership or other investment interest, either of record, beneficially or equitably, in any Person are included in the Acquired Assets. 3.2 Authorization and Enforceability. Each of the Seller Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements and instruments to be executed by them in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents"). The execution, delivery and performance by each of the Seller Parties of this Agreement and the Transaction Documents to which such Seller Party is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by each of the Seller Parties, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by the Seller Parties. This Agreement is a legal, valid and binding obligation of each Seller Party, enforceable against them in accordance with its terms except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which each of the Seller Parties is a party will be duly executed and delivered by each of the Seller Parties and will constitute the legal, valid and binding obligations of each of the Seller Parties, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 3.3 No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the Transaction Documents by each of the Seller Parties do not, 21 Arizona and the consummation of the transactions contemplated by this Agreement and the Transaction Documents by the Seller Parties, will not: (a) contravene any provision of the Restated Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of the other Seller Parties; or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or give to others any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which any of the Seller Parties is a party, or by which the Business or any of the Acquired Assets may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, Liens, interests or rights which, individually and in the aggregate, do not have a Material Adverse Effect or will be cured, waived or terminated prior to the Closing Date, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, to which any of the Seller Parties is subject, other than those violations or conflicts which individually and in the aggregate would not have a Material Adverse Effect. 3.4 Financial Statements. Citizens has previously delivered to Buyer the statement of income of the Business (the "Income Statement") and the Interim Statement of Net Assets contained in Schedule 3.4 (collectively, the "Financial Statements"). The Income Statement (a) fairly presents in all material respects the results of operations of the Business in accordance with generally accepted accounting principles ("GAAP") consistently applied except for the omission of full footnotes to the Income Statement and (b) has in all material respects been derived from the books and records of Seller and reflects the separation of the operation associated with the Business from other operations of Citizens. The Interim Statement of Net Assets (a) has in all material respects been derived from the books and records of Seller and reflects the separation of the operations associated with the Business from other operations of Citizens; (b) fairly presents in all material respects the Acquired Assets as of the Interim Statement of Net Assets Date; and (c) has in all material respects been prepared in accordance with GAAP consistently applied except for the omission of full footnotes to such Interim Statement of Net Assets. The financial statements included in the Annual Report to each PUC for the year ended December 31, 1998, were prepared in all material respects in accordance with the rules and regulations of such PUC. 3.5 No Changes. Since the Interim Statement of Net Assets Date to the date hereof, except as disclosed in Schedule 3.5, the Seller Parties have conducted the Business as presently operated only in the ordinary course of business consistent with past practice. Since the Interim Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has not been: 3.5.1 any Material Adverse Effect; 3.5.2 prior to the date of this Agreement, any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any Transferred Employee, or material change or material addition 22 Arizona to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the Transferred Employees participate) to which any of the Transferred Employees may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan other than in any such case (i) in the ordinary course consistent with past practice, (ii) as required by law, or (iii) as required by any collective bargaining agreement, if any; 3.5.3 any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or the provision of discounts, rebates or allowances; 3.5.4 any disposition of or failure to keep in effect any rights in, to or for the use of any Permit of the Business which individually or in the aggregate would have a Material Adverse Effect; 3.5.5 any damage, destruction or loss affecting the Business which individually or in the aggregate would have a Material Adverse Effect whether or not covered by insurance; 3.5.6 prior to the date of this Agreement, any change by Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP and is set forth on Schedule 3.5; or 3.5.7 prior to the date of this Agreement, any sale, transfer or other disposition of any material assets, properties or rights of the Business, except in the ordinary course of business consistent with past practice. 3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a list of all Contracts (other than (i) with respect to which the Business' total annual liability or expense is less than (a) $250,000 per such Contract and (b) $6,123,000 per all such Contracts (when taken together with similar contracts omitted from Schedule 3.6 of the Related Purchase Agreements), and (ii) Contracts that may be terminated by Seller, without penalty, on notice of 90 days or less) except line extension agreements and similar agreements and construction and design contracts. Seller has furnished to Buyer a correct and complete copy of each written agreement listed in Schedule 3.6. Except as disclosed on Schedule 3.6, with respect to each Contract, neither Seller nor, to the Seller Parties' knowledge, any other party thereto, is in breach or default, and to the Seller Parties' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the Contract, except in each case where such breaches, terminations, modifications, accelerations or defaults, individually or in the aggregate, do not have a Material Adverse Effect. Except as set forth in Schedule 3.6, there are no disputes pending or to the best of the Seller Parties' knowledge, threatened, under or in respect of any of the Contracts, other than those that individually and in the aggregate do not have a Material Adverse Effect. 3.7 Permits and Compliance With Laws Generally. 23 Arizona 3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes, including Environmental Laws (as defined below), except to the extent that any failure to possess, or to comply with, any Permit, laws, rules, regulations or orders would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in Schedule 3.7, the Business is conducted by Seller in compliance with all applicable laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA"), zoning, building and similar laws and Environmental Laws), rules, regulations, ordinances, codes, judgments and orders, except for such failures to comply which do not individually or in the aggregate have a Material Adverse Effect. Except as disclosed on Schedule 3.7, all Permits of Seller relating to the operation of the Business are in full force and effect, other than those the failure of which to be in full force and effect would not individually or in the aggregate have a Material Adverse Effect. There are no proceedings pending or, to the Seller Parties' knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Permits presently possessed by Seller other than those revocations, cancellations, suspensions or modifications which do not individually or in the aggregate have a Material Adverse Effect. 3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the knowledge of the Seller Parties, threatened, by any Authority or other Person with respect to any alleged (i) violation by Seller or any Affiliate of Seller relating to the Business of any law, ordinance, rule, regulation, code or order of any Authority; or (ii) failure by Seller or any Affiliate to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets), except, in each case, where such violations or failures, individually or in the aggregate, would not have a Material Adverse Effect. 3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and with such exceptions as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect: 3.8.1 Seller has not disposed of or arranged for the disposal of or Released any Hazardous Substances, other than in conformity with Environmental Laws, at any Real Estate, or, in connection with the Business or Acquired Assets, at any other facility, location, or other site. 3.8.2 Seller has not received any written notice or request for information with respect to, and to the best of the Seller Parties' knowledge, Seller has not been designated a potentially liable party for Remedial Action, in connection with any Real Estate, or, as of the date hereof, with respect to the Business or Acquired Assets, at any other facility, location, or other site under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or comparable state statutes. 24 Arizona 3.8.3 To the best of the Seller Parties' knowledge, except for such use or storage of Hazardous Substances as is incidental to the conduct of the Business, which use and storage is or has been in compliance with Environmental Laws, and which use and storage has not caused any condition that requires Remedial Action, no Real Estate has been used for the storage, treatment, generation, processing, production or disposal of any Hazardous Substances or as a landfill or other waste disposal site in violation of any Environmental Law. 3.8.4 To the best of the Seller Parties' knowledge, underground storage tanks are not, and have not in the past been, located on or under any Real Estate. 3.8.5 There are no pending or unresolved claims against Seller or the Business for investigatory costs, cleanup, removal, remedial or response costs, or natural resource damages arising out of any Releases or threat of Release of any Hazardous Substances at any Real Estate or, as of the date hereof, with respect to the Business or the Acquired Assets or at any other facility, location, or other site. 3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing materials are located at or in any Real Estate in violation of Environmental Laws or which require Remedial Action. 3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance managed or generated by or on behalf of Seller at the Real Estate or in connection with the Business or Acquired Assets has come to be located at any site that is listed or formally proposed for listing under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), or any similar state list or that is the subject of federal, state, or local enforcement actions or investigations. 3.8.8 The Seller Parties know of no facts or circumstances related to environmental matters (i) in connection with the operation of the Business or (ii) concerning the Real Estate, that are reasonably likely to result in any material reduction in the quality or quantity of water available for supply to the Seller Parties' customers. 3.8.9 The Seller Parties will within thirty (30) days of the date hereof provide Buyer with copies of all written environmental audits or investigations of which they are aware (after due inquiry) prepared for the Real Estate or operations of the Business. 3.8.10 Except as set forth in Schedule 3.8.10 or Citizens' Annual Report on Form 10-K for the year ended December 31, 1998: (a) The Seller Parties (including for purposes of Section 3.8.10(a) and (b), Affiliates and predecessors of the Seller Parties) are and have been for the past three years in full compliance with all federal and state primary drinking water standards; (b) The Seller Parties are and have been for the past three years in full compliance with all federal and state secondary drinking water standards; and 25 Arizona (c) As to all outstanding violations of state or federal drinking water standards, as of the date hereof, the Seller Parties have completed or are in the process of completion in accordance with all applicable deadlines, all actions required by Environmental Law or Authorities to correct or otherwise respond to such violations. 3.8.11 Except as set forth in Schedule 3.8.11, none of the Seller Parties will be required to place any notice or restriction relating to the presence of Hazardous Substances in the deed to any Real Estate, or in any written instrument accompanying this Agreement, and no Real Estate has such a notice or restriction in its deed or any other written instrument relating to the purchase, lease or rental of such property. For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way respond to any presence, Release or threat of Release of Hazardous Substances; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substances so it does not endanger or threaten to endanger public or employee health or welfare or the environment; or (z) perform studies, investigations or monitoring necessary or required to investigate the foregoing; (B) "Environmental Laws" means any common law or federal, state or local law, statutes, rule, regulation, ordinance, code, judgment or order relating to the protection of the environment or human health and safety and includes, but is not limited to, CERCLA (42 U.S.C. section 9601, et seq.), the Clean Water Act (33 U.S.C. section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. section 2701 et seq.), each as has been or may be interpreted or amended as of the Closing Date and the regulations promulgated pursuant thereto and in effect as of the Closing Date; (C) "Released" means released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or polluting substance or waste or contaminant under or pursuant to any Environmental Law, including petroleum products, PCBs and radioactive materials. 3.9 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by the Selling Parties of this Agreement, the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by the Seller Parties, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except (i) as required by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) as specified on Schedule 3.9, (iii) as required by the IDRB Documents, and (iv) for such other consents, approvals, authorizations, registrations or filings the failure of which to obtain or make would not individually or in the aggregate have a Material Adverse Effect or which are obtained by the Closing Date. 3.10 Title. Seller has good and valid title to all of the Acquired Assets constituting personal property, good and marketable title in fee simple to all of the owned Acquired Assets 26 Arizona constituting Real Estate and good and valid leasehold title to all of the leased Acquired Assets constituting Real Estate, in each case, free and clear of Liens subject only to the Permitted Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set forth in Schedule 3.10 hereto, (b) Liens securing Taxes, assessments, governmental charges or levies, or the claims of materialmen, mechanics, carriers and like persons, all of which are not yet due and payable or which are being contested in good faith or (c) such other Liens which, individually or in the aggregate, do not have a Material Adverse Effect (it being understood that to the extent a Permitted Exception relates to or arises from a Retained Liability, Seller shall still be liable for such Retained Liability to the extent set forth herein). 3.11 Real Estate. 3.11.1 As of the date hereof, Seller has not received any written or oral notice for assessments for public improvements against the Real Estate which remains unpaid, and to the best knowledge of the Seller Parties, no such assessment has been proposed. Except as set forth on Schedule 3.11, as of the date hereof, there is no pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate and to the best knowledge of the Seller Parties no such proceeding is threatened. 3.11.2 Except as disclosed on Schedule 3.6, as of the date hereof, Seller is not a lessee under any Contract relating to the use or occupancy of the Real Estate involving annual payments in excess of $100,000. 3.11.3 Each parcel of the Real Estate has physical and, to Seller's knowledge, legal vehicular and pedestrian access to and from public roadways as may be reasonably necessary to the operation of the Business except where the failure to have such access does not have a Material Adverse Effect. To Seller's knowledge, no fact or condition exists which would result in the termination of (a) the current access from each parcel of the Real Estate, and (b) continued use, operation, maintenance, repair and replacement of all existing and currently committed water lines used by Seller in connection with the Business, except where such termination would not have a Material Adverse Effect. 3.12 Taxes. The Seller Parties have (a) timely filed all material returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (b) paid all Taxes that are shown to have come due pursuant to such returns or reports and (c) paid all other material Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due. To the best of the Seller Parties' knowledge, all such returns or reports have been prepared in accordance with all applicable laws and requirements in all material respects. Except to the extent disclosed on Schedule 3.12, none of the assets of the Business or constituting any of the Acquired Assets (a) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (b) is 27 Arizona "tax-exempt use property" within the meaning of Section 168(h) of the Code or (c) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. 3.13 Patents and Intellectual Property Rights. To the best of the Seller Parties' knowledge, the operations of Seller do not make any unauthorized use of any Intellectual Property except for any such unauthorized uses which do not have a Material Adverse Effect. Assuming the consents listed as item XII on Schedule 3.9 are obtained, Buyer will not lose any of Seller's rights to, or be required to pay increased royalties for, any Intellectual Property included in the Acquired Assets as a result of the Closing and the consummation of the transactions contemplated by this Agreement, except for any such rights or such increased royalties the loss or payment of which would, individually or in the aggregate, not have a Material Adverse Effect. 3.14 Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Interim Statement of Net Assets or arising since the date thereof have arisen out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; the allowance for collection losses on the Interim Statement of Net Assets has been determined in accordance with GAAP consistent with past practice. 3.15 Labor Relations. As of the date hereof, except as set forth in Schedule 3.15, to best of the knowledge of the Seller Parties, there has been no union organizing efforts with respect to the Business conducted within the last three (3) years and there are none now being conducted with respect to the Business. Except as set forth in Schedule 3.15, Seller has not at any time during the three (3) years prior to the date of this Agreement had, nor, to the best of the Seller Parties' knowledge, is there now threatened, a strike, work stoppage or work slow down with respect to or affecting the Business which had or could reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as set forth in Schedule 3.15, (i) no Employee is represented by any union or other labor organization and (ii) there is no unfair labor practice charge pending or, to the best knowledge of the Seller Parties, threatened against Seller relating to any of the Employees as related to the Business which could reasonably be expected to have a Material Adverse Effect. 3.16 Employee Benefit Plans. 3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive, deferred compensation, excess benefit, employment contract, stock purchase, stock ownership, stock option, supplemental unemployment, vacation, sabbatical, sick-day, severance or other material employee benefit plan, program or arrangement (other than those required to be maintained by law), whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic, (i) maintained by, or contributed to by Citizens or any of its Affiliates, in respect of any Employee or Former Employee, or (ii) with respect to which Citizens or any of its Affiliates has any liability in respect of any Employee or Former Employee (the"Benefit Plans"). Except as disclosed on Schedule 3.16.1, neither Citizens nor any 28 Arizona of its Affiliates maintains any bonus, pension or welfare benefit plan, program or arrangement, including any deferred compensation arrangement, for directors, consultants or independent contractors of the Business. 3.16.2 A true and complete copy of each Benefit Plan and related trust agreements and (to the extent applicable) a copy of each Benefit Plan's current summary plan description and in the case of an unwritten Benefit Plan, a written description thereof, has been furnished to Buyer. In addition, to the extent applicable, Buyer has been provided a copy of the most recent Internal Revenue Service ("IRS") determination letter issued to each Benefit Plan and a copy of the most recent IRS Form 5500 together with all schedules and accountants' statement filed, and actuarial reports prepared, on behalf of each Benefit Plan. 3.16.3 Each Benefit Plan which is intended to be qualified under Section 401(a) of the Code (as designated on Schedule 3.16.1) is so qualified, and will remain so qualified upon the timely making of certain amendments required by law during the applicable remedial amendment period, and any trust forming a part of such a Benefit Plan is tax exempt under Section 501(a) of the Code. Each such Benefit Plan has been amended, as and when necessary, to comply with the Tax Reform Act of 1986 and upon timely filing of an Application for Determination with the Internal Revenue Service, will be eligible to make further such amendments under the"remedial amendment period." 3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code. 3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the Code or ERISA. 3.16.6 Neither Citizens nor any ERISA Affiliate and, to the knowledge of the Seller Parties, no other Person, has taken any action or failed to take any action with respect to any Benefit Plan that may subject Buyer or any Benefit Plan under which liabilities may be assumed by Buyer under Sections 5.10, 5.11 or 5.12 ("Assumed Benefit Liabilities") to any material liability or Tax under the Code or ERISA. 3.16.7 Neither Citizens nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Benefit Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, including any contingent liability under Section 4204 of ERISA or withdrawal liability arising from the actions of Citizens or any ERISA Affiliate contemplated by this Agreement. All contributions that Citizens or any ERISA Affiliate have been obliged to make to any Benefit Plan, including any multiemployer plan, have been duly and timely made. 29 Arizona 3.16.8 There are no pending or, to the knowledge of the Seller Parties, threatened claims (other than routine claims for benefits), assessments, complaints, proceedings or investigations of any kind in any court or governmental agency with respect to any Benefit Plan which could reasonably be expected to give rise to a material liability to Buyer. 3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides benefits, including without limitation, death or medical benefits, beyond termination of service or retirement other than (i) coverage mandated by law, or (ii) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code. Seller's Retiree Medical Plan contains provisions permitting Seller to modify or terminate retiree medical benefits at any time, without prior notice to any covered individual. Except with respect to retirees, "grandfathered" employees and collectively bargained employees, Seller knows of no reason why its ability to effect those provisions would be limited. 3.16.10 With respect to each Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, Citizens and each ERISA Affiliate have complied in all material respects with the continuation coverage requirements of the Code and ERISA. 3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.17, Seller has no liabilities with respect to the Business which would constitute Assumed Liabilities, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, except: 3.17.1 the Assumed Indebtedness and those other liabilities which would decrease the Base Cash Purchase Price pursuant to Section 2.6.5 to the extent assumed by Buyer at Closing; 3.17.2 liabilities arising in the ordinary course of business under any Contract or Permit or with respect to any agreement or instrument included within the definition of Real Estate; and 3.17.3 those liabilities incurred, consistent with past business practice, in or as a result of the normal and ordinary course of business and reflected in the books and records related to the Business; 3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; and 3.17.5 those other liabilities, which individually and in the aggregate, would not have a Material Adverse Effect. 3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule 3.18, there are no actions, suits, investigations or proceedings pending against or, to the best of the Seller 30 Arizona Parties' knowledge, threatened, against or affecting, Seller, the Business or any of the Acquired Assets before any court or arbitrator or Authority which individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there are currently no outstanding judgments, decrees or orders of any court or Authority against any of the Seller Parties, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets (other than any PUC order relating to rates, tariffs and similar matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. 3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real Estate has adequate arrangements for supplies of electricity, gas, oil, coal and/or sewer for all operations at the 1998 or current operating levels, whichever is greater. Except as set forth on Schedule 3.19, there are no actions or proceedings pending or, to the best of the Seller Parties' knowledge, threatened, that would adversely affect the supply of electricity, gas, coal or sewer to the Real Estate except for those which individually and in the aggregate would not have a Material Adverse Effect. 3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by Seller, together with the risks insured against, coverage limits and deductible amounts. 3.21 Relationship with Customers. As of the date hereof, Seller does not have any current customer which accounted for more than 5% of the net sales of the Business (taken together with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) for the immediately preceding 12-month period. 3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth in Schedule 3.22 hereto, within six months prior to the date hereof, (i) Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; or (b) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; (ii) Seller has not been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar state or local law; and (iii) none of Seller's employees who are employed in connection with the Business has suffered an "employment loss" (as defined in the WARN Act). 3.23 Condition of Assets. Except as set forth on Schedule 3.23, the buildings, machinery, equipment, tools, furniture, improvements and other fixed tangible assets of the Business included in the Acquired Assets, taken as a whole and taken together with the similar assets included among the assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements, are in good operating condition and repair, reasonable wear and tear excepted. 31 Arizona 3.24 Brokerage. None of the Seller Parties or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to Buyer or its Affiliates. 3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded Assets, the Acquired Assets include all assets, rights, properties and contracts the use of which is necessary to the continued conduct of the Business by Buyer substantially in the manner as it was conducted prior to the Closing Date, including the service of all utility customers in substantially the same manner and at substantially the same service levels as provided by Seller on the date hereof. 3.26 Year 2000 Matters. Citizens has (1) initiated a review and assessment of all mission critical areas within the Business and related operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by any Seller Party (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in Citizens' Annual report on Form 10-K for the fiscal year ended December 31, 1998 and Citizens' Quarterly reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in accordance with that timetable. Seller has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to Seller after making reasonable inquiries of such suppliers and vendors. Seller makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. 3.27 Product Liability. Except as disclosed in Schedule 3.27 and except for those liabilities which individually or in the aggregate would not have a Material Adverse Effect, there are no (a) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties, unasserted, with respect to any product liability or similar claim that relates to any product or service sold by Seller or the Business to others or (b) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties unasserted, with respect to any claim for the breach of any express or implied product warranty or a similar claim with respect to any product or service sold by Seller or the Business to others. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER Parent and Buyer jointly and severally represent and warrant to Seller as follows: 32 Arizona 4.1 Organization and Good Standing. 4.1.1 Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.1.2 Buyer is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business. Buyer is qualified to do business and is in good standing in all jurisdictions wherein the nature of the business conducted by it Buyer's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such failures of Buyer do not have a material adverse effect on its ability to perform its obligations under this Agreement and the Transaction Documents. 4.2 Authorization and Enforceability. Each of Buyer and Parent has full corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which either of them is a party. The execution, delivery and performance by Buyer and Parent of this Agreement and the Transaction Documents to which Buyer and/or Parent is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by Buyer and Parent, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by Buyer and Parent. This Agreement is a legal, valid and binding obligation of Buyer and Parent, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which Buyer and Parent is a party will be duly executed and delivered by Buyer and Parent and will constitute the legal, valid and binding obligations of Buyer and Parent, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 4.3 No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Transaction Documents by Buyer and/or Parent do not, and the consummation of the transactions contemplated hereby and thereby will not, (a) contravene any provision of the Articles of Incorporation or Bylaws of Buyer or the Certificate of Incorporation or Bylaws of Parent; or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, authorization, proof of dedication or other agreement or commitment, oral or written, to which Parent or Buyer is a party, or by which any of their assets or properties may be bound or affected, 33 Arizona except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, interests or rights which, individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation to which Buyer or Parent is subject other than those violations and conflicts which individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.4 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by Buyer and Parent of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by Buyer or Parent except (i) as required by the HSR Act, (ii) as specified on Schedule 3.9 and (iii) for such consents, approvals, authorizations, registrations or filings, the failure to obtain or make would not individually or in the aggregate have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.5 Financing. Buyer and Parent have, and at the Closing Date, will have sufficient resources to pay the Purchase Price, and Parent, Buyer or the other Affiliates of Parent that are buyers of the assets and businesses being acquired pursuant to the Related Purchase Agreements have, and at the Closing Date, will have sufficient resources to pay the purchase prices set forth in the Related Purchase Agreements. 4.6 Brokerage. None of Parent, Buyer or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to the Seller Parties. 4.7 Insurance. Schedule 4.7 lists the policies and contracts in effect as of the date hereof for casualty and property insurance covering Buyer's assets and properties and the operation of Buyer's business, together with the risks insured against, coverage limits and deductible amounts. ARTICLE 5 ADDITIONAL COVENANTS 5.1 Conduct of Business. Except (i) as otherwise specifically permitted by this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the prior written consent of Buyer, from and after the date of this Agreement and up to and including the Closing Date, each of the Seller Parties agree that: 34 Arizona 5.1.1 Seller shall conduct the Business as presently operated and only in the ordinary course of business consistent with past practice. 5.1.2 They shall promptly inform Buyer in writing of any specific event or circumstance of which they are aware, or of which they receive notice, that has or is likely to have, individually or in the aggregate, taken together with the other events or circumstances, a Material Adverse Effect on the Acquired Assets or the Assumed Liabilities. 5.1.3 Seller shall not: (a) change or modify in any material respect existing credit and collection policies, procedures and practices with respect to accounts receivable; (b) enter into any contract or commitment, waive any right or enter into any other transaction (except in the ordinary course of business) which would have a Material Adverse Effect; (c) except in the event of service interruption, emergency or casualty loss, commit to acquire subsequent to the Closing Date on behalf of the Business any capital asset or group of capital assets costing in excess of $1,000,000 that is not included in the capital budget of Seller for fiscal year 2000 and which, if so acquired, would be included in the Acquired Assets; commencing December 1, 1999, accept or receive customer advances for construction in excess of $9,000,000 (when combined with customer advances relating to the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) per each of the next four consecutive three-month periods unless pursuant to an existing tariff, Contract or Permit of Seller; or sell or lease or agree to sell or lease or otherwise dispose of any assets included in the Acquired Assets except in the ordinary course of the conduct of the Business, consistent with past practice; (d) except in the ordinary course of business, consistent with past practice or as required under any of Seller's debt instruments or indentures, mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets; (e) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any Transferred Employee except (i) as required by law, and (ii) in the ordinary course, consistent with past practice; provided, however, no individual Employee shall in any event receive a compensation increase in excess of seven percent (7%); (f) other than in the ordinary course of business consistent with past practice, sell or otherwise transfer any assets necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; 35 Arizona (g) change the Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP or any Authority; (h) intentionally and wilfully take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 3.25 hereof (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful omission to take action); or (i) prepay, redeem, retire, refund or otherwise extinguish any of the Assumed Indebtedness. 5.2 Negotiations. Neither Citizens nor any Person controlled by Citizens or under common control with Citizens (each such person being a "Section 5.2 Affiliate"), nor any officer, director, employee, representative or agent of Citizens or any of their Section 5.2 Affiliates, shall, directly or indirectly, solicit or initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into an agreement with any Person or group of Persons (other than Parent, Buyer or any Person controlled by Parent or Buyer or under common control with Parent, Buyer or any Persons providing financing to the parties hereto in connection with facilitating the consummation of the transactions contemplated by this Agreement) concerning any acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) that would result in the transfer to any such Person or group of Persons of ten percent (10%) of the Acquired Assets (as measured by net book value of such assets on the date of each such transaction) or the acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) involving the Seller Parties, if such acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) would be inconsistent, in any respect, with the obligations of the Seller Parties hereunder (any of the foregoing transactions, a "Competing Transaction"). 5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties will provide Buyer with a supplement or amendment to the Disclosure Schedules with respect to any matter, condition or occurrence which is required to be set forth or described in the Disclosure Schedules. For the avoidance of doubt, a matter, condition or occurrence shall only be "required" to be set forth or described in the Disclosure Schedules if the failure to be so disclosed would result in a breach of the applicable representation or warranty (qualified by Material Adverse Effect where applicable) on the date hereof or on the Closing Date. In addition, Seller shall have the right at any time and from time to time prior to the Closing to supplement or amend the Disclosure Schedules. Seller may provide Disclosure Schedules with respect to any representation or warranty of this Agreement whether or not a specific schedule is referred to therein. In the event that any supplement or amendment of such Disclosure Schedules shall be provided later than five (5) business days prior to the Closing Date, the Buyer shall have the right to delay the Closing for a period of five (5) business days in order for Buyer to review such supplement or amendment. No such supplement 36 Arizona or amendment shall be deemed to cure any breach of or alter any representation or warranty made in this Agreement so as to permit the Closing to occur unless Buyer specifically agrees thereto in writing. The Seller Parties shall promptly inform Buyer, and Buyer will promptly inform the Seller Parties of any fact or event which comes to their attention, the existence of which constitutes or likely will constitute a breach in any material respects of any representation or warranty in this Agreement. In addition, Parent will, within five (5) days of receipt thereof, forward to Seller (i) any title report Buyer receives from a title company with respect to the Real Estate and (ii) any written communication regarding a specific Lien or title defect affecting a specifically identified parcel of the Real Estate sent to the President, Treasurer or General Counsel of Parent or the President or Corporate Counsel of any other Buyer Party, and sent by a party other than the Seller Parties, their legal counsel, financial advisors or representatives. 5.4 Mutual Covenants. The parties mutually covenant from the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement, including Section 5.8 hereof): 5.4.1 to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents; 5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but not waiver) of the conditions to the Closing of the transactions contemplated herein (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and 5.4.3 to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 5.5 Filings and Authorizations. The parties hereto will as promptly as practicable, make or cause to be made all such filings and submissions under laws, rules and regulations applicable to it or its Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act and with the applicable public utility commission (each, a "PUC"). Any such filings and supplemental information will be in substantial compliance with the requirements of the applicable law, rule or regulation. Each of Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission to the PUC or which is necessary under the HSR Act. The Seller Parties, on the one hand and Buyer and Parent, on the other, shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Authority, including the PUC, the United States Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division"), and shall comply promptly with any such inquiry or request. Each 37 Arizona of Citizens, Seller, Parent and Buyer will use its reasonable efforts to obtain any clearance required under the HSR Act and from the PUC for the purchase and sale of the Acquired Assets in accordance with the terms and conditions hereof. Notwithstanding the foregoing, nothing contained in this Agreement will require or obligate any party or their respective Affiliates: (i) to initiate, pursue or defend any litigation (or threatened litigation) to which any Authority (including the PUC, the Antitrust Division and the FTC) is a party; (ii) to agree or otherwise become subject to any material limitations on (A) the right of Buyer or its Affiliates effectively to control or operate the Business or the right of Seller or its Affiliates effectively to control or operate Citizens' other businesses, (B) the right of Buyer or its Affiliates to acquire or hold the Business or the right of Seller or its Affiliates to hold the Excluded Assets or Citizens' other businesses, or (C) the right of Buyer to exercise full rights of ownership of the Business or all or any material portion of the Acquired Assets or the right of Citizens to exercise full rights of ownership of Citizens' other businesses or all or any material portion of the Excluded Assets; or (iii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, assets or operations of Citizens, Seller, Parent, Buyer, any Affiliate of Buyer or the Business. The parties agree that no representation, warranty or covenant of Buyer, Parent, or Citizens contained in this Agreement shall be breached or deemed breached as a result of the failure by Parent and Buyer on the one hand or the Seller Parties, on the other, to take any of the actions specified in the preceding sentence. 5.6 Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law (in which case the parties shall make reasonable efforts to consult with each other prior to such required announcement). 5.7 Further Assurances. Each of Citizens, Parent, Buyer and Seller, from time to time after the Closing, at Buyer's or Seller's request, will execute, acknowledge and deliver to the applicable person such other instruments of conveyance and transfer and will take such other actions and execute such other documents, certifications, and further assurances as Buyer or Seller, as the case may be, may reasonably require in order to transfer, in accordance with the terms and conditions of this Agreement, more effectively in Buyer or to put Buyer more fully in possession of any of the Acquired Assets or better to enable Buyer to complete, perform and discharge any of the Assumed Liabilities. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.8 Cooperation. 5.8.1 Parent, Buyer, Citizens and Seller shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the 38 Arizona orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 5.8.2 Without limiting the foregoing, neither Parent and Buyer, nor Citizens and Seller (nor any of their respective Affiliates) shall make any filings pursuant to federal or state securities laws ("Securities Filings") or make any consent solicitations to holders of Assumed Indebtedness which include any information about Seller, Buyer (or their respective Affiliates) or the transactions contemplated hereby without consulting with the other party and providing the other party a reasonable opportunity to review and comment on such information, it being understood and agreed that any party may so disclose such information in its reasonable judgment to the extent such party's counsel advises it that such disclosure is advisable under applicable law. Each of Parent, Buyer, Citizens and Seller shall, and shall cause their respective Affiliates to, comply with all applicable federal and state securities laws in connection with this Agreement and the transactions contemplated hereby (including any solicitation of consents of holders of Assumed Indebtedness), and all information supplied by any party for inclusion in any Securities Filing or consent solicitation, including, without limitation, any proxy or information statement, or any registration statement on Form S-4 shall be true and correct in all material respect and shall not contain any untrue statement of a material fact or omit to state any material fact which is required to be stated therein or which is necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. 5.8.3 During the first 90 days after the Closing Date (180 days for Trademarks on tanks), Buyer shall have the right to use all of the logos, trademarks and trade identification of Seller as are located at the Real Estate or on the Acquired Assets (collectively, the "Trademarks"). Buyer's use of the Trademarks shall be in accordance with such reasonable quality control standards as may be promulgated by Seller and provided to Buyer. If Seller shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Seller shall have the right to terminate Buyer's right under this Section 5.8.3 to use the Trademarks. 5.8.4 Seller shall give Buyer and its representatives (including Buyer's Accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, full access to the properties, contracts, employees, books, records and affairs of Seller to the extent relating to the Business and the Acquired Assets, and shall cause its officers, employees, agents and representatives to furnish to Buyer all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as Buyer may reasonably request. Except to the extent disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4, no investigation or receipt of information by Buyer pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller Parties under this Agreement or the conditions to the obligations of Parent or Buyer under this 39 Arizona Agreement. All information provided to Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement dated August 2, 1999 between Citizens and Parent. 5.9 Employees; Employee Benefits. 5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and hourly employees actively employed (as of the date of this Agreement) in each division by Seller or any of its Affiliates whose primary responsibilities relate to the Business. Schedule 5.9.1 lists job classifications and number of employees in each job classifications of those employees whose terms and conditions of employment are subject to a collective bargaining agreement ("Union Employees"). All individuals referred to on Schedule 5.9.1 are herein referred to as the "Employees." No later than March 1, 2000, Buyer and Seller shall determine the number of Employees to whom Buyer will offer employment, which number shall be at least equal to 250 (when combined with offers made by Buyer or Affiliates of Buyer to employees of Affiliates of Seller in connection with the Related Purchase Agreements) (the "Base Number"), and such additional number of Employees, if any, whom Buyer also wishes to employ. Upon determination of such Employees, Seller will supplement Schedule 5.9.1 with the name, job title, unused vacation, current base salary or hourly wage, date of hire and assigned location of each Transferred Employee (as that term is defined below). At the Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose all the information required under the preceding sentence as of the most recent practicable date prior to Closing. 5.9.2 Effective as of the Closing, Buyer shall offer employment to at least the Base Number of those employees included on Schedule 5.9.1. All Employees to whom Buyer offers employment and who accept such employment are herein referred to as the "Transferred Employees." In the event any Employees do not accept Buyer's offer of employment, Buyer shall offer employment to such additional employees (the identity of whom shall be determined by Buyer and Seller) as are necessary to bring the total number of Transferred Employees to the Base Number. Subject to the provisions of this Section 5.9 and Section 5.12, Buyer shall provide each Transferred Employee with base compensation at least equal to that provided by Seller on the Closing Date, and employee benefits which are substantially comparable to those provided by Buyer to its other similarly situated employees. Buyer agrees (i) to credit the service of each Transferred Employee with Seller and its Affiliates before the Closing, for all purposes under all employee benefit plans and arrangements maintained by Buyer (and/or any of its Affiliates) for the benefit of any Transferred Employee (including without limitation for purposes of attainment of retirement dates and payment of optional forms of benefits), other than for purposes of benefit accrual under any "defined benefit plan", within the meaning of Section 3(35) of ERISA, (ii) to provide accrued vacation to Transferred Employees in the year in which the Closing occurs, equal to the excess, if any, of the accrued vacation to which the Transferred Employee would otherwise be entitled under Seller's vacation plan during that year over the amount of accrued vacation the Transferred Employee 40 Arizona had taken during that year, and, thereafter, to provide vacation to Transferred Employees on the same basis as provided to similarly situated employees of Buyer, with service credit as provided in (i) hereof, (iii) to provide severance benefits to Transferred Employees terminated by Buyer that are substantially comparable to those benefits provided by Buyer to similarly situated employees, and (iv) to comply with all applicable legal requirements with respect to Union Employees (including without limitation any applicable duty to bargain with those employees' bargaining representative). Buyer shall be responsible for providing to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of Closing reduced by the number of vacation days such Transferred Employee has taken on or before Closing. Nothing in this Section 5.9 shall limit Buyer's authority to terminate the employment of any Transferred Employee at any time and for whatever reason. Until the second anniversary of the Closing Date, neither Seller nor any of its Affiliates shall directly or indirectly solicit or offer employment to any Transferred Employee then employed by Buyer or its Affiliates. 5.9.3 Except as specifically provided in Sections 5.9 and 5.12, Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by Buyer as the result of any claims against Buyer or its Affiliates that are made by any Employees or Former Employees (or the Beneficiary of any Employee or Former Employee) who are not made offers to become employees of Buyer or its Affiliates including, without limitation, claims asserted against Buyer as a result of their termination by Seller or its Affiliates. 5.9.4 Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation claims or the benefits provided under the Benefit Plans, whether paid before or after the Closing) owed to any Transferred Employee or the Beneficiary of any Transferred Employee or any Water Sector Retiree or the Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Seller or any of its Affiliates and such Transferred Employee or Beneficiary or (ii) any benefit claim or expense (including medical expenses) incurred before Closing under any Benefit Plan. For purposes of this Agreement, a medical expense shall be deemed to be incurred when the services giving rise to a claim are rendered, regardless of when billed or paid. Without limiting the foregoing, Seller shall be responsible for the payment of any employee benefits that become due to any Transferred Employees as a result of their termination by Seller. 5.9.5 Except as otherwise specifically provided in Section 5.9, 5.11 or 5.12, Buyer shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation, claims or the benefits provided under any employee benefit plan or arrangement of Buyer incurred after Closing) owed to any Transferred Employee or Beneficiary of any Transferred Employee or any Water Sector Retiree or Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Buyer or any of its Affiliates and any Transferred Employee or (ii) any benefit claim or expense (including medical expense) incurred after Closing under any 41 Arizona employee benefit plan sponsored or contributed to by Buyer or an ERISA Affiliate after Closing. Notwithstanding the foregoing, Buyer shall not be responsible for the payment of any employee benefits that become due to any Transferred Employees under any Benefit Plan (other than the Assumed Benefit Liabilities). 5.9.6 Buyer agrees to reimburse Seller for its proportionate share (as defined below) of any amount in excess of $1,000,000 paid by Seller as severance under Citizens' severance plan as in effect on the date hereof to any Employees (when such amount paid by Seller is aggregated with amounts paid by Citizens to other employees as referenced in Section 5.9.6 of the Related Purchase Agreements) provided (i) Buyer does not hire such Employees in accordance with the provisions of Sections 5.9, 5.11 and 5.12 and (ii) Seller provides notice to those Employees on or before the Closing Date to the effect that their employment will be terminated on or shortly after the Closing Date. Buyer will pay such reimbursement to Citizens within 5 days after receipt of a list of the Employees showing which are entitled to severance pay, the amounts of that severance pay and certifying that those amounts have been paid. The Buyer's "proportionate share" means the amount obtained by multiplying the amount in excess of $1,000,000 by a fraction, the numerator of which is the amount of severance paid by Seller to Employees under Section 5.9.6 of this Agreement and the denominator of which is the sum of (i) the amount paid by Seller to Employees under Section 5.9.6 of this Agreement and (ii) the aggregate amount paid by Citizens under Section 5.9.6 of each of the Related Purchase Agreements. 5.9.7 Until the second anniversary of the Closing Date, Buyer shall not directly or indirectly solicit or offer employment to any active employee of Seller, other than the Transferred Employees. 5.10 Employee Pension Plan. 5.10.1 At least fifteen days prior to the Closing Date, Seller shall take any and all actions necessary to cease benefit accruals and fully vest all Transferred Employees in their accrued benefits under the Citizens Pension Plan ("Seller's Pension Plan" or "Citizens Pension Plan"). Seller shall retain liability and related assets for benefits accrued through the Closing Date by Transferred Employees under Seller's Pension Plan. 5.10.2 As of the Closing Date, Transferred Employees shall be covered under the American Pension Plan, and shall be given credit for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, subsidized benefits, and entitlement to optional forms of payment, but not for accrual of benefits. 5.11 Employee Savings Plan. 5.11.1 Effective upon the date of the transfer described in Section 5.11.2, subject to the terms and conditions of this Agreement, Parent shall cause the Savings Plan for Employees of American Water Works Company, Inc. (the "American Savings Plan") to assume the 42 Arizona liability of the Seller's 401(k) Plan for the account balances of those Transferred Employees participating in the Seller's 401(k) Plan on the Closing Date (the "Affected Participants") that are transferred to the American Savings Plan. As of the Closing Date, Affected Participants shall be 100% vested in their account balances under the Seller's 401(k) Plan. Transferred Employees shall be given credit under the American Savings Plan for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, contribution levels and optional forms of benefit payment, to the same extent that credit for such service has been given by Seller and its Affiliates. 5.11.2 Buyer shall deliver to Seller as soon as practicable, but in no event later than ninety (90) days after Closing (i) a certified copy of the American Savings Plan and any amendment necessary to effectuate the transfer of assets and the assumption of account balances in accordance with this Section 5.11, (ii) a certified copy of the trust agreement for the American Savings Plan; (iii) the most recent favorable determination letter from the IRS with respect to the American Savings Plan; and (iv) an opinion from Buyer's legal counsel acceptable to Seller that the American Savings Plan, as so amended, complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of, and the transfer of assets and assumption of benefit liabilities by, the American Savings Plan. Seller shall deliver to Buyer as soon as practicable, but in no event later than ninety (90) days after Closing, an opinion from Seller's legal counsel acceptable to Buyer that the Seller's 401(k) Plan complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of the Seller's 401(k) Plan, and the transfer of assets to, and assumptions of benefit limitations by, the American Savings Plan. As soon as practicable, but in any event within 120 days after Closing, Seller shall cause the trustee of the Seller's 401(k) Plan to transfer in cash and promissory notes representing outstanding loans to Affected Participants to the trustee of the American Savings Plan an amount equal to the sum of the account balances of the Transferred Employees (the "Transferred Accounts") calculated as of the most recent valuation date under the Seller's 401(k) Plan (which shall, in any event, be within thirty (30) days of the transfer). Both the Seller Parties and Buyer will file any IRS Form 5310A that is required with respect to the transfer contemplated by this Section 5.11 date at least 30 days prior to the transfer. Upon the transfer described in this Section 5.11, Buyer and the American Savings Plan shall be responsible for all benefits attributable to the Transferred Accounts to which Transferred Employees were entitled under the Seller's 401(k) Plan as of such date, and Seller and the Seller's 401(k) Plan shall cease to have any liability, contingent or otherwise, for such benefits. 5.12 Welfare Benefits. 5.12.1 Within sixty (60) days after the Closing, Seller agrees to transfer to trusts established by Buyer under Section 501(c)(9) of the Code ("Buyer's VEBAs") the amount held under any trust established by Seller under Section 501(c)(9) of the Code ("Seller's VEBAs") to fund post-retirement health care and life insurance benefits attributable to the Business, including Former Employees identified on Schedule 5.12 (the "Water Sector Retirees") and any "grandfathered" Transferred Employees as set forth on Schedule 5.12. Buyer agrees to provide post-retirement health care and life insurance benefits to the Water Sector Retirees and, as applicable, Transferred Employees who become eligible for such benefits after Closing and further agrees that Buyer's 43 Arizona VEBAs will apply an amount at least equal to the sum of the assets (and earnings thereon calculated at the rate of return generated by Buyer's VEBAs) transferred from Seller's VEBAs to provide post-retirement health care and life insurance benefits for such employees. Upon Closing, Buyer shall be responsible for all obligations of the Seller Parties to provide post-retirement health care and life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing and the Seller Parties shall cease to have any liability, contingent or otherwise, for such benefits. In consideration of such transfer, Buyer agrees not to terminate or materially modify those post-retirement health and life benefit provisions applicable to such grandfathered Transferred Employees and Water Sector Retirees as such provisions are in effect immediately prior to the Closing Date. 5.12.2 Buyer shall take all action necessary and appropriate to ensure that, as of the Closing Date, Buyer provides medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefits (including retiree medical benefits) to Transferred Employees that, in the case of Non-Union Transferred Employees and Union Transferred Employees are substantially similar to those benefits provided by Buyer under its corresponding welfare benefit plans (the "Buyer's Welfare Plans"). For purposes of determining eligibility to participate, and entitlement to benefits, in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, waiting periods, and requirements for evidence of insurability under the Buyer Welfare Plans shall be waived in Buyer's Welfare Plans for Transferred Employees and retirees of the Water Sector and their respective Beneficiaries, and Transferred Employees and retirees of the Water Sector and their respective Beneficiaries shall receive credit under the Buyer Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees and retirees of the Water Sector and their respective Beneficiaries who had credited service under a Seller Welfare Plan, together with each such individual's service, copayment, deductible and out-of-pocket payment amounts under such plan. 5.12.3 Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the Closing Date. Seller shall provide to Buyer prior to the Closing Date a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such Account, and balances standing to their credit as of the Closing Date. 5.13 Taxes. The Seller Parties, on the one hand, and Parent and Buyer, on the other, shall (a) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (b) each retain and provide the other with any records or other information which may be relevant to such return, 44 Arizona audit, examination or proceeding, and (c) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 5.14 Intentionally Omitted. 5.15 Citizens' Guarantees and Surety Instruments. Each of Parent and Buyer shall use its reasonable efforts to assist Citizens in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed on Schedule 5.15. In addition, until such time as Citizens' guarantee to the City of Tolleson, Arizona (as listed as item 1 on Schedule 5.15) is released, Buyer shall deposit into a BancOne, Arizona trust account, on the first business day of each calendar month commencing after the Closing Date, cash in the amount of $43,430.00. Citizens will open such account at its expense prior to Closing and, on the Closing Date, Sun City Sewer Company will deposit into such account cash equal to the total accrued amount recorded on the books of Sun City Sewer Company as of the Closing Date that is associated with the City of Tolleson Municipal Finance Corporation Refunding Series 1998 Bonds. Buyer shall maintain such account after Closing and be responsible for all fees and expenses of BancOne, Arizona, relating to such account arising after Closing. For purposes of this Section 5.15 and Section 5.16, reasonable efforts: (a) shall include Parent's or Buyer's assumption of the Assumed Indebtedness, the Contracts and the Permits on the terms set forth in this Agreement; (b) shall include an obligation on the part of Parent or Buyer to provide a guarantee, letter of credit, bond or other required surety instrument at Closing to the extent required by any Contract or Permit and in general to provide an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business; and (c) shall include the obligation of Buyer and/or Parent to provide a debt obligation (including obtaining a minimum credit rating necessary to prevent any change to the tax-exempt status of any of the Assumed Indebtedness and providing credit enhancements such as bond insurance) to the issuer of any Bonds relating to the Assumed Indebtedness satisfactory to such issuer in replacement of and in substitution for Citizens' obligations to such issuer under the Assumed Indebtedness, all to enable Parent or Buyer to assume the Assumed Indebtedness. 5.16 Assumption of Seller Debt. 5.16.1 Each of Buyer and Parent shall use its reasonable efforts (as defined in Section 5.15) to assist Seller in obtaining all consents and opinions and taking such other actions as may be required to enable Buyer or Parent, as the case may be, to assume at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 45 Arizona 2.3. If, after using such reasonable efforts, the parties reasonably conclude that all such required consents and opinions will not be obtained by the date that the conditions to Closing set forth in the first sentences of Sections 6.1.4 and 6.2.4 are expected to be satisfied, then Citizens, Parent and Buyer will use their reasonable efforts and take such other actions as may be required to enable Citizens to assign at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 2.3, including complying with the provisions of Section 5.24 to the extent applicable to such assignment of the Assumed Indebtedness. 5.16.2 Representations Re: Assumed Indebtedness. (a) The Seller Parties represent that each of the Bonds which make up the Assumed Indebtedness is a bond issue which was used to finance sewage facilities within the meaning of Section 103(b)(4)(E) of the Internal Revenue Code of 1954 as amended ("1954 Code") or Section 142(a)(5) of the Code, as the case may be, or facilities for the furnishing of water within the meaning of Section 103(b)(4)(G) of the 1954 Code or Section 142(a)(4) and Section 142(e) of the Code, as the case may be, and that the interest of such Bonds was as of their date of issue, excludable from the gross income of the holders of such Bonds for federal or state (other than Illinois) income tax purposes pursuant to such sections of the IRC or the Code. In the case of the facilities for the furnishing of water (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. (b) The Seller Parties represent that they have complied with all of their duties and obligations under the IDRB Documents, including their obligations relating to the use of the proceeds of the bonds and the ownership, operation, use and maintenance of the Assets financed with the proceeds of the Bonds. Citizens and the other Seller Parties represent that the representations and warranties of "Company" in the IDRB Documents remain true and correct, and that they have not taken nor permitted to be taken any action which would have the effect of subjecting the interest on any of such Bonds to federal or state (other than Illinois) income taxation, except as otherwise contemplated or permitted by the IDRB Documents. (c) The Seller Parties represent that as of Closing all the proceeds of the Bonds will have been spent in accordance with the IDRB Documents, the construction of the projects to be financed with the Bonds will have been completed, that there are no reserve funds associated with the Trust Indentures for such Bonds, and that all of the proceeds of such Bonds were invested in tax-exempt obligations of state and local governments (except to the extent used to acquire or construct the facilities financed by such Bonds) and, that therefore, the Seller Parties do not have any arbitrage profits subject to the rebate requirements of Section 148 of the Code. 46 Arizona (d) The Seller Parties represent that there is and has been no audit or other examination by any taxing authority relating to the Bonds. (e) The Seller Parties further represent the following with respect to the Bonds: (1) The Assets financed by the Bonds are sewage facilities or facilities for the furnishing of water, which means that (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof; (2) They have not caused or permitted to be caused any reissuance of the Bonds under Section 1001 of the Code, without first obtaining a "no adverse effect" opinion of bond counsel; (3) They have not caused an extension of the maturity of such Bonds without first obtaining a "no adverse effect" opinion of bond counsel; (4) They have not taken or caused to be taken any action that would cause the Bonds to be arbitrage bonds under Section 148 of the Code, including, but not limited to, the failure to rebate arbitrage profits, if any, as required by Section 148(f) of the Code; (5) They have not taken any action that would cause the Bonds not to be registered in accordance with Section 149(a) of the Code; and (6) They have not permitted the Bonds to become directly or indirectly "federally guaranteed" under Section 149 of the Code. 5.16.3 Covenants of Parent and Buyer. Parent and Buyer covenant and agree, so long as any Assumed IDRB Indebtedness is outstanding, to cause the Assets that were acquired, constructed, improved or equipped with the proceeds of such Assumed IDRB Indebtedness to be used as sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code or Section 142(a)(5) of the Code, as the case may be, and facilities for the furnishing of water within the meaning of Section 103(b)(4)(G) of the 1954 Code or 142(a)(4) and Section 142(e) of the Code, as the case may be, which means in the case of the facilities for the furnishing of water that (a) the 47 Arizona water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. Each of Parent and Buyer further covenants and agrees, so long as any Assumed IDRB Indebtedness is outstanding, the following: (a) It will not cause or permit to be caused any reissuance under Section 1001 of the Code without first obtaining a "no adverse effect" opinion of bond counsel; (b) It will not cause an extension of the maturity of the Bonds without first obtaining a "no adverse effect" opinion of bond counsel; (c) It will not take or cause to be taken any action that would cause the Bonds to be arbitrage bonds under Section 148 of the Code, including, but not limited to, the failure to rebate arbitrage profits, if any, as required by Section 148(f) of the Code; (d) It will not take any action that would cause the Bonds not to be registered in accordance with Section 149(a) of the Code; (e) It will not permit the Bonds to become directly or indirectly "federally guaranteed" under Section 149 of the Code; and (f) It will comply with each representation, warranty, covenant or other agreement or obligation set out by the IDRB Documents as in effect on the date of execution of this Agreement. 5.17 Schedule of Permits. No later than March 13, 2000, Citizens shall deliver to Buyer a schedule, to be identified as Schedule 5.17, which sets forth all material Permits required for the use of the Acquired Assets and the operation of the Business by Buyer substantially in the manner as it was conducted prior to the date hereof. For purposes of this Section 5.17, material Permits shall include those required for the service of all utility customers at substantially the same service levels as provided by Seller on the date of this Agreement. All Permits listed on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule 3.9 shall be so designated. Seller has made or will make prior to the Closing Date timely applications for renewals of all such Permits listed on Schedule 5.17, which under applicable law must be filed prior to the Closing Date to maintain the Permits listed on Schedule 5.17 in full force and effect. 5.18 Title Information. No later than March 13, 2000, Seller shall use its reasonable efforts to deliver to Buyer true, correct and complete copies of all existing title policies, surveys, leases, deeds, instruments and agreements relating to title to the Real Estate in Seller's possession. 48 Arizona 5.19 Transaction with Related Parties. Effective as of the Closing Date, except as otherwise provided in Sections 5.9 through 5.12, 5.15, 5.24, 5.26, 5.27 and 2.7.1(j) of this Agreement, Seller shall have terminated and canceled all contracts, commitments and agreements (including employment relationships) relating to the Acquired Assets or the Business, between Seller, any Affiliate of Seller (including Citizens), any officer or director of any Seller Party, or any Affiliate of the foregoing. Seller shall be solely liable for any contractual or other claims, express or implied arising out of the termination and cancellation of any of the foregoing raised by any party thereto. 5.20 Approval by Citizens. Citizens shall, as the sole owner of common stock of each other Seller Party, vote all of such shares of common stock to approve this Agreement and the transactions contemplated hereby. 5.21 Supplemental Information. 5.21.1 Citizens shall provide Buyer, within fifteen (15) days after the execution or the date of receipt thereof, a copy of (a) each Contract (other than with respect to which the Business' total annual liability or expense is less than $100,000 per such Contract) entered into by Seller after the date hereof and prior to the Closing Date; (b) a copy of any written notice for assessments for public improvements against the Real Estate received after the date hereof and prior to the Closing Date; (c) a copy of the filing of any condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate received after the date hereof but prior to the Closing Date; and (d) a copy of any Contract where Seller is a lessee relating to the use or occupancy of the Real Estate and where such Contract involves annual payments in excess of $100,000 entered into by Seller after the date hereof and prior to the Closing Date. 5.21.2 Within fifteen (15) days after the receipt of notice of violation, Citizens shall notify Buyer of any violations of state or federal drinking water standards which, if such violations existed on the date hereof, would be required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly notify Buyer of the actions proposed to be taken by Seller to correct or otherwise respond to such violations. 5.22 Non-Competition. The Seller Parties agree that for a period of fifteen (15) years after the Closing Date no Seller Party nor any Affiliate of a Seller Party shall directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of or be otherwise connected in any substantial manner with any entity (other than Buyer and its successors and assigns) engaged in the business of storing, supplying and distributing water in the States in which Buyer acquires any Acquired Assets, whether or not such business is subject to regulation by a PUC (it being understood that the individual directors of Seller and Citizens are not Affiliates of a Seller Party). 5.23 Intentionally Omitted. 49 Arizona 5.24 IDRB Obligations. (a) Buyer's IDRB Obligations. Each party acknowledges that (x) Citizens is and after the Closing Date shall continue to be and shall remain the primary obligor with respect to the Retained IDRB Indebtedness outstanding immediately after the Closing Date to the same extent as though no sale of the Acquired Assets had been made and that Parent and Buyer shall have no payment obligations with respect to such Retained IDRB Indebtedness, (y) the IDRB Documents require Citizens not to take or permit to be taken any action which would have the effect, directly or indirectly, of subjecting the interest on any of the Bonds to federal or state (other than Illinois) income taxation, and (z) the IDRB Documents governing certain of the Bonds issued by The Industrial Development Authority of the County of Maricopa, Arizona (the "Maricopa IDA"), require Buyer to agree in writing with the Maricopa IDA with respect to certain matters relating to the operation, ownership, maintenance and use of the Assets that were acquired, constructed, improved or equipped with the proceeds of such Bonds. Accordingly, Parent and Buyer covenant and agree (i) to deliver to the Maricopa IDA on or prior to the Closing Date an agreement substantially in the form attached hereto as Exhibit C, duly executed by Buyer, (ii) at Closing to execute and deliver to Citizens an agreement substantially in the form attached hereto as Exhibit D, with respect to each issuer of Bonds relating to Retained IDRB Documents that will be outstanding after the Closing Date, (iii) so long as any such Bonds are outstanding, to cause the Acquired Assets that were acquired, constructed, improved or equipped with the proceeds of such Bonds to be used as facilities for the furnishing of water (that is, (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof) or sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code, or Section 142(a)(5) of the Code as the case may be. (b) IDRB Construction Funds. Citizens hereby represents that there will be no construction funds or unspent bond proceeds available after the Closing Date that are held by the trustees of the Bonds relating to the Retained IDRB Indebtedness. (c) Consents and Opinions. The parties shall use their respective best commercially reasonable efforts to obtain all consents and legal opinions as may be required under the Retained IDRB Documents to enable Seller to retain all Retained IDRB Indebtedness and to sell the Acquired Assets to Buyer. 5.25 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller may, at Seller's written election delivered to Buyer no later than five (5) days prior to the Closing Date, direct that all or a portion of the Initial Cash Payment be delivered to a "qualified intermediary" as defined in Treasury Regulation ss.1.1031(k) - (g)(4) as to enable Seller's relinquishment of the Acquired Assets to qualify as part of a like-kind exchange of property covered 50 Arizona by Section 1031 of the Code. If Seller so elects, Buyer shall reasonably cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller reasonably requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions reasonably required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. Seller shall indemnify and hold Buyer harmless from any cost, expense or liability arising from its cooperating under this Section 5.25. 5.26 Transition Plan. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a transitional services team, which shall include expertise from various functional specialties associated with or involved in providing billing, payroll and other support services provided to Seller by any automated or manual process using facilities or employees that are not included among the Acquired Assets or Transferred Employees. Such team will be responsible for preparing, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. The transition plan will set forth reasonable arrangements providing Buyer, at Buyer's sole expense, with appropriate access to Seller's relevant computer systems to allow for a full conversion of the relevant data and functionality to Buyer's systems on the Closing Date. Buyer and Seller shall use their commercially reasonable efforts to cause their representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan no later than 60 days prior to the Closing Date. 5.27 Procedures regarding Refunds of Advances. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a working group of appropriate subject matter experts to determine the appropriate obligations of Parent and Buyer regarding notification and the provision of other accurate and timely data to Citizens to enable Citizens timely and accurately to satisfy the refund obligations described in Section 2.3.3(b). Such working group will be responsible for preparing a comprehensive agreement no later than March 13, 2000, which agreement shall be executed by the parties at Closing. Among other arrangements, the parties would require that the customers and developers owed refunds provide joint notices to Buyer and Citizens. 5.28 Title Insurance. Prior to Closing, Seller shall cooperate with Buyer and use commercially reasonable efforts to assist Buyer if Buyer desires to obtain ALTA title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final 51 Arizona form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issuing ALTA (or its local equivalent) form of title insurance policies insuring good, valid, indefeasible fee simple title to the Real Estate in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Liens or other exceptions to title other than Permitted Exceptions (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyers' request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION 6.1 Conditions Precedent to Obligations of Buyer and Parent. The obligations of Buyer and Parent to cause the purchase of the Acquired Assets and the assumption of the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer and Parent in their sole discretion): 6.1.1 Performance of Agreements; Representations and Warranties. Seller shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Seller shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 3.25), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a Material Adverse Effect; provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso); and provided further, that the representation and warranty set forth in Section 3.5.1 shall be deemed to be true and correct on and as of the Closing Date if any Material Adverse Effect that may have arisen or occurred between the execution date of this Agreement and the Closing Date shall have been cured or remedied such that such Material Adverse Effect is not continuing as of the Closing Date. Buyer shall have been furnished with a 52 Arizona certificate of the Chief Financial Officer or other Vice President of Citizens dated the Closing Date, certifying to the foregoing. 6.1.2 Opinion of Counsel. Buyer shall have received from L. Russell Mitten II, Vice President and General Counsel of Seller, an opinion dated the Closing Date, in form and substance satisfactory to Buyer, to the effect set forth in Exhibit E hereto. 6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.1.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby, and such order shall not contain any restrictions or conditions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the Business in existence as of the date of this Agreement applicable to Seller be continued following the transactions contemplated hereby) which would have a Material Adverse Effect or a material adverse effect on any other regulated business of Buyer in the state in which the PUC has jurisdiction, and such order shall be final and unappealable; Seller shall have obtained all statutory, regulatory and other consents and approvals which are required in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business in the manner contemplated by Section 3.25 hereof other than those the failure of which to obtain would not have a Material Adverse Effect. Seller shall have also obtained (i) all consents and legal opinions required to enable Parent or Buyer to assume (or for Citizens to assign to Parent or Buyer) the Assumed Indebtedness (without any change in the tax-exempt status of such Assumed Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)) and all other consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing (without any change in the tax-exempt status of such Assumed Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture) and (ii) all consents required under Contracts and Permits relating to Seller's water appropriation and flowage rights to the extent reasonably sufficient to enable Buyer to service the customers of the Business and to service future commitments under such Contracts. 6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Buyer's ownership of all or any material portion of the Acquired Assets, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which would reasonably be expected to materially limit or materially adversely affect Buyer's ownership of the Acquired Assets. 6.1.6 Documents. Seller and Citizens shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 2.7 hereof and shall have made arrangements reasonably satisfactory 53 Arizona to Buyer to deliver to Buyer as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the Business. 6.1.7 Related Closings. Buyer shall be reasonably satisfied that the consummation of each of the asset purchase and sale transactions contemplated by those certain purchase agreements described on Schedule 6.1.7 (the "Related Purchase Agreements") will occur concurrently with the Closing. 6.2 Conditions Precedent to Obligations of Seller Parties. The obligations of the Seller Parties to cause the sale of the Acquired Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by the Seller Parties in their sole discretion): 6.2.1 Performance of Agreements; Representations and Warranties. Parent and Buyer shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Buyer and Parent shall be true and correct on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 4.2), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a material adverse effect on the respective ability of Buyer and Parent to perform their obligations under this Agreement and the Transaction Documents, provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso). Seller shall have been furnished with a certificate of the President or Vice President of Parent and Buyer, dated the Closing Date, certifying to the foregoing. 6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price & Rhoads, counsel to Parent and Buyer, an opinion dated the Closing Date, in form and substance satisfactory to Seller, to the effect set forth in Exhibit F hereto. 6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.2.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby and such order shall not contain any restrictions or conditions which would have a material adverse effect on Seller's business activities in the State in which the PUC has jurisdiction or any significant adverse effect on Citizens' 54 Arizona acquisition and divestiture activities in that State (including divestiture of the Acquired Assets), and such order shall be final and unappealable; Seller shall have obtained all statutory and regulatory consents and approvals which are required in order to consummate the transactions contemplated hereby, other than those the failure of which to obtain would not have a material adverse effect on the Seller after the Closing. Seller shall have obtained (i) all consents and legal opinions required to enable Parent or Buyer to assume (or Citizens to assign to Parent or Buyer) the Assumed Indebtedness without any change in the tax-exempt status thereof and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F), (ii) all consents and legal opinions required under the Retained IDRB Documents to enable Seller to retain the Retained IDRB Indebtedness until maturity and to sell the Acquired Assets to Buyer at the Closing (in each case without any change in the tax-exempt status of the Assumed Indebtedness or the Retained IDRB Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture), and (iii) all other consents required or advisable in order for Seller to transfer Acquired Assets without incurring material liability under any Contract, Permit or Real Estate instrument. 6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Seller's ownership of all or any material portion of its properties, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which could reasonably be expected to materially limit or materially adversely affect Seller's ownership of any of its properties. 6.2.6 Documents. Parent and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Sections 2.7, 5.24 and 5.27, and shall have taken such actions as Seller may have requested pursuant to Section 5.25 hereof. 6.2.7 Related Closings. Seller shall be reasonably satisfied that the consummation of each of the Related Purchase Agreements will occur concurrently with Closing. 6.3 Termination. This Agreement may be terminated at anytime prior to the Closing Date: 6.3.1 by mutual written consent of the Seller Parties, Buyer and Parent; 6.3.2 by any of the Seller Parties, Parent or Buyer if: (i) any governmental or regulatory body the consent of which is a condition to the obligations of the Seller Parties, Parent and Buyer to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful; (ii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions 55 Arizona contemplated hereby and such order, judgment or decree shall have become final and nonappealable; or (iii) the Closing shall not have occurred on or before March 31, 2001; provided, however, that the right to terminate this Agreement under this Section 6.3.2(iii) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; and provided, further, that if Closing has not occurred by such date because the conditions precedent to Closing set forth in the first sentence of Section 6.1.4 and the first sentence of Section 6.2.4 have not been fulfilled, then such date shall be automatically extended to September 30, 2001; or 6.3.3 If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Section 6.3, this Agreement shall become void and of no further force and effect, except for the provisions of Section 5.6 relating to publicity, Sections 3.24 and 4.6 relating to brokerage and Section 7.1 relating to expenses. Nothing in this Section 6.3 shall be deemed to release either party from any liability for any willful breach by such party of the terms and provisions of this Agreement. ARTICLE 7 CERTAIN ADDITIONAL COVENANTS 7.1 Certain Taxes and Expenses. Citizens shall be solely responsible for all state and local sales, use, transfer, real property transfer and other similar taxes, fees and charges that are calculated based on the value of the Acquired Assets being transferred arising from and with respect to the sale and purchase of the Acquired Assets and Buyer shall be solely responsible for all transfer, registration, documentary stamp, recording and other similar fees and charges arising from and with respect to the transfer and recording of title documentation relating to the Acquired Assets. Parent shall be responsible for all costs and expenses relating to the assumption by or assignment to Parent or Buyer of the Assumed Indebtedness. Except as otherwise provided in this Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 7.2 Maintenance of Books and Records. The Seller Parties, on the one hand, and Buyer and Parent, on the other hand, shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets or the Assumed Liabilities or the conduct of the Business (whether in the possession of the Seller Parties or Buyer or Parent). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least 30 days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 7.2 shall be during normal business hours and upon not less than two (2) business days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information 56 Arizona contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 7.3 Survival. 7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j), all representations, warranties, covenants and agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing: (a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (b) the covenants contained in Section 5.2 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; (c) the representations and warranties contained in Sections 3.12 and 3.16 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought following the expiration of the applicable statute of limitations (or extensions or waivers thereof); (d) the representations and warranties contained in Section 3.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (e) the representations and warranties contained in Section 3.10 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (f) the representations and warranties contained in Section 3.7 and 3.17 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (g) the representations and warranties contained in Sections 3.3, 3.5, 3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; 57 Arizona (h) the representations and warranties contained in Section 3.11 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (i) the representations and warranties contained in Section 4.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (j) the representations and warranties contained in Sections 4.3 and 4.4 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (k) the representations and warranties contained in Section 4.5 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; and (l) all other representations and warranties contained in this Agreement and the related indemnity obligations contained in Section 7.4 shall terminate on and no further action or claim with respect thereto may be brought after, the second anniversary of the Closing Date; (m) such representations and warranties specified in the foregoing clauses (c) through (k), and the covenants contained in Section 5.1, 5.2, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such party has been given written notice setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims prior to the relevant anniversary of the Closing Date or the 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. If any claim for indemnification is asserted or could be asserted with respect to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and the Buyer or Parent is also entitled to indemnification in respect of that claim for breach or asserted breach of any other representation or warranty in this Agreement for which there is a shorter survival period, such shorter period will apply to such claim except to the extent that such claim is a product liability, toxic tort or similar claim (as described in Section 2.3.3(a)) brought by a private party litigant. 7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by Buyer or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C): (a) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), for any action or claim with respect to the Pre-Existing Conditions; 58 Arizona (b) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), with respect to the presence of Hazardous Substances at any locations other than the Real Estate; and (c) after the third anniversary of the Closing Date, for any action or claim with respect to any other Retained Liability; Provided, however, that the foregoing time limitations shall not apply to any such claims which have been the subject of a written notice from Parent and/or Buyer to the Seller Parties prior to such period setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims; and, provided, further, that the foregoing time limitations shall also not apply to any such claims: (u) with respect to Taxes; (v) with respect to any liability of the types that appear as "Trade Payables" or "Other Current and Accrued Liabilities" (other than liabilities arising after the Closing Date and relating to the Contracts listed as items I.G.3(a), (b) and (c) on Schedule 3.6 (relating to the Tolleson contractual arrangements) and the Contract listed as item I.G.4 (the Glendale contract) on the financial statements of Seller; (w) not exclusively related to the Acquired Assets or not exclusively related to the Business; and (x) with respect to any of the matters discussed in Section 3.16 hereof. For purposes of Sections 7.3.2(a) and (b), a "Change of Control of Citizens" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), other than an underwriter engaged in a firm commitment underwriting on behalf of Citizens, is or becomes the beneficial owner (as such term is used in Rule 13D-3 and 13D-5 under the Exchange Act, except that for purposes of this clause (i) a person shall be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding shares of common stock of the Company; (ii) all or substantially all of Citizens' and its Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any person or group of persons acting in concert; (iii) Citizens is merged or consolidated with any other person, whether or not Citizens is the surviving corporation in such merger or consolidation; or (iv) Citizens is liquidated or dissolved or adopts a plan of liquidation. 7.4 Indemnification. Seller, Parent and Buyer agree as follows: 7.4.1 General Indemnification Obligations. (a) Seller shall indemnify Buyer and its directors, officers and other Affiliates (including Parent) and hold Buyer and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by the Seller Parties in this Agreement or in any document or certificate required to be furnished to Buyer by any of the Seller Parties pursuant to this Agreement (including the Transaction Documents); (B) subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; (C) subject to Section 7.3.2, the ownership, operation or use of any of the businesses or 59 Arizona assets of the Seller Parties or their Affiliates (other than the Business and the Acquired Assets) whether before, on or after the Closing Date; and (D) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Retained IDRB Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement. (b) Buyer and Parent shall indemnify Seller, and their directors, officers and other Affiliates (including Citizens) and hold Seller and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by Parent or Buyer in this Agreement or in any document or certificate required to be furnished to Seller by Parent or Buyer pursuant to this Agreement (including the Transaction Documents), including the Buyer's IDRB Obligations; (B) any Assumed Liabilities after the Closing Date, including the Assumed Indebtedness; (C) the ownership, operation or use of the Business or the Acquired Assets after the Closing Date (except to the extent resulting from Retained Liabilities or to the extent resulting from breaches by the Seller Parties of representations, warranties, covenants or agreements hereunder or in the other Transaction Documents); (D) any claim by a Transferred Employee or a Former Employee referred to on Schedule 5.12 or the Beneficiary of any such employee or former employee for post-retirement health care or life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing; (E) any violation by Parent or Buyer, or any assignee, lessee or successor of Parent or Buyer, of the covenants and agreements as provided by Section 5.16.3 hereof and Section 5 of Exhibit D hereto; and (F) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Assumed Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement and/or the assignment or assumption of the Assumed Indebtedness. (c) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including any governmental penalty or punitive damages assessed or asserted against the party seeking indemnification and including costs of investigation, clean-up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and reasonable expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened, incident to the successful enforcement of this Agreement). For purposes of this Section 7.4, the determination of whether any breach of any representation, covenant or agreement has occurred, and the calculation of the amount of Damages incurred by the Indemnified Party arising out of or resulting from any breach of a representation, covenant or agreement by any party hereto, the references to a "Material Adverse Effect" or materiality (or other correlative terms) shall be disregarded, provided that no such breach shall be found to have occurred due to facts or circumstances arising from an occurrence or condition described in Section 1.1.61(a). Notwithstanding the foregoing, Damages shall not include the loss of profits of the party seeking indemnification, or punitive damages unless the party seeking indemnification has had punitive damages assessed or asserted against it. 60 Arizona (d) Notwithstanding any language contained in any Transaction Document (including deeds to Real Estate and instruments delivered by Seller to the Title Company), representations and warranties as to Real Estate set forth in Section 3.10 and 3.11 will not be merged into any Transaction Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement, shall control. No provision set forth in any Transaction Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. 7.4.2 General Indemnification Procedures. (a) A party seeking indemnification pursuant to this Section 7.4 (an "Indemnified Party") shall give prompt written notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party after receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided, that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, solely the Indemnifying Party shall be obligated to satisfy and discharge the Third Party Claim, (B) such Third Party Claim does not include a request or demand for injunctive or other equitable relief by an Authority and (C) the Indemnifying Party makes reasonably adequate provision to assure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that is reasonably likely to result. The Indemnifying Party shall be deemed to have satisfied the condition set forth in clause (C) of the proceeding sentence if it is a regulated utility. (b) Neither the Indemnified Party nor the Indemnifying Party shall settle any Third Party Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (d) Amounts paid in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price. 61 Arizona (e) Subject to Section 7.4.2(f) and Section 7.4.2(i), neither Parent nor Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages incurred unless the aggregate amount of Damages incurred by Parent or Buyer (or the other Persons for which they can claim indemnification), together with all other claims for Damages under Section 7.4.2(e) of each of the Related Purchase Agreements, exceeds $6,123,000 in the aggregate (the "Threshold Amount"), in which case Seller shall then be liable for Damages in excess of the Threshold Amount. Subject to Section 7.4.2(f) and Section 7.4.2(i), the cumulative aggregate indemnity obligation of Citizens and its Affiliates under Section 7.4 of this Agreement and the Related Purchase Agreements shall not exceed $60,000,000 (the "Ceiling"). (f) Notwithstanding the foregoing, the parties acknowledge that Parent or Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages in respect of intentional and wilful breaches of covenants or agreements in this Agreement or any of the Retained Liabilities other than the Specified Liabilities irrespective of the Threshold Amount or the Ceiling (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful breach). As used herein, the "Specified Liabilities" shall mean the Retained Liabilities arising from claims made after the Closing Date which (i) do not relate to matters within the scope of clauses (u), (v), (w) and (x) of Section 7.3.2; (ii) were not known to the Seller Parties on or prior to Closing; and (iii) relate exclusively to the Acquired Assets or the Business prior to the Closing Date. Notwithstanding anything to the contrary in this Section 7.4, Parent or Buyer (or the other Persons for which they can claim indemnification) shall be entitled to indemnification for Damages in respect of a breach of Section 3.2, 3.12 or 3.16 irrespective of the Threshold Amount or the Ceiling. (g) The rights and remedies of Seller, Parent and Buyer under this Section 7.4 are exclusive and in lieu of any and all other rights and remedies which Seller, Parent and Buyer may have under this Agreement or otherwise for monetary relief with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by Seller, Parent or Buyer in or pursuant to this Agreement or any of the Transaction Documents or (y) any breach or failure to perform any covenant or agreements set forth in this Agreement or any of the Transaction Documents. (h) Except to the extent provided in Section 7.4.2(j) below, no right to indemnification under this Section 7.4 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto including, without limitation, the knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. (i) No party shall have any liability to another party under this Section 7.4 for Damages (and no cost or expense relating to such Damages shall be included in determining the extent of Damages incurred by such party for purposes of Section 7.4.2(e)) to the extent that: 62 Arizona (A) the Indemnified Party recovers insurance proceeds covering the Damages or otherwise recovers payments in respect of such Damages from any other source (whether in a lump sum or stream of payments); or (B) the Indemnified Party's Tax liability is actually reduced as a result of a tax benefit to which the Indemnified Party becomes entitled in respect of the Damages. (j) Seller shall have no liability or obligation under this Section 7.4 for any Damages resulting from the inaccuracy or breach of any representation or warranty if such inaccuracy or breach is disclosed by Seller pursuant to and in accordance with Sections 5.3 and 8.4 hereof; (k) Buyer agrees to use its commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Buyer consistent with its customary risk management practices, appear likely to give rise to a claim against Buyer that is likely to involve one or more insurance policies of Buyer. Any such notice shall be given in good faith by Buyer without regard to the possibility of indemnification payments by Seller under this Section 7.4, and shall be processed by Buyer in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Buyer agrees that (i) if it is entitled to receive payment from Seller for Damages arising under or pursuant to a breach of the representation and warranty set forth in Section 3.10, and (ii) if Buyer has obtained title insurance which may cover the claim or matter giving rise to such Damages, then (iii) such title insurance shall be primary coverage and Buyer will make a claim under the title insurance if such claim can be made in good faith before enforcing its right to receive payment from Seller. Buyer shall be under no obligation to obtain title insurance or prosecute such claim (other than the initial filing of such claim). (l) If at any time subsequent to the receipt by an Indemnified Party of an indemnity payment hereunder, such Indemnified Party (or any Affiliate thereof) receives any recovery, settlement or other similar payment with respect to the Damages for which it received such indemnity payment (including insurance proceeds and other payments pursuant to Section 7.4.2(i)(A) and a tax benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified Party shall promptly pay to the Indemnifying Party an amount equal to the amount of such Recovery, less any expense incurred by such Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment; (m) In the event of any indemnification claim under this Section 7.4 involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Indemnifying Party in the defense of any such claim under this Section 7.4. Without limiting the generality of the foregoing, the Indemnified Party shall furnish the Indemnifying Party with such documentary or other evidence as is then in its or any of its Affiliates' possession as may reasonably be requested by the Indemnifying Party for the purpose 63 Arizona of defending against any such claim. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 7.4.3 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer all inquiries with respect to ownership of the Acquired Assets or the Business to Buyer. In addition, Seller will execute such documents and financing statements as Buyer may reasonably request from time to time to evidence transfer of the Acquired Assets to Buyer in accordance with this Agreement, including any necessary assignment of financing statements. 7.6 Financial Statements. In connection with the preparation and filing of any registration statement or periodic report of Buyer or its Affiliates pursuant to Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, Seller, at Buyer's expense, shall provide Buyer (a) by April 30, 2000 or within 120 days after Buyer's written request therefor if made after January 1, 2000, with the following audited financial statements: (i) a statement of net assets of the Business as of the end of the last fiscal year prior to Closing; and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business for the last fiscal year prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements), including opinions thereon of Seller's Accountants, and (b) within 90 days after Buyer's written request made therefor (provided such request is made after the end of the fiscal quarter described below), the following unaudited statements: (i) a statement of net assets of the Business as of the end of the last fiscal quarter prior to Closing (but only if such quarter is subsequent to the last fiscal year prior to Closing); and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business, for the period from the end of the last fiscal year through the end of the last fiscal quarter prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements). 7.7 Collection of Receivables. Seller agrees that it shall promptly (and in any event no later than five (5) Business Days following receipt) deliver all such payments with respect 64 Arizona to accounts receivable from customers of the Business received on and after the Closing Date (including but not limited to negotiable instruments tendered in payment of accounts receivable assigned to Buyer hereunder which shall be duly endorsed by Seller to the order of Buyer) to Buyer. Seller shall cooperate with Buyer in coordinating the transfer of collection agents and customers of the Business who pay their bills through the Automated Clearinghouse (ACH) process to Buyer. ARTICLE 8 MISCELLANEOUS 8.1 Construction. Parent, Buyer and the Seller Parties have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Parent, Buyer and the Seller Parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean including without limitation. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified. The word "or" shall not be exclusive. Provisions of this Agreement shall apply, when appropriate, to successive events and transactions. Section references refer to this Agreement unless otherwise specified. 8.2 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier addressed to the party at its address set forth below: If to Parent: American Water Works Company 1025 Laurel Oak Road P.O. Box 1770 Voorhees, New Jersey 08043 65 Arizona Fax: (609) 346-8299 Attention: General Counsel with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Buyer: Arizona-American Water Company 7500 East McDonald Drive Suite 200-A Scottsdale, AZ 85250 Fax: (480) 483-8314 Attention: Corporation Counsel With a copy to Parent and a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Seller: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: Robert J. DeSantis Telecopier: (203) 614-4625 66 Arizona with copies to: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten, II Telecopier: (203) 614-4651 and Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: J. Michael Love Telecopier: (203) 614-5201 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 8.3 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto; provided that Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the Code. 8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be clearly related to any other paragraph or section, be deemed to be disclosed with respect to that other paragraph or section. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. 67 Arizona 8.6 Dispute Resolution. Except as otherwise provided herein, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"); provided, however, that at the election of either party, the arbitration shall take place before three (3) arbitrators, one arbitrator being selected by Parent, one arbitrator being selected by Citizen, and the third arbitrator, knowledgeable in the general subject matter of the dispute, controversy or claim, being selected by the other two arbitrators. Either party may demand such arbitration in accordance with the procedures set out in the Rules. The parties hereto shall use reasonable efforts to coordinate any arbitration commenced under this Agreement with any arbitration on the same or similar issues commenced under any of the Related Purchase Agreements so that the resolution of the arbitration under this Agreement and the similar issues under the Related Purchase Agreements can be resolved as expeditiously and efficiently as reasonably practicable. Reasonable efforts shall include use of a common arbitrator or panel of arbitrators where practicable. The arbitration shall take place in Newark, New Jersey. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator(s) shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator(s) shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator(s), present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator(s) shall not have the authority to award, exemplary or punitive damages. The 68 Arizona arbitrator(s) shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrators' majority decision shall be binding and final. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator(s); provided, however, that if the arbitrator(s) determines that the position taken in the Dispute by the non-prevailing party taken as a whole is unreasonable, the arbitrator(s) may order the non-prevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator(s) shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator(s) and the American Arbitration Association. (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 8.6 and (ii) if any party, as party of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 8.6. 8.7 Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto and their successors and permitted assigns any rights or remedies under or by reason of this Agreement. 8.9 Entire Agreement. This Agreement, the Schedules and Exhibits hereto and the other Transaction Documents, and the Confidentiality Agreement dated August 2, 1999, between Citizens and Parent, (i) together constitute the entire understanding of the parties (and their affiliates) with respect to the subject matter hereof, and any related matter, (ii) supercede all prior agreements or understandings, written or oral, entered into by any of the parties that concern the subject matter hereof and (iii) are not intended to confer upon any Person other than the parties hereto any benefit, right or remedy. 8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (i) extend the time for the 69 Arizona performance of any of the obligations of the other party; (ii) waive any inaccuracies in representations and warranties by the other party; (iii) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (iv) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or extension, as the case may be. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.12 Headings. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 8.13 Definitions. For purposes of this Agreement, references to the knowledge of the Seller Parties (including a reference to "the best of the knowledge of the Seller Parties" and similar references) shall mean the actual knowledge possessed by any of the following officers or employees of Citizens: Chief Financial Officer, Vice President and Treasurer; President, Citizens Public Services; Vice President, Corporate Human Resources; Secretary; Vice President, Water; and the general manager of the Business. 8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE, INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES, PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT, BUYER OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER PARTIES. 70 Arizona 8.15 Construction of Certain Provisions. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. 8.16 Bulk Sales. Buyer agrees that it shall not make any filings under any tax bulk sales provisions with respect to the transactions contemplated by this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. CITIZENS UTILITIES COMPANY By:_____________________________________ Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer CITIZENS BUSINESS SERVICES COMPANY CITIZENS CONSUMER SERVICES, INC. CITIZENS RESOURCES COMPANY CITIZENS WATER RESOURCES COMPANY OF ARIZONA CITIZENS WATER SERVICES COMPANY OF ARIZONA HAVASU WATER COMPANY, INC. SUN CITY SEWER COMPANY SUN CITY WATER COMPANY SUN CITY WEST UTILITIES COMPANY TUBAC VALLEY WATER COMPANY, INC. CITIZENS PUBLIC WORKS SERVICE COMPANY OF ARIZONA By:_____________________________________ Robert J. DeSantis, Vice President AMERICAN WATER WORKS COMPANY, INC. By:_____________________________________ Joseph F. Hartnett, Jr., Treasurer 71 Arizona ARIZONA-AMERICAN WATER COMPANY By:_____________________________________ Theodore Jones, Jr., President California EXECUTION COPY ASSET PURCHASE AGREEMENT among CITIZENS UTILITIES COMPANY AND CERTAIN OF ITS AFFILIATES AND AMERICAN WATER WORKS COMPANY, INC. AND CALIFORNIA-AMERICAN WATER COMPANY Dated as of October 15, 1999 California TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Certain Definitions..............................................1 ARTICLE 2 THE TRANSACTION.................................................10 2.1 Sale and Purchase of Assets.....................................10 2.2 Excluded Assets.................................................10 2.3 Assumption of Certain Liabilities...............................11 2.4 Consent of Third Parties........................................14 2.5 Closing.........................................................14 2.6 Purchase Price..................................................15 2.6.1 Purchase Price............................................15 2.6.2 Payment of Initial Cash Payment...........................15 2.6.3 Estimated Closing Statement...............................15 2.6.4 Post-Closing Adjustment to Purchase Price.................16 2.6.5 Adjustment for Certain Liabilities........................17 2.6.6 Additional Adjustment to the Purchase Price...............18 2.7 Deliveries and Proceedings at Closing...........................18 2.7.1 Deliveries to Buyer.......................................18 2.7.2 Deliveries By Buyer to the Seller Parties.................19 2.8 Allocation of Consideration.....................................19 2.9 Prorations......................................................19 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.......................20 3.1 Qualification; No Interest in Other Entities....................20 3.2 Authorization and Enforceability................................20 3.3 No Violation of Laws or Agreements..............................21 3.4 Financial Statements............................................21 3.5 No Changes......................................................22 3.6 Contracts.......................................................23 3.7 Permits and Compliance With Laws Generally......................23 3.8 Environmental Matters...........................................24 3.9 Consents........................................................26 3.10 Title...........................................................26 3.11 Real Estate.....................................................26 3.12 Taxes...........................................................27 3.13 Patents and Intellectual Property Rights........................27 3.14 Accounts Receivable.............................................27 3.15 Labor Relations.................................................27 3.16 Employee Benefit Plans..........................................28 3.17 Absence of Undisclosed Liabilities..............................29 3.18 No Pending Litigation or Proceedings............................30 i California 3.19 Supply of Utilities.............................................30 3.20 Insurance.......................................................30 3.21 Relationship with Customers.....................................30 3.22 WARN Act........................................................31 3.23 Condition of Assets.............................................31 3.24 Brokerage.......................................................31 3.25 All Assets......................................................31 3.26 Year 2000 Matters...............................................31 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER..............32 4.1 Organization and Good Standing..................................32 4.2 Authorization and Enforceability................................32 4.3 No Violation of Laws or Agreements..............................33 4.4 Consents........................................................33 4.5 Financing.......................................................33 4.6 Brokerage.......................................................34 4.7 Insurance.......................................................34 ARTICLE 5 ADDITIONAL COVENANTS............................................34 5.1 Conduct of Business.............................................34 5.2 Negotiations....................................................35 5.3 Disclosure Schedules............................................36 5.4 Mutual Covenants................................................36 5.5 Filings and Authorizations......................................37 5.6 Public Announcement.............................................37 5.7 Further Assurances..............................................38 5.8 Cooperation.....................................................38 5.9 Employees; Employee Benefits....................................39 5.10 Employee Pension Plan...........................................42 5.11 Employee Savings Plan...........................................42 5.12 Welfare Benefits................................................43 5.13 Taxes...........................................................44 5.14 Intentionally Omitted...........................................45 5.15 Citizens' Guarantees and Surety Instruments.....................45 5.16 Assumption of Seller Debt.......................................45 5.17 Schedule of Permits.............................................45 5.18 Title Information...............................................45 5.19 Transaction with Related Parties................................45 5.20 Approval by Citizens............................................46 5.21 Supplemental Information........................................46 5.22 Non-Competition.................................................46 5.23 Intentionally Omitted...........................................46 5.24 Intentionally Omitted...........................................46 ii California 5.25 Cooperation with Respect to Like-Kind Exchange..................46 5.26 Transition Plan.................................................47 5.27 Procedures regarding Refunds of Advances........................47 5.28 Title Insurance.................................................47 ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION...............................48 6.1 Conditions Precedent to Obligations of Buyer and Parent.........48 6.1.1 Performance of Agreements; Representations and Warranties.48 6.1.2 Opinion of Counsel........................................49 6.1.3 HSR Act...................................................49 6.1.4 Required PUC and Other Consents...........................49 6.1.5 Injunction; Litigation....................................49 6.1.6 Documents.................................................49 6.1.7 Related Closings..........................................49 6.2 Conditions Precedent to Obligations of Seller Parties...........50 6.2.1 Performance of Agreements; Representations and Warranties.50 6.2.2 Opinion of Counsel........................................50 6.2.3 HSR Act...................................................50 6.2.4 Required PUC and Other Consents...........................50 6.2.5 Injunction; Litigation....................................51 6.2.6 Documents.................................................51 6.2.7 Related Closings..........................................51 6.3 Termination.....................................................51 ARTICLE 7 CERTAIN ADDITIONAL COVENANTS....................................52 7.1 Certain Taxes and Expenses......................................52 7.2 Maintenance of Books and Records................................52 7.3 Survival........................................................52 7.4 Indemnification.................................................55 7.4.1 General Indemnification Obligations.......................55 7.4.2 General Indemnification Procedures........................56 7.4.3 Indemnification for Negligence............................59 7.5 UCC Matters.....................................................59 7.6 Financial Statements............................................59 7.7 Collection of Receivables.......................................60 ARTICLE 8 MISCELLANEOUS...................................................60 8.1 Construction....................................................60 8.2 Notices.........................................................61 8.3 Successors and Assigns..........................................62 8.4 Exhibits and Schedules..........................................62 8.5 Governing Law...................................................63 8.6 Dispute Resolution..............................................63 ii California 8.7 Severability....................................................64 8.8 No Third Party Beneficiaries....................................64 8.9 Entire Agreement................................................64 8.10 Amendment and Waiver............................................65 8.11 Counterparts....................................................65 8.12 Headings........................................................65 8.13 Definitions.....................................................65 8.14 No Implied Representation.......................................65 8.15 Construction of Certain Provisions..............................66 8.16 Bulk Sales......................................................66 iv California v California vi California vii California List of Schedules Schedule 1.1.1(a) ................................................. Real Estate Schedule 1.1.10 .......................................... Assumed Indebtedness Schedule 2.2.12 ............................................... Excluded Assets Schedule 2.6 ................................................... Purchase Price Schedule 3.3 ............................... No Violation of Laws or Agreements Schedule 3.4 ............................................. Financial Statements Schedule 3.5 ....................................................... No Changes Schedule 3.6 ........................................................ Contracts Schedule 3.7 ....................... Permits and Compliance with Laws Generally Schedule 3.8 ................................ Environmental Matters - Generally Schedule 3.8.10 ............................... Compliance with Water Standards Schedule 3.8.11 .............................................. Deed Restriction Schedule 3.9 ......................................... Seller Parties' Consents Schedule 3.10 ........................................................... Title Schedule 3.11 ......................................... Real Estate Proceedings Schedule 3.12 ........................................................... Taxes Schedule 3.15 ................................................. Labor Relations Schedule 3.16.1 ........................................ Employee Benefit Plans Schedule 3.16.4 ........................... Employee Benefit Plans - Compliance Schedule 3.16.9 ............... Employee Benefit Plans - Extraordinary Benefits Schedule 3.17 .............................. Absence of Undisclosed Liabilities Schedule 3.18 ............................ No Pending Litigation or Proceedings Schedule 3.19 ............................................. Supply of Utilities Schedule 3.20 .............................................. Seller's Insurance Schedule 3.22 ........................................................ WARN Act Schedule 3.23 ............................................. Condition of Assets Schedule 3.25 ...................................................... All Assets Schedule 3.27 ............................................... Product Liability Schedule 4.7 ................................................ Buyer's Insurance Schedule 5.1 .............................................. Conduct of Business Schedule 5.9.1 ...................................................... Employees Schedule 5.9.2 ............................... Collective Bargaining Agreements Schedule 5.12 ................................................ Former Employees Schedule 5.15 ............................................ Citizens' Guarantees Schedule 5.16 ............................................. Schedule of Permits Schedule 6.1.7 .................................... Related Purchase Agreements viii California TABLE OF EXHIBITS Exhibit A - Form of Assumption Agreement Exhibit B - Form of Assignment and Bill of Sale Exhibit C - Intentionally Omitted Exhibit D - Intentionally Omitted Exhibit E - Form of Seller's Opinion of Counsel Exhibit F - Form of Buyer's Opinion of Counsel ix California ASSET PURCHASE AGREEMENT THIS IS AN ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of October 15, 1999, by and among Citizens Utilities Company, a Delaware corporation ("Citizens"), and each of the wholly-owned subsidiaries of Citizens named on the signature page hereof (collectively with Citizens, "Seller" or the "Seller Parties"), and American Water Works Company, Inc., a Delaware corporation ("Parent"), and California-American Water Company, a California corporation ("Buyer"). Background 1. Citizens Utilities Company of California is a public utility engaged, among other things, in the business of storing, supplying, distributing and selling water to the public, wholesale water transmission, and related services and activities in the State of California (the "Business"). 2. Parent is a holding company which desires to cause the Buyer to purchase substantially all of the assets, properties and rights of the Seller Parties relating to the Business, and Seller desires to sell, and to cause the sale of, such assets, properties and rights, on the terms and subject to the conditions set forth in this Agreement. Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: 1.1.1 "Acquired Assets" means, subject to Section 2.2, all of each Seller Party's right, title, and interest in, under and to all of the assets, properties and rights exclusively used in the Business as a going concern of every kind, nature and description existing on the Closing Date, wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the assets, properties and rights exclusively relating to the Business enumerated below: (a) all real property described in Schedule 1.1.1(a), together with all fixtures, fittings, buildings, structures and other improvements erected thereon, and easements, California rights of way, water lines, rights of use, licenses, railroad crossing agreements, hereditaments, tenements, privileges and other appurtenances thereto or otherwise exclusively related to the Business (such as appurtenant rights in and to public streets) (the "Real Estate"); (b) to the extent not included in clause (a) above, all water tanks, reservoirs, water works, plant and systems, purification and filtration systems, pumping stations, pumps, wells, mains, water pipes, hydrants, equipment, machinery, vehicles, tools, dies, spare parts, materials, water supplies, fixtures and improvements, construction in progress, jigs, molds, patterns, gauges and production fixtures and other tangible personal property, in transit or otherwise, used exclusively in the Business (the "Equipment and Other Tangible Personal Property"); (c) notwithstanding the provisions of Section 2.2 but subject to Section 2.4, all of Seller's water appropriation and flowage rights to the extent not transferred to Buyer upon assignment of the Contracts and Permits to Buyer; (d) all notes receivable, accounts receivable, accrued utility revenues, materials and supplies (at average cost net of reserve for obsolescence) and prepayments attributable in each case exclusively to the Business; (e) all unamortized debt expense related to the Assumed Indebtedness, deferred capital costs, and other deferred charges (excluding deferred taxes collectable) attributable exclusively to the Business of which recovery in future rates is probable; (f) Intellectual Property and goodwill, licenses and sublicenses granted and obtained with respect thereto; (g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements and instruments relating to the sale of any assets, services, properties, materials or products, including all customer contracts, operating contracts and distribution contracts relating exclusively to the conduct of the Business; (ii) orders, contracts, supply agreements and other agreements relating exclusively to the purchase of any assets, services, properties, materials, or products for the Business; (iii) all leases of Real Estate exclusively related to the Business; (iv) all other contracts, agreements and instruments related exclusively to the Business (other than contracts, agreements and instruments included in the definition of Real Estate or Permits); and (v) any such contracts, agreements and other instruments referred to in clauses (i) - (iv) inclusive, entered into between the date hereof and the Closing Date which are consistent with the terms of this Agreement and are entered into in the ordinary course of business consistent with past practice, and including in the case of clauses (i) - (iv) all such contracts, agreements and instruments more specifically listed or described in Schedule 3.6 (and specifically including one Collective Bargaining Agreement to the extent provided in Section 5.9.2, but specifically excluding any contract, agreement and instrument listed or described on Schedule 2.2.12) (the "Contracts"); 2 California (h) subject to Section 2.4 hereof, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority relating exclusively to the conduct of the Business and all pending applications therefor (the "Permits"); (i) books, records, ledgers, files, documents (including originally executed copies of written Contracts, to the extent available, and copies to the extent not available), correspondence, Tax returns relating exclusively to the Business, memoranda, forms, lists, plats, architectural plans, drawings, and specifications, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the Transferred Employees (to the extent such transfer is not prohibited by law), photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent exclusively relating to the Business, the Acquired Assets or the Transferred Employees; (j) all rights or choses in action arising out of occurrences before or after the Closing Date and exclusively related to any of the Acquired Assets, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Seller; provided, however, that (notwithstanding the foregoing provisions of this Section 1.1.1(j)), to the extent that Seller pays or discharges a liability related to the Business or any of the Acquired Assets and related to such right or chose in action (whether by reason of indemnification under this Agreement or otherwise), Buyer will reassign or reconvey to Seller such right or chose in action to the extent that such right or chose in action relates to a recovery of amounts paid to Buyer; and (k) all rights to insurance and condemnation proceeds (i) to the extent relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing but only to the extent that the proceeds exceed the amount of the write-down of the net book value of such Acquired Assets on the books and records of Seller as a result of such damage, destruction, taking or other impairment and (ii) to the extent they relate to amounts paid by Buyer for Damages to the extent Buyer does not receive payment pursuant to Section 7.4.1(a), but only to the extent Buyer is entitled to indemnification by Seller pursuant to Sections 7.3 and 7.4. 1.1.2 "Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.3 "Affected Participant" has the meaning set forth as Section 5.11.1 hereof. 3 California 1.1.4 "Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. 1.1.5 "Agreement" has the meaning set forth in the introduction hereof. 1.1.6 "American Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.7 "American Savings Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof 1.1.9 "Assumed Benefit Liabilities" has the meaning set forth in Section 3.16.6 hereof. 1.1.10 "Assumed Indebtedness" means the liabilities and obligations from and after the Closing Date (except as set forth below) with respect to the loan document listed as item I.L.1 of Schedule 3.6 with respect to the indebtedness of Citizens Utilities Company of California owed to the State of California Department of Water Resources (the "California Water Debt"), to the extent assumed by Buyer. For purposes of clarity, except as set forth in the next sentence below, "Assumed Indebtedness" shall not include any liability or obligation to the extent accrued prior to the Closing Date or to the extent arising out of or relating to an event, circumstance or occurrence prior to the Closing Date. "Assumed Indebtedness" shall include the outstanding principal amount and the accrued but unpaid interest owed by Seller on the debt obligations set forth in the first sentence of this definition, if such debt obligations are assumed by Buyer. 1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2 hereof. 1.1.13 "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof). 1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under a Benefit Plan. 4 California 1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof. 1.1.17 Intentionally Omitted. 1.1.18 "Business" has the meaning set forth in the Background section hereof. 1.1.19 Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. 1.1.20 "Buyer" has the meaning set forth in the introduction hereof. 1.1.21 Intentionally Omitted. 1.1.22 "Buyer's Accountants" means PricewaterhouseCoopers LLP or any firm of independent public accountants hereafter designated by Buyer for purposes of this Agreement. 1.1.23 Intentionally Omitted 1.1.24 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.25 "CERCLA" has the meaning set forth in Section 3.8.2 hereof. 1.1.26 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof. 1.1.27 "Citizens" has the meaning set forth in the introduction hereof. 1.1.28 "Closing" has the meaning set forth in Section 2.5 hereof. 1.1.29 "Closing Date" has the meaning set forth in Section 2.5 hereof. 1.1.30 "Closing Statement of Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.31 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.32 "Collective Bargaining Agreement" means the agreement identified as such on Schedule 3.6 hereto. 1.1.33 "Competing Transaction" has the meaning set forth in Section 5.2. 1.1.34 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof. 5 California 1.1.35 "Control" with respect to any Person means the ownership, directly or indirectly, of at least a majority of the voting power of each class of capital stock of such Person entitled to vote in the election of directors of such Person generally. 1.1.36 "Damages" has the meaning set forth in Section 7.4.1 hereof. 1.1.37 "Disclosure Schedules" means the Schedules referenced in Articles 3, 4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3. 1.1.38 "Dispute" has the meaning set forth in Section 8.6. 1.1.39 "Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.40 "Environmental Laws" has the meaning set forth in Section 3.8 hereof. 1.1.41 "Equipment and Other Tangible Personal Property" has the meaning set forth in Section 1.1.1(b) hereof. 1.1.42 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.43 "ERISA Affiliate" means (a) any corporation included with any of the Seller Parties in a controlled group of corporations within the meaning of Section 414(b) of the Code; (b) any trade or business (whether or not incorporated) which is under common control with any of the Seller Parties within the meaning of Section 414 of the Code; any member of an affiliated service group of which any of the Seller Parties is a member within the meaning of Section 414(m) of the Code; or (d) any other person or entity treated as an affiliate of any of the Seller Parties under Section 414(o) of the Code. 1.1.44 "Excluded Assets" has the meaning set forth in Section 2.2 hereof. 1.1.45 "Financial Statements" has the meaning set forth in Section 3.4 hereof. 1.1.46 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof. 1.1.47 "Former Employees" means all salaried and hourly employees once employed by Seller or any of its Affiliates, but who are no longer so employed on the Closing Date. 1.1.48 "FTC" has the meaning set forth in Section 5.5 hereof. 1.1.49 "GAAP" has the meaning set forth in Section 3.4 hereof. 6 California 1.1.50 "Hazardous Substance" has the meaning set forth in Section 3.8 hereof. 1.1.51 "HSR Act" has the meaning set forth in Section 3.9 hereof. 1.1.52 Intentionally Omitted. 1.1.53 Intentionally Omitted. 1.1.54 "Indemnified Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.55 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.56 "Intellectual Property" means the trademarks, patents, trade names and copyrights and applications therefor, inventions, trade secrets, and confidential business information (including know-how, formulas, water filtration, purification and pumping processes and techniques, technical data, designs, drawings, customer and supplier lists, and business and marketing plans and proposals), all computer software (including data and related documentation and object and source codes), whether in magnetic format or hard copy, and tangible embodiments thereof (in whatever form or medium) of Seller, in each case, utilized exclusively in the Business. 1.1.57 "Interim Statement of Net Assets" means the Citizens Water Resources Statement of Net Assets - California, June 30, 1999, which is attached hereto as Schedule 3.4. 1.1.58 "Interim Statement of Net Assets Date" means June 30, 1999. 1.1.59 "IRS" has the meaning set forth in Section 3.16.2 hereof. 1.1.60 "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). 1.1.61 "Material Adverse Effect" means a change or effect (or series of related changes or effects) which has or is reasonably likely to have a material adverse change in or effect upon the business, assets, condition (financial or otherwise), or results of operations of the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. For purpose of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect 7 California (a) if it arises from general business, economic or financial market conditions, from conditions generally effecting the industries in which Seller competes, or from the transactions contemplated by this Agreement, or (b) to the extent that it consists of strikes, work stoppages, walk-outs, slow-downs or other business interruption at the facilities in California that are part of the Acquired Assets, or (c) solely with respect to matters arising prior to Closing, to the extent that either (i) Seller realizes the benefit of insurance maintained by Citizens on or prior to the Closing Date and Buyer receives the cash proceeds of such insurance to the extent required by Section 1.1.1(k), or (ii) Seller arranges for Buyer to recover payments in respect of such occurrence or condition from any other source (whether in a lump sum or stream of payments), it being understood and agreed that a Material Adverse Effect may have occurred irrespective of such insurance recovery if the occurrence or condition giving rise to such recovery also causes a non-monetary material adverse change in or effect upon the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. 1.1.62 "Mortgage Indenture" means Indenture of Mortgage and Deed of Trust between BNY Western Trust Company (successor in interest to Wells Fargo Bank, N.A.) and First Interstate Bank of California (as successor trustee to Marine Midland, N.A., formerly the Marine Midland Trust Company of New York). 1.1.63 "OSHA" has the meaning set forth in Section 3.7.1 hereof. 1.1.64 "PCBs" has the meaning set forth in Section 3.8.6 hereof. 1.1.65 "Permits" has the meaning set forth in Section 1.1.1(h) hereof. 1.1.66 "Permitted Exceptions" has the meaning set forth in Section 3.10 hereof; provided, however, that from and after the Closing, Permitted Exceptions shall not include any Lien arising under or resulting from the Mortgage Indenture. 1.1.67 "Person" means an individual, a corporation, a partnership, an association, an Authority, a trustor other entity or organization. 1.1.68 "Pre-Existing Conditions" has the meaning set forth in Section 2.3.1(d). 1.1.69 "Prime Rate" means the rate per annum announced from time to time during the reference period by Citibank N.A. as its United States prime, reference or base rate for commercial loans. 1.1.70 "PUC" has the meaning set forth in Section 5.5 hereof. 1.1.71 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 8 California 1.1.72 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof. 1.1.73 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof. 1.1.74 "Related Purchase Agreements" as the meaning set forth in Section 6.1.7 hereof. 1.1.75 "Release" or "Released" has the meaning set forth in Section 3.8 hereof. 1.1.76 "Remedial Action" has the meaning set forth in Section 3.8 hereof. 1.1.77 Intentionally Omitted. 1.1.78 "Retained Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.79 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.80 "SEC" means the U.S. Securities and Exchange Commission. 1.1.81 "Securities Filings" has the meaning set forth in Section 5.8.2 hereof. 1.1.82 "Seller" and "Seller Parties" have the respective meaning set forth in the introduction hereof. 1.1.83 "Seller's Accountants" means KPMG LLP or any other firm of independent public accountants hereafter designated by Seller for purposes of this Agreement. 1.1.84 "Seller's Adjusted Amount" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.85 "Seller's Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.86 "Seller's 401(k) Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.87 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f) hereof. 1.1.88 "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall profits, social security (or similar unemployment), disability, transfer, registration, value added, 9 California alternative, or add-on minimum, estimated, or capital stock and franchise and other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 1.1.89 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.91 "Threshold Amount" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.92 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i) hereof. 1.1.93 "Transferred Accounts" has the meaning set forth in Section 5.11.2 hereof. 1.1.94 "Transaction Documents" has the meaning set forth in Section 3.2 hereof. 1.1.95 "Transferred Employees" has the meaning set forth in Section 5.9.2 hereof. 1.1.96 "Union Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.97 "VEBAs" has the meaning set forth in Section 5.12 hereof. 1.1.98 "WARN Act" means the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. section 2102- 2109, as amended. ARTICLE 2 THE TRANSACTION 2.1 Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 2.5 below, Citizens shall, and shall cause the other Seller Parties to, sell, assign, transfer, deliver and convey to Buyer, and Parent shall cause Buyer to purchase, the Acquired Assets for the Purchase Price specified in Section 2.6. 2.2 Excluded Assets. The following assets of Seller shall be excluded from the Acquired Assets (the "Excluded Assets"): 2.2.1 assets of the Seller used in both the Business and in Citizens' gas, electric or communications businesses, the material items of which are described on Schedule 2.2.12; 10 California 2.2.2 cash and cash equivalents in transit, in hand or in bank accounts. 2.2.3 except as otherwise set forth herein, assets attributable or related to any Benefit Plan; 2.2.4 the stock record and minute books of Seller; 2.2.5 Acquired Assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; 2.2.6 except to the extent set forth in Sections 2.9, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member, and which are treated as Retained Liabilities under Section 2.3.3(b) below. 2.2.7 customer and other deposits held in Seller's accounts; 2.2.8 accounts owing by and among Seller and its Affiliates; 2.2.9 notes receivable and other receivables (other than note and accounts receivable attributable exclusively to the Business); 2.2.10 all deferred tax assets or collectibles; 2.2.11 duplicate copies of all books and records transferred to Buyer; and 2.2.12 those certain items listed on Schedule 2.2.12. 2.3 Assumption of Certain Liabilities. 2.3.1 Buyer shall not assume any liabilities of Citizens or Seller or any of their Affiliates, except that Buyer shall assume the following specific liabilities and obligations: (a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; (b) except as set forth in Section 2.3.3(b), all liabilities and obligations of Seller in respect of the Contracts and Permits assigned or transferred to Buyer pursuant to this Agreement in accordance with the respective terms thereof, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; 11 California (c) the Assumed Indebtedness; (d) any liability, obligation or responsibility of Seller for conditions at the Real Estate, whether based on statutory or common law, now or hereafter in effect, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment at the Real Estate or into or from any building, structure, pipeline or other facility at the Real Estate, or from violation of any law relating to the foregoing, including without limitation, any CERCLA or similar liability under any federal or state law or regulation, except to the extent Buyer has given written notice of a claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to the expiration of the claims period set forth in Section 7.3.2(a) or (b) (and if Buyer has given written notice prior to the expiration of such claims period, to the extent that such claim is not entitled to indemnification under Sections 7.3 and 7.4) (the foregoing, the "Pre-Existing Conditions"); (e) all liabilities and obligations of Seller related to unperformed service obligations, easement and right-of-way relocation obligations, and construction work in progress, and all engineering and construction required to complete scheduled construction and other capital projects for the Business, in each case relating to the Business and outstanding on or arising after the Closing Date except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (f) liability for accrued but unused vacation pay for the Transferred Employees to the extent provided in Section 5.9.2; (g) any liability, obligation or responsibility relating to customer deposits held by Seller on the Closing Date and relating to the Business; and (h) all liabilities and obligations imposed on Buyer by any PUC in connection with the operation of the Business or the ownership of the Acquired Assets, including with respect to any liability of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the financial statements of Seller. 2.3.2 Any liabilities or obligations which are assumed by Buyer pursuant to Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities." At the Closing, Parent shall cause Buyer to execute and deliver to Seller an assumption agreement, in substantially the form of the Assumption Agreement attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which Buyer shall assume the Assumed Liabilities. Each of Parent and Buyer hereby irrevocably and unconditionally waives and releases the Seller Parties from all Assumed Liabilities and all liabilities or obligations exclusively relating to the Business or the Acquired Assets to the extent arising from events or occurrences after the Closing or to the extent otherwise relating to the period after the Closing, including any liabilities created or which arise by statute or common law, 12 California including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). 2.3.3 Buyer shall not assume any liabilities, commitments or obligations (contingent or absolute and whether or not determinable as of the Closing) of any of the Seller Parties or any of their Affiliates except for the Assumed Liabilities as specifically and expressly provided for above, whether such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Buyer hereunder as Assumed Liabilities are being retained by the Seller Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby irrevocably and unconditionally waives and releases Buyer from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Without limitation to the foregoing, all of the following shall be considered Retained Liabilities and not Assumed Liabilities (except as specified below) for the purposes of this Agreement: (a) any product liability, toxic tort or similar claim for injury to person or property, regardless of when made or asserted, to the extent that it arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any of the Seller Parties or any of their Affiliates prior to Closing, or alleged to have been made by any of such Persons, or to the extent that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product distributed or sold by or on behalf of any of the Seller Parties or any of their Affiliates prior to Closing, including any claim referred to above in this Section 2.3.3(a) relating to water quality standards, any claim relating to any product delivered in connection with the performance of services provided by Seller and any claim seeking recovery for consequential damages, lost revenue or income; (b) all refund obligations relating to the advances existing on the Closing Date for construction of facilities relating to the Business; (c) except to the extent set forth in Section 2.9, any federal, state, foreign or local income or other Tax payable with respect to the business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member. (d) any liability or obligation associated with or in connection with any common plant assets of Seller (other than the liabilities and obligations exclusively related to any common plant assets included among the Acquired Assets); 13 California (e) except as provided in Section 2.3.1 above, any liability or obligation with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any of the Seller Parties or any of their Affiliates, whether or not employed by Buyer after the Closing, that arises out of or relates to events or conditions to the extent occurring before the Closing Date; (f) except to the extent set forth in Section 2.3.1(d), any liability, obligation or responsibility of any of the Seller Parties, or any of their Affiliates or predecessors, whether based on statutory or common law, but only as any such law is interpreted, amended and in effect on the Closing Date, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment or into or from any building, structure, pipeline or other facility or relating to or arising from the generation, use, storage, treatment, disposal, transport or other handling of Hazardous Substances or sale or product containing Hazardous Substances from violation of any law relating to the foregoing (but only as such law is interpreted, amended and in effect on the Closing Date) including without limitation, any (A) CERCLA or similar liability under any federal or state law or regulation as interpreted, amended and in effect on the Closing Date or (B) any such liability associated with businesses or assets of the Seller Parties other than the Business or the Acquired Assets; (g) liabilities and obligations relating to the Business to the extent arising prior to Closing (unless otherwise constituting Assumed Liabilities) arising by operation of law under any common law or statutory doctrine (including successor liability or de facto merger); (h) any obligation or liability arising under any contract, commitment, instrument or agreement (1) subject to the penultimate sentence of Section 2.4, that is not transferred to Buyer as part of the Acquired Assets, or (2) that relates to any breach or default (or to the extent that it relates to an event which would, with the passing of time or the giving of notice, or both, constitute a default) under any Contract, instrument or agreement or to any services to be provided by Seller under any such Contract, instrument or agreement to the extent that such services were performed or were required to have been performed on or prior to the Closing Date; (i) any liability or obligation in respect of the Excluded Assets; (j) any liability or obligation of any of the Seller Parties or any of their Affiliates existing as a result of any act, failure to act or other state of facts or occurrence which constitutes a breach or violation of any of Seller's representations, warranties, covenants or agreements contained in this Agreement, except to the extent set forth in Section 7.4; or (k) except for the Assumed Liabilities as specifically and expressly set forth herein, any liability to the extent arising out of or relating to the ownership or operation of the Acquired Assets or the Business prior to the Closing Date (including any predecessor 14 California operations), any claims, obligations or litigation to the extent arising out of or relating to events or conditions occurring before the Closing Date, and any liability associated with any business other than the Business. 2.4 Consent of Third Parties. On the Closing Date, Citizens shall cause Seller to assign to Buyer, and Parent shall cause Buyer to assume, the Contracts and the Permits which are to be transferred to Buyer as provided in this Agreement by means of the Assumption Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent (or result in a breach or violation thereof) of the other party thereto or any other third party, and such consent shall not be obtained prior to Closing, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets. In order, however, to provide Buyer the full realization and value of every Contract of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Buyer, in the name of Seller or otherwise as Buyer shall specify, take all reasonable actions (including without limitation the appointment of Buyer as attorney-in-fact for Seller to proceed at Buyer's sole cost and expense) and do or cause to be done all such things as shall in the reasonable opinion of Buyer be necessary (a) to assure that the rights of Seller or its Affiliates under such Contracts shall be preserved for the benefit of Buyer and (b) to facilitate receipt of the consideration to be received by Seller or its Affiliates in and under every such Contract. To the extent that Buyer does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract "assigned or transferred to Buyer pursuant to this Agreement" within the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in any way diminish the obligations of Seller to obtain consents and approvals under this Agreement. 2.5 Closing. Subject to the terms and conditions of this Agreement, the closing of the sale and purchase of the Acquired Assets (the "Closing") shall take place at 10 a.m., East Coast time, on a date mutually satisfactory to Buyer and Seller which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in Sections 6.1 and 6.2 hereof (other than those conditions which require the delivery of any documents or the taking of other action, at the Closing) at the offices of Fleischman and Walsh, LLP, 1400 Sixteenth Street, N.W., Washington, D.C. 20036, or on such other date and at such other time or place as may be mutually agreed upon by the parties hereto (the "Closing Date"). Upon payment of the Initial Cash Payment by Buyer and confirmed receipt thereof by Seller or the Escrow Agent pursuant to Section 2.6.2 below, Seller shall operate the Business at the direction of and under the control of Buyer. Notwithstanding the foregoing, the Closing shall be deemed to be effective as of 11:59 p.m. on the Closing Date for all purposes. 2.6 Purchase Price. 2.6.1 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price be paid by Buyer for the purchase of the Acquired Assets (the "Purchase Price") shall be: (i) $161,330,000 in cash (the "Base Cash Purchase Price," the Base Cash Purchase Price as adjusted in accordance with Section 2.6.3, Section 2.6.5 and Section 2.6.6 15 California is referred to as the "Initial Cash Payment"), subject to adjustment pursuant to the provisions of this Agreement (including Section 2.6.3, Section 2.6.4, Section 2.6.5, Section 2.6.6 and Section 2.9 of this Agreement) and (ii) the assumption by Buyer of the Assumed Liabilities. 2.6.2 Payment of Initial Cash Payment. Subject to the terms and conditions of this Agreement, the Initial Cash Payment shall be paid by Buyer on the Closing Date by federal other wire transfer of immediately available funds to the account designated by Seller in writing at least two (2) Business Days prior to the Closing Date. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Buyer shall deliver the Initial Cash Payment to Buyer's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. Upon receipt, the Escrow Agent shall invest the Initial Cash Payment in an interest-bearing account mutually agreed upon by Seller and Buyer. At Closing, Parent shall sign and deliver to Citizens a statement which confirms that the Closing has occurred and which instructs the Escrow Agent to transfer to Citizens the funds representing the Initial Cash Payment, plus an amount representing the interest earned after the Closing Date until the date the funds are transferred, to an account that Citizens shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to Buyer. The fees and expenses of Escrow Agent shall be paid by Buyer. 2.6.3 Estimated Closing Statement. At least five (5) business days prior to the Closing Date, Citizens shall deliver to Parent and Buyer a statement of net assets (the "Estimated Statement of Net Assets") reflecting its good faith calculation of the Acquired Assets of the Business as of the last day of the latest calendar month for which financial statements of Seller are available (the "Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall be prepared in the same manner and utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999). The Base Cash Purchase Price shall be increased or decreased on a dollar for dollar basis by the amount, if any, by which the Estimated Adjusted Net Assets is greater than or less than $93,819,658 (such increase or decrease, as the case may be, is referred to herein as the "Estimated Net Asset Adjustment"). 2.6.4 Post-Closing Adjustment to Purchase Price. (a) Within 90 days after the Closing, Citizens shall prepare and deliver to Parent and Buyer a Statement of Net Assets (the "Closing Statement of Net Assets") which reflects the Acquired Assets, as of 11:59 p.m. on the Closing Date, based on actual financial performance and calculated in the same manner, utilizing the same accounting principles, policies and methods utilized in preparing the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999), together with (A) an audit report of Seller's Accountants stating that the Closing Statement of Net Assets has been prepared utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets and (B) a calculation of Citizens' determination of the amount of increase 16 California or decrease in the amount of the Acquired Assets of the Business from the Interim Statement of Net Assets Date to the Closing Date which is derived from the Closing Statement of Net Assets ("Seller's Adjustment Amount"). The Closing Statement of Net Assets shall not give effect to any purchase accounting treatment arising from Buyer's purchase of the Acquired Assets. Buyer shall pay the fees and expenses of Seller's Accountants incurred in connection with this Section 2.6.4. Buyer agrees to cooperate, and agrees to cause Buyer's Accountants to cooperate, with Citizens and Seller's Accountants in connection with the preparation of the Closing Statement of Net Assets, and related information, and shall provide to Citizens and Seller's Accountants such books, records and information as may be reasonably requested from time to time, including the work papers of Buyer's Accountants. Citizens will give Buyer and its representatives access during the normal business hours of Citizens to the personnel, books and records of Citizens and the work papers of Seller's Accountants to assist Buyer in the review of the Closing Statement of Net Assets and related matters. Buyer agrees that, following the Closing through the date on which the Closing Statement of Net Assets is delivered, it will not take any actions with respect to any accounting books, records, policies or procedures on which the Closing Statement of Net Assets is to be based that would make it impossible or impracticable to calculate the Acquired Assets in the manner and utilizing the methods required hereby. Without limiting the generality of the foregoing, no changes shall be made in any reserve or other account existing as of the date of the Interim Statement of Net Assets except in the ordinary course or as a result of events occurring after the date of the Interim Statement of Net Assets and, in such event, only in a manner consistent with past practices of Seller. (b) Parent or Buyer may dispute any amounts reflected on the Closing Statement of Net Assets, in the Seller's Adjustment Amount or in the Statement of Certain Assumed Liabilities, provided, however, that Buyer shall notify Citizens in writing of each disputed amount, and specify the amount thereof in dispute and the basis of such dispute, within 30 days of the Buyer's receipt of the Closing Statement of Net Assets and the Seller's Adjustment Amount (such 30 day period hereinafter referred to as the "Review Period"). In the event of a dispute with respect to the Closing Statement of Net Assets, the Seller's Adjustment Amount or the Statement of Certain Assumed Liabilities, Buyer and Seller shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Buyer and Seller are unable to reach a resolution of such differences within 30 days of receipt of Buyer's written notice of dispute to Seller, Buyer and Seller shall submit the amounts remaining in dispute (together with any amounts remaining in dispute pursuant to Section 2.6.4(b) of each of the Related Purchase Agreements) for resolution to an independent accountant firm of national reputation mutually appointed by Seller and Buyer (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall be requested to determine and report to the parties, within 30 days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Buyer and the Seller Parties so that the Seller Parties' share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to the Third Accounting Firm that is unsuccessfully disputed by the Buyer (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed 17 California amounts so submitted by the Buyer to the Third Accounting Firm. Buyer shall pay the fees and expenses of Buyer's Accountants incurred in connection with this Section 2.6.4(b). Seller's Adjustment Amount, if there are no disputes with respect thereto, or Seller's Adjustment Amount as adjusted after the resolution of all disputes with respect thereto in accordance herewith, shall be referred to as the "Final Net Asset Adjustment." (c) If the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment exceeds the Initial Cash Payment, then within five (5) business days after final determination thereof Buyer shall pay Seller the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. If the Initial Cash Payment exceeds the sum of the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment, then within five (5) business days after final determination thereof Seller shall pay Buyer the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. 2.6.5 Adjustment for Certain Liabilities. Concurrent with the delivery of the Estimated Statement of Net Assets, Citizens also shall deliver to Parent and Buyer a statement reflecting (i) the customer and other deposits held by Seller on the Closing Date and relating to the Business, (ii) the total amount of the Assumed Indebtedness that will be outstanding immediately after the Closing Date, (iii) the items specified in Section 2.9 to the extent set forth therein, and (iv) without duplications of any amount included in clause (i) above any payments received by Seller under the Contracts and Permits for obligations not performed as of the Closing Date (the "Statement of Certain Assumed Liabilities"). The Statement of Certain Assumed Liabilities shall reflect Citizens' good faith calculation of such liabilities as of the Closing Date. The Base Cash Purchase Price shall be decreased by the net amount set forth in the Statement of Certain Assumed Liabilities. Concurrent with the delivery of the Closing Statement of Net Assets, Citizens also shall deliver to Parent a statement showing any adjustments to the Statement of Certain Assumed Liabilities and the Base Cash Purchase Price shall be further adjusted to give effect to any such adjustments to the Statement of Certain Assumed Liabilities. 2.6.6 Additional Adjustment to the Purchase Price. The Base Cash Purchase Price shall be decreased by an amount equal to the proceeds of Seller's sale of the property described in Item 2 of Schedule 5.1 (net of expenses) less the sum of (i) the federal and state income taxes payable by Seller in respect of those proceeds and (ii) the book value of such property, as of June 30, 1999, on Seller's books. 2.7 Deliveries and Proceedings at Closing. Subject to the terms and conditions of this Agreement, at the Closing: 18 California 2.7.1 Deliveries to Buyer. Citizens shall, and shall cause Seller to deliver to Buyer: (a) bills of sale and instruments of assignment to the Acquired Assets, duly executed by Seller, substantially in the form of Exhibit B hereto and; (b) the consents to transfer, of all transferable or assignable Contracts, Intellectual Property, Permits (including Environmental Permits), to the extent specifically required hereunder; (c) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Seller (together with any other transfer forms necessary to transfer title to such vehicles); (d) special warranty deeds of conveyance with respect to the parcels of Real Estate owned in fee simple by Seller (or, with respect to any such parcel which was acquired by Seller (or its predecessor in interest, in cases involving mergers) by deed without covenant or warranty of title, a quit claim deed without covenant or warranty of title) to Buyer, duly executed and acknowledged by Seller and in recordable form; (e) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Real Estate, duly executed by the Seller Parties (the "FIRPTA Affidavit"); (f) the certificates, opinions and other documents required to be delivered by the Seller Parties pursuant to Section 6.1 hereof and certified resolutions evidencing the authority of the Seller Parties as set forth in Section 3.2 hereof; (g) all agreements and other documents required by this Agreement; (h) a receipt for the payment of the Initial Cash Payment duly executed by Citizens; and (i) all such other instruments of conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer to Buyer the Acquired Assets in accordance with this Agreement and where necessary or desirable, in recordable form. 2.7.2 Deliveries By Buyer to the Seller Parties. Parent shall, and shall cause Buyer to deliver to the Seller Parties: (a) wire transfer of immediately available funds in an amount equal to the Initial Cash Payment; (b) the Assumption Agreement, duly executed by Buyer; 19 California (c) the certificates, opinions and other documents required to be delivered by Buyer pursuant to Section 6.2 hereof; (d) all of the instruments contemplated by Section 5.24(a) to the extent not previously executed and delivered by Parent; and (e) all such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Parent and Buyer to assume the Assumed Liabilities in accordance with this Agreement. 2.8 Allocation of Consideration. Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Authority or in any proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in any legal requirement. 2.9 Prorations. The parties hereto agree that the following expenses shall be calculated and pro rated as of the Closing Date, with Seller responsible for such expenses and to receive the benefit for the same for the period through and including the Closing Date, and Buyer to be responsible for and to receive the benefit of the same after the Closing Date: 2.9.1 personal and real property taxes (on the basis on which the same were assessed and paid) and sales, occupation and use taxes, in each case, to the extent relating to the Business and except as otherwise provided in Section 7.1; 2.9.2 electric, fuel, gas, telephone, sewer and utility charges, in each case, to the extent relating to the Business; 2.9.3 rentals and other charges under Contracts to be assumed by Buyer pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h)); and 20 California 2.9.4 charges under maintenance and service contracts and other Contracts (except to the extent provided in Section 2.3.3(h)), and fees under Permits to be transferred to Buyer as part of the Acquired Assets; 2.9.5 water, sewer and other similar types of taxes, and installments on special benefit assessments; and 2.9.6 payroll expenses, payroll taxes, reimbursable employee business expenses and the financial cost of the accrued vacation of each Transferred Employee. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Each of the Seller Parties jointly and severally represent and warrant to Parent and Buyer as follows: 3.1 Qualification; No Interest in Other Entities. 3.1.1 Each of the Seller Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as presently being conducted. Each of the Seller Parties is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of the business conducted by it or such Seller Party's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of the Seller Parties do not have a Material Adverse Effect. 3.1.2 No shares of any corporation or any ownership or other investment interest, either of record, beneficially or equitably, in any Person are included in the Acquired Assets. 3.2 Authorization and Enforceability. Each of the Seller Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements and instruments to be executed by them in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents"). The execution, delivery and performance by each of the Seller Parties of this Agreement and the Transaction Documents to which such Seller Party is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by each of the Seller Parties, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by the Seller Parties. This Agreement is a legal, valid and binding obligation of each Seller Party, enforceable against them in accordance with its terms except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief 21 California is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which each of the Seller Parties is a party will be duly executed and delivered by each of the Seller Parties and will constitute the legal, valid and binding obligations of each of the Seller Parties, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 3.3 No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the Transaction Documents by each of the Seller Parties do not, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents by the Seller Parties, will not: (a) contravene any provision of the Restated Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of the other Seller Parties; or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or give to others any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which any of the Seller Parties is a party, or by which the Business or any of the Acquired Assets may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, Liens, interests or rights which, individually and in the aggregate, do not have a Material Adverse Effect or will be cured, waived or terminated prior to the Closing Date, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, to which any of the Seller Parties is subject, other than those violations or conflicts which individually and in the aggregate would not have a Material Adverse Effect. 3.4 Financial Statements. Citizens has previously delivered to Buyer the statement of income of the Business (the "Income Statement") and the Interim Statement of Net Assets contained in Schedule 3.4 (collectively, the "Financial Statements"). The Income Statement (a) fairly presents in all material respects the results of operations of the Business in accordance with generally accepted accounting principles ("GAAP") consistently applied except for the omission of full footnotes to the Income Statement and (b) has in all material respects been derived from the books and records of Seller and reflects the separation of the operation associated with the Business from other operations of Citizens. The Interim Statement of Net Assets (a) has in all material respects been derived from the books and records of Seller and reflects the separation of the operations associated with the Business from other operations of Citizens; (b) fairly presents in all material respects the Acquired Assets as of the Interim Statement of Net Assets Date; and (c) has in all material respects been prepared in accordance with GAAP consistently applied except for the omission of full footnotes to such Interim Statement of Net Assets. The financial statements included in the Annual Report to each PUC for the year ended December 31, 1998, were prepared in all material respects in accordance with the rules and regulations of such PUC. 22 California 3.5 No Changes. Since the Interim Statement of Net Assets Date to the date hereof, except as disclosed in Schedule 3.5, the Seller Parties have conducted the Business as presently operated only in the ordinary course of business consistent with past practice. Since the Interim Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has not been: 3.5.1 any Material Adverse Effect; 3.5.2 prior to the date of this Agreement, any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any Transferred Employee, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the Transferred Employees participate) to which any of the Transferred Employees may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan other than in any such case (i) in the ordinary course consistent with past practice, (ii) as required by law, or (iii) as required by the Collective Bargaining Agreement; 3.5.3 any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or the provision of discounts, rebates or allowances; 3.5.4 any disposition of or failure to keep in effect any rights in, to or for the use of any Permit of the Business which individually or in the aggregate would have a Material Adverse Effect; 3.5.5 any damage, destruction or loss affecting the Business which individually or in the aggregate would have a Material Adverse Effect whether or not covered by insurance; 3.5.6 prior to the date of this Agreement, any change by Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP and is set forth on Schedule 3.5; or 3.5.7 prior to the date of this Agreement, any sale, transfer or other disposition of any material assets, properties or rights of the Business, except in the ordinary course of business consistent with past practice. 3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a list of all Contracts (other than (i) with respect to which the Business' total annual liability or expense is less than (a) $250,000 per such Contract and (b) $6,123,000 per all such Contracts (when taken together with similar contracts omitted from Schedule 3.6 of the Related Purchase Agreements), and (ii) Contracts that may be terminated by Seller, without penalty, on notice of 90 days or less) except line extension agreements and similar agreements and construction and design contracts. Seller has 23 California furnished to Buyer a correct and complete copy of each written agreement listed in Schedule 3.6. Except as disclosed on Schedule 3.6, with respect to each Contract, neither Seller nor, to the Seller Parties' knowledge, any other party thereto, is in breach or default, and to the Seller Parties' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the Contract, except in each case where such breaches, terminations, modifications, accelerations or defaults, individually or in the aggregate, do not have a Material Adverse Effect. Except as set forth in Schedule 3.6, there are no disputes pending or to the best of the Seller Parties' knowledge, threatened, under or in respect of any of the Contracts, other than those that individually and in the aggregate do not have a Material Adverse Effect. 3.7 Permits and Compliance With Laws Generally. 3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes, including Environmental Laws (as defined below), except to the extent that any failure to possess, or to comply with, any Permit, laws, rules, regulations or orders would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in Schedule 3.7, the Business is conducted by Seller in compliance with all applicable laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA"), zoning, building and similar laws and Environmental Laws), rules, regulations, ordinances, codes, judgments and orders, except for such failures to comply which do not individually or in the aggregate have a Material Adverse Effect. Except as disclosed on Schedule 3.7, all Permits of Seller relating to the operation of the Business are in full force and effect, other than those the failure of which to be in full force and effect would not individually or in the aggregate have a Material Adverse Effect. There are no proceedings pending or, to the Seller Parties' knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Permits presently possessed by Seller other than those revocations, cancellations, suspensions or modifications which do not individually or in the aggregate have a Material Adverse Effect. 3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the knowledge of the Seller Parties, threatened, by any Authority or other Person with respect to any alleged (i) violation by Seller or any Affiliate of Seller relating to the Business of any law, ordinance, rule, regulation, code or order of any Authority; or (ii) failure by Seller or any Affiliate to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets), except, in each case, where such violations or failures, individually or in the aggregate, would not have a Material Adverse Effect. 24 3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and with such exceptions as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect: 3.8.1 Seller has not disposed of or arranged for the disposal of or Released any Hazardous Substances, other than in conformity with Environmental Laws, at any Real Estate, or, in connection with the Business or Acquired Assets, at any other facility, location, or other site. 3.8.2 Seller has not received any written notice or request for information with respect to, and to the best of the Seller Parties' knowledge, Seller has not been designated a potentially liable party for Remedial Action, in connection with any Real Estate, or, as of the date hereof, with respect to the Business or Acquired Assets, at any other facility, location, or other site under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or comparable state statutes. 3.8.3 To the best of the Seller Parties' knowledge, except for such use or storage of Hazardous Substances as is incidental to the conduct of the Business, which use and storage is or has been in compliance with Environmental Laws, and which use and storage has not caused any condition that requires Remedial Action, no Real Estate has been used for the storage, treatment, generation, processing, production or disposal of any Hazardous Substances or as a landfill or other waste disposal site in violation of any Environmental Law. 3.8.4 To the best of the Seller Parties' knowledge, underground storage tanks are not, and have not in the past been, located on or under any Real Estate. 3.8.5 There are no pending or unresolved claims against Seller or the Business for investigatory costs, cleanup, removal, remedial or response costs, or natural resource damages arising out of any Releases or threat of Release of any Hazardous Substances at any Real Estate or, as of the date hereof, with respect to the Business or the Acquired Assets or at any other facility, location, or other site. 3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing materials are located at or in any Real Estate in violation of Environmental Laws or which require Remedial Action. 3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance managed or generated by or on behalf of Seller at the Real Estate or in connection with the Business or Acquired Assets has come to be located at any site that is listed or formally proposed for listing under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), or any similar state list or that is the subject of federal, state, or local enforcement actions or investigations. 25 California 3.8.8 The Seller Parties know of no facts or circumstances related to environmental matters (i) in connection with the operation of the Business or (ii) concerning the Real Estate, that are reasonably likely to result in any material reduction in the quality or quantity of water available for supply to the Seller Parties' customers. 3.8.9 The Seller Parties will within thirty (30) days of the date hereof provide Buyer with copies of all written environmental audits or investigations of which they are aware (after due inquiry) prepared for the Real Estate or operations of the Business. 3.8.10 Except as set forth in Schedule 3.8.10 or Citizens' Annual Report on Form 10-K for the year ended December 31, 1998: (a) The Seller Parties (including for purposes of Section 3.8.10(a) and (b), Affiliates and predecessors of the Seller Parties) are and have been for the past three years in full compliance with all federal and state primary drinking water standards; (b) The Seller Parties are and have been for the past three years in full compliance with all federal and state secondary drinking water standards; and (c) As to all outstanding violations of state or federal drinking water standards, as of the date hereof, the Seller Parties have completed or are in the process of completion in accordance with all applicable deadlines, all actions required by Environmental Law or Authorities to correct or otherwise respond to such violations. 3.8.11 Except as set forth in Schedule 3.8.11, none of the Seller Parties will be required to place any notice or restriction relating to the presence of Hazardous Substances in the deed to any Real Estate, or in any written instrument accompanying this Agreement, and no Real Estate has such a notice or restriction in its deed or any other written instrument relating to the purchase, lease or rental of such property. For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way respond to any presence, Release or threat of Release of Hazardous Substances; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substances so it does not endanger or threaten to endanger public or employee health or welfare or the environment; or (z) perform studies, investigations or monitoring necessary or required to investigate the foregoing; (B) "Environmental Laws" means any common law or federal, state or local law, statutes, rule, regulation, ordinance, code, judgment or order relating to the protection of the environment or human health and safety and includes, but is not limited to, CERCLA (42 U.S.C. section 9601, et seq.), the Clean Water Act (33 U.S.C. section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. section 2701 et seq.), each as has been or may be interpreted or amended as of the Closing Date and the regulations promulgated pursuant thereto 26 California and in effect as of the Closing Date; (C) "Released" means released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or polluting substance or waste or contaminant under or pursuant to any Environmental Law, including petroleum products, PCBs and radioactive materials. 3.9 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by the Selling Parties of this Agreement, the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by the Seller Parties, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except (i) as required by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) as specified on Schedule 3.9, (iii) as required to assume the California Water Debt, and (iv) for such other consents, approvals, authorizations, registrations or filings the failure of which to obtain or make would not individually or in the aggregate have a Material Adverse Effect or which are obtained by the Closing Date. 3.10 Title. Seller has good and valid title to all of the Acquired Assets constituting personal property, good and marketable title in fee simple to all of the owned Acquired Assets constituting Real Estate and good and valid leasehold title to all of the leased Acquired Assets constituting Real Estate, in each case, free and clear of Liens subject only to the Permitted Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set forth in Schedule 3.10 hereto, (b) Liens securing Taxes, assessments, governmental charges or levies, or the claims of materialmen, mechanics, carriers and like persons, all of which are not yet due and payable or which are being contested in good faith or (c) such other Liens which, individually or in the aggregate, do not have a Material Adverse Effect (it being understood that to the extent a Permitted Exception relates to or arises from a Retained Liability, Seller shall still be liable for such Retained Liability to the extent set forth herein). 3.11 Real Estate. 3.11.1 As of the date hereof, Seller has not received any written or oral notice for assessments for public improvements against the Real Estate which remains unpaid, and to the best knowledge of the Seller Parties, no such assessment has been proposed. Except as set forth on Schedule 3.11, as of the date hereof, there is no pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate and to the best knowledge of the Seller Parties no such proceeding is threatened. 3.11.2 Except as disclosed on Schedule 3.6, as of the date hereof, Seller is not a lessee under any Contract relating to the use or occupancy of the Real Estate involving annual payments in excess of $100,000. 27 California 3.11.3 Each parcel of the Real Estate has physical and, to Seller's knowledge, legal vehicular and pedestrian access to and from public roadways as may be reasonably necessary to the operation of the Business except where the failure to have such access does not have a Material Adverse Effect. To Seller's knowledge, no fact or condition exists which would result in the termination of (a) the current access from each parcel of the Real Estate, and (b) continued use, operation, maintenance, repair and replacement of all existing and currently committed water lines used by Seller in connection with the Business, except where such termination would not have a Material Adverse Effect. 3.12 Taxes. The Seller Parties have (a) timely filed all material returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (b) paid all Taxes that are shown to have come due pursuant to such returns or reports and (c) paid all other material Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due. To the best of the Seller Parties' knowledge, all such returns or reports have been prepared in accordance with all applicable laws and requirements in all material respects. Except to the extent disclosed on Schedule 3.12, none of the assets of the Business or constituting any of the Acquired Assets (a) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (b) is "tax-exempt use property" within the meaning of Section 168(h) of the Code or (c) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. 3.13 Patents and Intellectual Property Rights. To the best of the Seller Parties' knowledge, the operations of Seller do not make any unauthorized use of any Intellectual Property except for any such unauthorized uses which do not have a Material Adverse Effect. Assuming the consents listed as item XII on Schedule 3.9 are obtained, Buyer will not lose any of Seller's rights to, or be required to pay increased royalties for, any Intellectual Property included in the Acquired Assets as a result of the Closing and the consummation of the transactions contemplated by this Agreement, except for any such rights or such increased royalties the loss or payment of which would, individually or in the aggregate, not have a Material Adverse Effect. 3.14 Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Interim Statement of Net Assets or arising since the date thereof have arisen out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; the allowance for collection losses on the Interim Statement of Net Assets has been determined in accordance with GAAP consistent with past practice. 3.15 Labor Relations. As of the date hereof, except as set forth in Schedule 3.15, to best of the knowledge of the Seller Parties, there has been no union organizing efforts with respect to the Business conducted within the last three (3) years and there are none now being conducted 28 California with respect to the Business. Except as set forth in Schedule 3.15, Seller has not at any time during the three (3) years prior to the date of this Agreement had, nor, to the best of the Seller Parties' knowledge, is there now threatened, a strike, work stoppage or work slow down with respect to or affecting the Business which had or could reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as set forth in Schedule 3.15, (i) no Employee is represented by any union or other labor organization and (ii) there is no unfair labor practice charge pending or, to the best knowledge of the Seller Parties, threatened against Seller relating to any of the Employees as related to the Business which could reasonably be expected to have a Material Adverse Effect. 3.16 Employee Benefit Plans. 3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive, deferred compensation, excess benefit, employment contract, stock purchase, stock ownership, stock option, supplemental unemployment, vacation, sabbatical, sick-day, severance or other material employee benefit plan, program or arrangement (other than those required to be maintained by law), whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic, (i) maintained by, or contributed to by Citizens or any of its Affiliates, in respect of any Employee or Former Employee, or (ii) with respect to which Citizens or any of its Affiliates has any liability in respect of any Employee or Former Employee (the"Benefit Plans"). Except as disclosed on Schedule 3.16.1, neither Citizens nor any of its Affiliates maintains any bonus, pension or welfare benefit plan, program or arrangement, including any deferred compensation arrangement, for directors, consultants or independent contractors of the Business. 3.16.2 A true and complete copy of each Benefit Plan and related trust agreements and (to the extent applicable) a copy of each Benefit Plan's current summary plan description and in the case of an unwritten Benefit Plan, a written description thereof, has been furnished to Buyer. In addition, to the extent applicable, Buyer has been provided a copy of the most recent Internal Revenue Service ("IRS") determination letter issued to each Benefit Plan and a copy of the most recent IRS Form 5500 together with all schedules and accountants' statement filed, and actuarial reports prepared, on behalf of each Benefit Plan. 3.16.3 Each Benefit Plan which is intended to be qualified under Section 401(a) of the Code (as designated on Schedule 3.16.1) is so qualified, and will remain so qualified upon the timely making of certain amendments required by law during the applicable remedial amendment period, and any trust forming a part of such a Benefit Plan is tax exempt under Section 501(a) of the Code. Each such Benefit Plan has been amended, as and when necessary, to comply with the Tax Reform Act of 1986 and upon timely filing of an Application for Determination with the Internal Revenue Service, will be eligible to make further such amendments under the"remedial amendment period." 29 California 3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code. 3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the Code or ERISA. 3.16.6 Neither Citizens nor any ERISA Affiliate and, to the knowledge of the Seller Parties, no other Person, has taken any action or failed to take any action with respect to any Benefit Plan that may subject Buyer or any Benefit Plan under which liabilities may be assumed by Buyer under Sections 5.10, 5.11 or 5.12 ("Assumed Benefit Liabilities") to any material liability or Tax under the Code or ERISA. 3.16.7 Neither Citizens nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Benefit Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, including any contingent liability under Section 4204 of ERISA or withdrawal liability arising from the actions of Citizens or any ERISA Affiliate contemplated by this Agreement. All contributions that Citizens or any ERISA Affiliate have been obliged to make to any Benefit Plan, including any multiemployer plan, have been duly and timely made. 3.16.8 There are no pending or, to the knowledge of the Seller Parties, threatened claims (other than routine claims for benefits), assessments, complaints, proceedings or investigations of any kind in any court or governmental agency with respect to any Benefit Plan which could reasonably be expected to give rise to a material liability to Buyer. 3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides benefits, including without limitation, death or medical benefits, beyond termination of service or retirement other than (i) coverage mandated by law, or (ii) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code. Seller's Retiree Medical Plan contains provisions permitting Seller to modify or terminate retiree medical benefits at any time, without prior notice to any covered individual. Except with respect to retirees, "grandfathered" employees and collectively bargained employees, Seller knows of no reason why its ability to effect those provisions would be limited. 3.16.10 With respect to each Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, Citizens and each ERISA Affiliate have complied in all material respects with the continuation coverage requirements of the Code and ERISA. 3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.17, Seller has no liabilities with respect to the Business which would constitute Assumed Liabilities, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, except: 30 California 3.17.1 the Assumed Indebtedness and those other liabilities which would decrease the Base Cash Purchase Price pursuant to Section 2.6.5 to the extent assumed by Buyer at Closing; 3.17.2 liabilities arising in the ordinary course of business under any Contract or Permit or with respect to any agreement or instrument included within the definition of Real Estate; and 3.17.3 those liabilities incurred, consistent with past business practice, in or as a result of the normal and ordinary course of business and reflected in the books and records related to the Business; 3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; and 3.17.5 those other liabilities, which individually and in the aggregate, would not have a Material Adverse Effect. 3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule 3.18, there are no actions, suits, investigations or proceedings pending against or, to the best of the Seller Parties' knowledge, threatened, against or affecting, Seller, the Business or any of the Acquired Assets before any court or arbitrator or Authority which individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there are currently no outstanding judgments, decrees or orders of any court or Authority against any of the Seller Parties, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets (other than any PUC order relating to rates, tariffs and similar matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. 3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real Estate has adequate arrangements for supplies of electricity, gas, oil, coal and/or sewer for all operations at the 1998 or current operating levels, whichever is greater. Except as set forth on Schedule 3.19, there are no actions or proceedings pending or, to the best of the Seller Parties' knowledge, threatened, that would adversely affect the supply of electricity, gas, coal or sewer to the Real Estate except for those which individually and in the aggregate would not have a Material Adverse Effect. 3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by Seller, together with the risks insured against, coverage limits and deductible amounts. 31 California 3.21 Relationship with Customers. As of the date hereof, Seller does not have any current customer which accounted for more than 5% of the net sales of the Business (taken together with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) for the immediately preceding 12-month period. 3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth in Schedule 3.22 hereto, within six months prior to the date hereof, (i) Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; or (b) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; (ii) Seller has not been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar state or local law; and (iii) none of Seller's employees who are employed in connection with the Business has suffered an "employment loss" (as defined in the WARN Act) . 3.23 Condition of Assets. Except as set forth on Schedule 3.23, the buildings, machinery, equipment, tools, furniture, improvements and other fixed tangible assets of the Business included in the Acquired Assets, taken as a whole and taken together with the similar assets included among the assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements, are in good operating condition and repair, reasonable wear and tear excepted. 3.24 Brokerage. None of the Seller Parties or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to Buyer or its Affiliates. 3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded Assets, the Acquired Assets include all assets, rights, properties and contracts the use of which is necessary to the continued conduct of the Business by Buyer substantially in the manner as it was conducted prior to the Closing Date, including the service of all utility customers in substantially the same manner and at substantially the same service levels as provided by Seller on the date hereof. 3.26 Year 2000 Matters. Citizens has (1) initiated a review and assessment of all mission critical areas within the Business and related operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by any Seller Party (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in Citizens' Annual report on Form 10-K for the fiscal year ended December 31, 1998 and Citizens' Quarterly reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in 32 California accordance with that timetable. Seller has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to Seller after making reasonable inquiries of such suppliers and vendors. Seller makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. 3.27 Product Liability. Except as disclosed in Schedule 3.27 and except for those liabilities which individually or in the aggregate would not have a Material Adverse Effect, there are no (a) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties, unasserted, with respect to any product liability or similar claim that relates to any product or service sold by Seller or the Business to others or (b) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties unasserted, with respect to any claim for the breach of any express or implied product warranty or a similar claim with respect to any product or service sold by Seller or the Business to others. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER Parent and Buyer jointly and severally represent and warrant to Seller as follows: 4.1 Organization and Good Standing. 4.1.1 Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.1.2 Buyer is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business. Buyer is qualified to do business and is in good standing in all jurisdictions wherein the nature of the business conducted by it or Buyer's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such failures of Buyer do not have a material adverse effect on its ability to perform its obligations under this Agreement and the Transaction Documents. 4.2 Authorization and Enforceability. Each of Buyer and Parent has full corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which either of them is a party. The execution, delivery and performance by Buyer and Parent of this Agreement and the Transaction Documents to which Buyer and/or Parent is a party have been duly authorized by all necessary corporate action on the part of each of 33 California them. This Agreement has been duly executed and delivered by Buyer and Parent, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by Buyer and Parent. This Agreement is a legal, valid and binding obligation of Buyer and Parent, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which Buyer and Parent is a party will be duly executed and delivered by Buyer and Parent and will constitute the legal, valid and binding obligations of Buyer and Parent, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 4.3 No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Transaction Documents by Buyer and/or Parent do not, and the consummation of the transactions contemplated hereby and thereby will not, (a) contravene any provision of the Articles of Incorporation or Bylaws of Buyer or the Certificate of Incorporation or Bylaws of Parent; or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, authorization, proof of dedication or other agreement or commitment, oral or written, to which Parent or Buyer is a party, or by which any of their assets or properties may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, interests or rights which, individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation to which Buyer or Parent is subject other than those violations and conflicts which individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.4 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by Buyer and Parent of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by Buyer or Parent except (i) as required by the HSR Act, (ii) as specified on Schedule 3.9 and (iii) for such consents, approvals, authorizations, registrations or filings, the failure to obtain or make would not individually or in the aggregate have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 34 California 4.5 Financing. Buyer and Parent have, and at the Closing Date, will have sufficient resources to pay the Purchase Price, and Parent, Buyer or the other Affiliates of Parent that are buyers of the assets and businesses being acquired pursuant to the Related Purchase Agreements have, and at the Closing Date, will have sufficient resources to pay the purchase prices set forth in the Related Purchase Agreements. 4.6 Brokerage. None of Parent, Buyer or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to the Seller Parties. 4.7 Insurance. Schedule 4.7 lists the policies and contracts in effect as of the date hereof for casualty and property insurance covering Buyer's assets and properties and the operation of Buyer's business, together with the risks insured against, coverage limits and deductible amounts. ARTICLE 5 ADDITIONAL COVENANTS 5.1 Conduct of Business. Except (i) as otherwise specifically permitted by this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the prior written consent of Buyer, from and after the date of this Agreement and up to and including the Closing Date, each of the Seller Parties agree that: 5.1.1 Seller shall conduct the Business as presently operated and only in the ordinary course of business consistent with past practice. 5.1.2 They shall promptly inform Buyer in writing of any specific event or circumstance of which they are aware, or of which they receive notice, that has or is likely to have, individually or in the aggregate, taken together with the other events or circumstances, a Material Adverse Effect on the Acquired Assets or the Assumed Liabilities. 5.1.3 Seller shall not: (a) change or modify in any material respect existing credit and collection policies, procedures and practices with respect to accounts receivable; (b) enter into any contract or commitment, waive any right or enter into any other transaction (except in the ordinary course of business) which would have a Material Adverse Effect; 35 California (c) except in the event of service interruption, emergency or casualty loss, commit to acquire subsequent to the Closing Date on behalf of the Business any capital asset or group of capital assets costing in excess of $1,000,000 that is not included in the capital budget of Seller for fiscal year 2000 and which, if so acquired, would be included in the Acquired Assets; commencing December 1, 1999, accept or receive customer advances for construction in excess of $9,000,000 (when combined with customer advances relating to the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) per each of the next four consecutive three-month periods unless pursuant to an existing tariff, Contract or Permit of Seller; or sell or lease or agree to sell or lease or otherwise dispose of any assets included in the Acquired Assets except in the ordinary course of the conduct of the Business, consistent with past practice; (d) except in the ordinary course of business, consistent with past practice or as required under any of Seller's debt instruments or indentures, mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets; (e) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any Transferred Employee except (i) as required by law, (ii) in the ordinary course, consistent with past practice and (iii) as required by the Collective Bargaining Agreement in existence on the date hereof; provided, however, no individual Employee shall in any event receive a compensation increase in excess of seven percent (7%) except as required by the Collective Bargaining Agreement in existence on the date hereof; (f) other than in the ordinary course of business consistent with past practice, sell or otherwise transfer any assets necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; (g) change the Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP or any Authority; (h) intentionally and wilfully take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 3.25 hereof (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful omission to take action); or (i) prepay, redeem, retire, refund or otherwise extinguish any of the Assumed Indebtedness. 5.2 Negotiations. Neither Citizens nor any Person controlled by Citizens or under common control with Citizens (each such person being a "Section 5.2 Affiliate"), nor any 36 California officer, director, employee, representative or agent of Citizens or any of their Section 5.2 Affiliates, shall, directly or indirectly, solicit or initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into an agreement with any Person or group of Persons (other than Parent, Buyer or any Person controlled by Parent or Buyer or under common control with Parent, Buyer or any Persons providing financing to the parties hereto in connection with facilitating the consummation of the transactions contemplated by this Agreement) concerning any acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) that would result in the transfer to any such Person or group of Persons of ten percent (10%) of the Acquired Assets (as measured by net book value of such assets on the date of each such transaction) or the acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) involving the Seller Parties, if such acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) would be inconsistent, in any respect, with the obligations of the Seller Parties hereunder (any of the foregoing transactions, a "Competing Transaction"). 5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties will provide Buyer with a supplement or amendment to the Disclosure Schedules with respect to any matter, condition or occurrence which is required to be set forth or described in the Disclosure Schedules. For the avoidance of doubt, a matter, condition or occurrence shall only be "required" to be set forth or described in the Disclosure Schedules if the failure to be so disclosed would result in a breach of the applicable representation or warranty (qualified by Material Adverse Effect where applicable) on the date hereof or on the Closing Date. In addition, Seller shall have the right at any time and from time to time prior to the Closing to supplement or amend the Disclosure Schedules. Seller may provide Disclosure Schedules with respect to any representation or warranty of this Agreement whether or not a specific schedule is referred to therein. In the event that any supplement or amendment of such Disclosure Schedules shall be provided later than five (5) business days prior to the Closing Date, the Buyer shall have the right to delay the Closing for a period of five (5) business days in order for Buyer to review such supplement or amendment. No such supplement or amendment shall be deemed to cure any breach of or alter any representation or warranty made in this Agreement so as to permit the Closing to occur unless Buyer specifically agrees thereto in writing. The Seller Parties shall promptly inform Buyer, and Buyer will promptly inform the Seller Parties of any fact or event which comes to their attention, the existence of which constitutes or likely will constitute a breach in any material respects of any representation or warranty in this Agreement. In addition, Parent will, within five (5) days of receipt thereof, forward to Seller (i) any title report Buyer receives from a title company with respect to the Real Estate and (ii) any written communication regarding a specific Lien or title defect affecting a specifically identified parcel of the Real Estate sent to the President, Treasurer or General Counsel of Parent or the President or Corporate Counsel of any other Buyer Party, and sent by a party other than the Seller Parties, their legal counsel, financial advisors or representatives. 37 California 5.4 Mutual Covenants. The parties mutually covenant from the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement, including Section 5.8 hereof): 5.4.1 to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents; 5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but not waiver) of the conditions to the Closing of the transactions contemplated herein (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and 5.4.3 to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 5.5 Filings and Authorizations. The parties hereto will as promptly as practicable, make or cause to be made all such filings and submissions under laws, rules and regulations applicable to it or its Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act and with the applicable public utility commission (each, a "PUC"). Any such filings and supplemental information will be in substantial compliance with the requirements of the applicable law, rule or regulation. Each of Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission to the PUC or which is necessary under the HSR Act. The Seller Parties, on the one hand and Buyer and Parent, on the other, shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Authority, including the PUC, the United States Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division"), and shall comply promptly with any such inquiry or request. Each of Citizens, Seller, Parent and Buyer will use its reasonable efforts to obtain any clearance required under the HSR Act and from the PUC for the purchase and sale of the Acquired Assets in accordance with the terms and conditions hereof. Notwithstanding the foregoing, nothing contained in this Agreement will require or obligate any party or their respective Affiliates: (i) to initiate, pursue or defend any litigation (or threatened litigation) to which any Authority (including the PUC, the Antitrust Division and the FTC) is a party; (ii) to agree or otherwise become subject to any material limitations on (A) the right of Buyer or its Affiliates effectively to control or operate the Business or the right of Seller or its Affiliates effectively to control or operate Citizens' other businesses, (B) the right of Buyer or its Affiliates to acquire or hold the Business or the right of Seller or its Affiliates to hold the Excluded Assets or Citizens' other businesses, or (C) the right of Buyer to exercise full rights of ownership of the Business or all or any material portion of the Acquired Assets 38 California or the right of Citizens to exercise full rights of ownership of Citizens' other businesses or all or any material portion of the Excluded Assets; or (iii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, assets or operations of Citizens, Seller, Parent, Buyer, any Affiliate of Buyer or the Business. The parties agree that no representation, warranty or covenant of Buyer, Parent, or Citizens contained in this Agreement shall be breached or deemed breached as a result of the failure by Parent and Buyer on the one hand or the Seller Parties, on the other, to take any of the actions specified in the preceding sentence. 5.6 Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law (in which case the parties shall make reasonable efforts to consult with each other prior to such required announcement). 5.7 Further Assurances. Each of Citizens, Parent, Buyer and Seller, from time to time after the Closing, at Buyer's or Seller's request, will execute, acknowledge and deliver to the applicable person such other instruments of conveyance and transfer and will take such other actions and execute such other documents, certifications, and further assurances as Buyer or Seller, as the case may be, may reasonably require in order to transfer, in accordance with the terms and conditions of this Agreement, more effectively in Buyer or to put Buyer more fully in possession of any of the Acquired Assets or better to enable Buyer to complete, perform and discharge any of the Assumed Liabilities. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.8 Cooperation. 5.8.1 Parent, Buyer, Citizens and Seller shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 5.8.2 Without limiting the foregoing, neither Parent and Buyer, nor Citizens and Seller (nor any of their respective Affiliates) shall make any filings pursuant to federal or state securities laws ("Securities Filings") or make any consent solicitations to holders of Assumed Indebtedness which include any information about Seller, Buyer (or their respective Affiliates) or the transactions contemplated hereby without consulting with the other party and providing the other party a reasonable opportunity to review and comment on such information, it being understood and agreed that any party may so disclose such information in its reasonable judgment to the extent such party's counsel advises it that such disclosure is advisable under applicable law. Each of Parent, 39 California Buyer, Citizens and Seller shall, and shall cause their respective Affiliates to, comply with all applicable federal and state securities laws in connection with this Agreement and the transactions contemplated hereby (including any solicitation of consents of holders of Assumed Indebtedness), and all information supplied by any party for inclusion in any Securities Filing or consent solicitation, including, without limitation, any proxy or information statement, or any registration statement on Form S-4 shall be true and correct in all material respect and shall not contain any untrue statement of a material fact or omit to state any material fact which is required to be stated therein or which is necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. 5.8.3 During the first 90 days after the Closing Date (180 days for Trademarks on tanks), Buyer shall have the right to use all of the logos, trademarks and trade identification of Seller as are located at the Real Estate or on the Acquired Assets (collectively, the "Trademarks"). Buyer's use of the Trademarks shall be in accordance with such reasonable quality control standards as may be promulgated by Seller and provided to Buyer. If Seller shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Seller shall have the right to terminate Buyer's right under this Section 5.8.3 to use the Trademarks. 5.8.4 Seller shall give Buyer and its representatives (including Buyer's Accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, full access to the properties, contracts, employees, books, records and affairs of Seller to the extent relating to the Business and the Acquired Assets, and shall cause its officers, employees, agents and representatives to furnish to Buyer all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as Buyer may reasonably request. Except to the extent disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4, no investigation or receipt of information by Buyer pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller Parties under this Agreement or the conditions to the obligations of Parent or Buyer under this Agreement. All information provided to Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement dated August 2, 1999 between Citizens and Parent. 5.9 Employees; Employee Benefits. 5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and hourly employees actively employed (as of the date of this Agreement) in each division by Seller or any of its Affiliates whose primary responsibilities relate to the Business. Schedule 5.9.1 lists job classifications and number of employees in each job classification of those employees whose terms and conditions of employment are subject to the Collective Bargaining Agreement ("Union Employees"). All individuals referred to on Schedule 5.9.1 are herein referred to as the 40 California "Employees." No later than March 1, 2000, Buyer and Seller shall determine the number of Employees to whom Buyer will offer employment, which number shall be at least equal to 250 (when combined with offers made by Buyer or Affiliates of Buyer to employees of Affiliates of Seller in connection with the Related Purchase Agreements) (the "Base Number"), and such additional number of Employees, if any, whom Buyer also wishes to employ. Upon determination of such Employees, Seller will supplement Schedule 5.9.1 with the name, job title, unused vacation, current base salary or hourly wage, date of hire and assigned location of each Transferred Employee (as that term is defined below). At the Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose all the information required under the preceding sentence as of the most recent practicable date prior to Closing. 5.9.2 Effective as of the Closing, Buyer shall offer employment to at least the Base Number of those employees included on Schedule 5.9.1. All Employees to whom Buyer offers employment and who accept such employment are herein referred to as the "Transferred Employees." In the event any Employees do not accept Buyer's offer of employment, Buyer shall offer employment to such additional employees (the identity of whom shall be determined by Buyer and Seller) as are necessary to bring the total number of Transferred Employees to the Base Number. Subject to the provisions of this Section 5.9 and Section 5.12, Buyer shall provide each Transferred Employee with base compensation at least equal to that provided by Seller on the Closing Date, and employee benefits which are substantially comparable to those provided by Buyer to its other similarly situated employees. Except as otherwise provided under the terms of any assumed collective bargaining agreement and under terms of Section 5.12, Buyer shall provide each Union Transferred Employee with compensation at least equal to that provided by Seller immediately prior to the Closing Date and with the benefits provided to Buyer's similarly situated collectively bargained employees. On and after the Closing Date, Buyer shall assume Seller's obligations under, and be bound by the provisions of, the collective bargaining agreement between Citizens Utilities Company of California, Sacramento District, and International Union of Operating Engineers Stationary Local No. 39, AFL-CIO (the "California Union"), dated March 4, 1997 (the "California Agreement"), to the extent of provisions covering Transferred Employees, as in effect on the date of this Agreement. With respect to any amendment, extension, or renegotiation of the California Agreement, the contract as so amended, extended or renegotiated will be assumed if, but only if, (i) in connection with such amendment, extension or renegotiation, the California Union agrees to substitute for Seller's employee pension plan (to the extent required to be provided under the California Agreement) Parents' employee pension plan, and (ii) the other terms and conditions of the collective bargaining agreement pertaining to the Transferred Employees on the Closing Date are substantially identical to the terms and conditions of the Collective Bargaining Agreement as in effect on the date of this Agreement. Each collective bargaining agreement pertaining to Transferred Employees shall be identified on a Schedule 5.9.2 to be prepared by Seller and submitted to Buyer on or before the Closing Date. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. Buyer agrees (i) to credit the service of each Transferred Employee with Seller and its Affiliates before the Closing, for all purposes under all employee benefit plans and arrangements maintained by Buyer (and/or any of its Affiliates) for the 41 California benefit of any Transferred Employee (including without limitation for purposes of attainment of retirement dates and payment of optional forms of benefits), other than for purposes of benefit accrual under any "defined benefit plan", within the meaning of Section 3(35) of ERISA, (ii) to provide accrued vacation to Transferred Employees in the year in which the Closing occurs, equal to the excess, if any, of the accrued vacation to which the Transferred Employee would otherwise be entitled under Seller's vacation plan during that year over the amount of accrued vacation the Transferred Employee had taken during that year, and, thereafter, to provide vacation to Transferred Employees on the same basis as provided to similarly situated employees of Buyer, with service credit as provided in (i) hereof, (iii) to provide severance benefits to Transferred Employees terminated by Buyer that are substantially comparable to those benefits provided by Buyer to similarly situated employees, and (iv) to comply with all applicable legal requirements with respect to Union Employees (including without limitation any applicable duty to bargain with those employees' bargaining representative). Buyer shall be responsible for providing to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of Closing reduced by the number of vacation days such Transferred Employee has taken on or before Closing. Nothing in this Section 5.9 shall limit Buyer's authority to terminate the employment of any Transferred Employee at any time and for whatever reason. Until the second anniversary of the Closing Date, neither Seller nor any of its Affiliates shall directly or indirectly solicit or offer employment to any Transferred Employee then employed by Buyer or its Affiliates. 5.9.3 Except as specifically provided in Sections 5.9 and 5.12, Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by Buyer as the result of any claims against Buyer or its Affiliates that are made by any Employees or Former Employees (or the Beneficiary of any Employee or Former Employee) who are not made offers to become employees of Buyer or its Affiliates including, without limitation, claims asserted against Buyer as a result of their termination by Seller or its Affiliates. 5.9.4 Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation claims or the benefits provided under the Benefit Plans, whether paid before or after the Closing) owed to any Transferred Employee or the Beneficiary of any Transferred Employee or any Water Sector Retiree or the Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Seller or any of its Affiliates and such Transferred Employee or Beneficiary or (ii) any benefit claim or expense (including medical expenses) incurred before Closing under any Benefit Plan. For purposes of this Agreement, a medical expense shall be deemed to be incurred when the services giving rise to a claim are rendered, regardless of when billed or paid. Without limiting the foregoing, Seller shall be responsible for the payment of any employee benefits that become due to any Transferred Employees as a result of their termination by Seller. 42 California 5.9.5 Except as otherwise specifically provided in Section 5.9, 5.11 or 5.12, Buyer shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation, claims or the benefits provided under any employee benefit plan or arrangement of Buyer incurred after Closing) owed to any Transferred Employee or Beneficiary of any Transferred Employee or any Water Sector Retiree or Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Buyer or any of its Affiliates and any Transferred Employee or (ii) any benefit claim or expense (including medical expense) incurred after Closing under any employee benefit plan sponsored or contributed to by Buyer or an ERISA Affiliate after Closing. Notwithstanding the foregoing, Buyer shall not be responsible for the payment of any employee benefits that become due to any Transferred Employees under any Benefit Plan (other than the Assumed Benefit Liabilities). 5.9.6 Buyer agrees to reimburse Seller for its proportionate share (as defined below) of any amount in excess of $1,000,000 paid by Seller as severance under Citizens' severance plan as in effect on the date hereof to any Employees (when such amount paid by Seller is aggregated with amounts paid by Citizens to other employees as referenced in Section 5.9.6 of the Related Purchase Agreements) provided (i) Buyer does not hire such Employees in accordance with the provisions of Sections 5.9, 5.11 and 5.12 and (ii) Seller provides notice to those Employees on or before the Closing Date to the effect that their employment will be terminated on or shortly after the Closing Date. Buyer will pay such reimbursement to Citizens within 5 days after receipt of a list of the Employees showing which are entitled to severance pay, the amounts of that severance pay and certifying that those amounts have been paid. The Buyer's "proportionate share" means the amount obtained by multiplying the amount in excess of $1,000,000 by a fraction, the numerator of which is the amount of severance paid by Seller to Employees under Section 5.9.6 of this Agreement and the denominator of which is the sum of (i) the amount paid by Seller to Employees under Section 5.9.6 of this Agreement and (ii) the aggregate amount paid by Citizens under Section 5.9.6 of each of the Related Purchase Agreements. 5.9.7 Until the second anniversary of the Closing Date, Buyer shall not directly or indirectly solicit or offer employment to any active employee of Seller, other than the Transferred Employees. 5.10 Employee Pension Plan. 5.10.1 At least fifteen days prior to the Closing Date, Seller shall take any and all actions necessary to cease benefit accruals and fully vest all Transferred Employees in their accrued benefits under the Citizens Pension Plan ("Seller's Pension Plan" or "Citizens Pension Plan"). Seller shall retain liability and related assets for benefits accrued through the Closing Date by Transferred Employees under Seller's Pension Plan. 43 California 5.10.2 As of the Closing Date except as may be required under the California Agreement, Transferred Employees shall be covered under the American Pension Plan, and shall be given credit for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, subsidized benefits, and entitlement to optional forms of payment, but not for accrual of benefits. 5.11 Employee Savings Plan. 5.11.1 Effective upon the date of the transfer described in Section 5.11.2, subject to the terms and conditions of this Agreement, Parent shall cause the Savings Plan for Employees of American Water Works Company, Inc. (the "American Savings Plan") to assume the liability of the Seller's 401(k) Plan for the account balances of those Transferred Employees participating in the Seller's 401(k) Plan on the Closing Date (the "Affected Participants") that are transferred to the American Savings Plan. As of the Closing Date, Affected Participants shall be 100% vested in their account balances under the Seller's 401(k) Plan. Transferred Employees shall be given credit under the American Savings Plan for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, contribution levels and optional forms of benefit payment, to the same extent that credit for such service has been given by Seller and its Affiliates. 5.11.2 Buyer shall deliver to Seller as soon as practicable, but in no event later than ninety (90) days after Closing (i) a certified copy of the American Savings Plan and any amendment necessary to effectuate the transfer of assets and the assumption of account balances in accordance with this Section 5.11, (ii) a certified copy of the trust agreement for the American Savings Plan; (iii) the most recent favorable determination letter from the IRS with respect to the American Savings Plan; and (iv) an opinion from Buyer's legal counsel acceptable to Seller that the American Savings Plan, as so amended, complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of, and the transfer of assets and assumption of benefit liabilities by, the American Savings Plan. Seller shall deliver to Buyer as soon as practicable, but in no event later than ninety (90) days after Closing, an opinion from Seller's legal counsel acceptable to Buyer that the Seller's 401(k) Plan complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of the Seller's 401(k) Plan, and the transfer of assets to, and assumptions of benefit limitations by, the American Savings Plan. As soon as practicable, but in any event within 120 days after Closing, Seller shall cause the trustee of the Seller's 401(k) Plan to transfer in cash and promissory notes representing outstanding loans to Affected Participants to the trustee of the American Savings Plan an amount equal to the sum of the account balances of the Transferred Employees (the "Transferred Accounts") calculated as of the most recent valuation date under the Seller's 401(k) Plan (which shall, in any event, be within thirty (30) days of the transfer). Both the Seller Parties and Buyer will file any IRS Form 5310A that is required with respect to the transfer contemplated by this Section 5.11 date at least 30 days prior to the transfer. Upon the transfer described in this Section 5.11, Buyer and the American Savings Plan shall be responsible for all benefits attributable to the Transferred Accounts to which 44 California Transferred Employees were entitled under the Seller's 401(k) Plan as of such date, and Seller and the Seller's 401(k) Plan shall cease to have any liability, contingent or otherwise, for such benefits. 5.12 Welfare Benefits. 5.12.1 Within sixty (60) days after the Closing, Seller agrees to transfer to trusts established by Buyer under Section 501(c)(9) of the Code ("Buyer's VEBAs") the amount held under any trust established by Seller under Section 501(c)(9) of the Code ("Seller's VEBAs") to fund post-retirement health care and life insurance benefits attributable to the Business, including Former Employees identified on Schedule 5.12 (the "Water Sector Retirees") and any "grandfathered" Transferred Employees as set forth on Schedule 5.12. Buyer agrees to provide post-retirement health care and life insurance benefits to the Water Sector Retirees and, as applicable, Transferred Employees who become eligible for such benefits after Closing and further agrees that Buyer's VEBAs will apply an amount at least equal to the sum of the assets (and earnings thereon calculated at the rate of return generated by Buyer's VEBAs) transferred from Seller's VEBAs to provide post-retirement health care and life insurance benefits for such employees. Upon Closing, Buyer shall be responsible for all obligations of the Seller Parties to provide post-retirement health care and life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing and the Seller Parties shall cease to have any liability, contingent or otherwise, for such benefits. In consideration of such transfer, Buyer agrees not to terminate or materially modify those post-retirement health and life benefit provisions applicable to such grandfathered Transferred Employees and Water Sector Retirees as such provisions are in effect immediately prior to the Closing Date. 5.12.2 Buyer shall take all action necessary and appropriate to ensure that, as of the Closing Date, Buyer provides medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefits (including retiree medical benefits) to Transferred Employees that, in the case of Non-Union Transferred Employees and Union Transferred Employees are substantially similar to those benefits provided by Buyer under its corresponding welfare benefit plans (the "Buyer's Welfare Plans"). For purposes of determining eligibility to participate, and entitlement to benefits, in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, waiting periods, and requirements for evidence of insurability under the Buyer Welfare Plans shall be waived in Buyer's Welfare Plans for Transferred Employees and retirees of the Water Sector and their respective Beneficiaries, and Transferred Employees and retirees of the Water Sector and their respective Beneficiaries shall receive credit under the Buyer Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees and retirees of the Water Sector and their respective Beneficiaries who had credited service under 45 California a Seller Welfare Plan, together with each such individual's service, copayment, deductible and out-of-pocket payment amounts under such plan. 5.12.3 Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the Closing Date. Seller shall provide to Buyer prior to the Closing Date a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such Account, and balances standing to their credit as of the Closing Date. 5.13 Taxes. The Seller Parties, on the one hand, and Parent and Buyer, on the other, shall (a) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (b) each retain and provide the other with any records or other information which may be relevant to such return, audit, examination or proceeding, and (c) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 5.14 Intentionally Omitted. 5.15 Citizens' Guarantees and Surety Instruments. Each of Parent and Buyer shall use its reasonable efforts to assist Citizens in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed on Schedule 5.15. For purposes of this Section 5.15 and Section 5.16, reasonable efforts: (a) shall include Parent's or Buyer's assumption of the Assumed Indebtedness, the Contracts and the Permits on the terms set forth in this Agreement; (b) shall include an obligation on the part of Parent or Buyer to provide a guarantee, letter of credit, bond or other required surety instrument at Closing to the extent required by any Contract or Permit and in general to provide an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business; and (c) shall include the obligation of Buyer to provide a debt obligation relating to the California Water Debt satisfactory to the lender in replacement of and in substitution for the obligations of Citizens Utilities Company of California to such lender under the California Water Debt, all to enable Buyer to assume the California Water Debt. 46 California 5.16 Assumption of Seller Debt. Each of Buyer and Parent shall use its reasonable efforts (as defined in Section 5.15) to assist Seller in obtaining all consents and opinions and taking such other actions as may be required to enable Buyer or Parent, as the case may be, to assume at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 2.3. 5.17 Schedule of Permits. No later than March 13, 2000, Citizens shall deliver to Buyer a schedule, to be identified as Schedule 5.17, which sets forth all material Permits required for the use of the Acquired Assets and the operation of the Business by Buyer substantially in the manner as it was conducted prior to the date hereof. For purposes of this Section 5.17, material Permits shall include those required for the service of all utility customers at substantially the same service levels as provided by Seller on the date of this Agreement. All Permits listed on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule 3.9 shall be so designated. Seller has made or will make prior to the Closing Date timely applications for renewals of all such Permits listed on Schedule 5.17, which under applicable law must be filed prior to the Closing Date to maintain the Permits listed on Schedule 5.17 in full force and effect. 5.18 Title Information. No later than March 13, 2000, Seller shall use its reasonable efforts to deliver to Buyer true, correct and complete copies of all existing title policies, surveys, leases, deeds, instruments and agreements relating to title to the Real Estate in Seller's possession. 5.19 Transaction with Related Parties. Effective as of the Closing Date, except as otherwise provided in Sections 5.9 through 5.12, 5.15, 5.26, 5.27 and 2.7.1(j) of this Agreement, Seller shall have terminated and canceled all contracts, commitments and agreements (including employment relationships) relating to the Acquired Assets or the Business, between Seller, any Affiliate of Seller (including Citizens), any officer or director of any Seller Party, or any Affiliate of the foregoing. Seller shall be solely liable for any contractual or other claims, express or implied arising out of the termination and cancellation of any of the foregoing raised by any party thereto. 5.20 Approval by Citizens. Citizens shall, as the sole owner of common stock of each other Seller Party, vote all of such shares of common stock to approve this Agreement and the transactions contemplated hereby. 5.21 Supplemental Information. 5.21.1 Citizens shall provide Buyer, within fifteen (15) days after the execution or the date of receipt thereof, a copy of (a) each Contract (other than with respect to which the Business' total annual liability or expense is less than $100,000 per such Contract) entered into by Seller after the date hereof and prior to the Closing Date; (b) a copy of any written notice for assessments for public improvements against the Real Estate received after the date hereof and prior to the Closing Date; (c) a copy of the filing of any condemnation, expropriation, eminent domain 47 California or similar proceeding affecting all or any portion of any of the Real Estate received after the date hereof but prior to the Closing Date; and (d) a copy of any Contract where Seller is a lessee relating to the use or occupancy of the Real Estate and where such Contract involves annual payments in excess of $100,000 entered into by Seller after the date hereof and prior to the Closing Date. 5.21.2 Within fifteen (15) days after the receipt of notice of violation, Citizens shall notify Buyer of any violations of state or federal drinking water standards which, if such violations existed on the date hereof, would be required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly notify Buyer of the actions proposed to be taken by Seller to correct or otherwise respond to such violations. 5.22 Non-Competition. The Seller Parties agree that for a period of fifteen (15) years after the Closing Date no Seller Party nor any Affiliate of a Seller Party shall directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of or be otherwise connected in any substantial manner with any entity (other than Buyer and its successors and assigns) engaged in the business of storing, supplying and distributing water in the States in which Buyer acquires any Acquired Assets, whether or not such business is subject to regulation by a PUC (it being understood that the individual directors of Seller and Citizens are not Affiliates of a Seller Party). 5.23 Intentionally Omitted. 5.24 Intentionally Omitted. 5.25 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller may, at Seller's written election delivered to Buyer no later than five (5) days prior to the Closing Date, direct that all or a portion of the Initial Cash Payment be delivered to a "qualified intermediary" as defined in Treasury Regulation ss.1.1031(k) - (g)(4) as to enable Seller's relinquishment of the Acquired Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall reasonably cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller reasonably requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions reasonably required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. Seller shall 48 California indemnify and hold Buyer harmless from any cost, expense or liability arising from its cooperating under this Section 5.25. 5.26 Transition Plan. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a transitional services team, which shall include expertise from various functional specialties associated with or involved in providing billing, payroll and other support services provided to Seller by any automated or manual process using facilities or employees that are not included among the Acquired Assets or Transferred Employees. Such team will be responsible for preparing, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. The transition plan will set forth reasonable arrangements providing Buyer, at Buyer's sole expense, with appropriate access to Seller's relevant computer systems to allow for a full conversion of the relevant data and functionality to Buyer's systems on the Closing Date. Buyer and Seller shall use their commercially reasonable efforts to cause their representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan no later than 60 days prior to the Closing Date. 5.27 Procedures regarding Refunds of Advances. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a working group of appropriate subject matter experts to determine the appropriate obligations of Parent and Buyer regarding notification and the provision of other accurate and timely data to Citizens to enable Citizens timely and accurately to satisfy the refund obligations described in Section 2.3.3(b). Such working group will be responsible for preparing a comprehensive agreement no later than March 13, 2000, which agreement shall be executed by the parties at Closing. Among other arrangements, the parties would require that the customers and developers owed refunds provide joint notices to Buyer and Citizens. 5.28 Title Insurance. Prior to Closing, Seller shall cooperate with Buyer and use commercially reasonable efforts to assist Buyer if Buyer desires to obtain ALTA title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issuing ALTA (or its local equivalent) form of title insurance policies insuring good, valid, indefeasible fee simple title to the Real Estate in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Liens or other exceptions to title other than Permitted Exceptions (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyers' request for Title 49 California Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION 6.1 Conditions Precedent to Obligations of Buyer and Parent. The obligations of Buyer and Parent to cause the purchase of the Acquired Assets and the assumption of the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer and Parent in their sole discretion): 6.1.1 Performance of Agreements; Representations and Warranties. Seller shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Seller shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 3.25), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a Material Adverse Effect; provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso); and provided further, that the representation and warranty set forth in Section 3.5.1 shall be deemed to be true and correct on and as of the Closing Date if any Material Adverse Effect that may have arisen or occurred between the execution date of this Agreement and the Closing Date shall have been cured or remedied such that such Material Adverse Effect is not continuing as of the Closing Date. Buyer shall have been furnished with a certificate of the Chief Financial Officer or other Vice President of Citizens dated the Closing Date, certifying to the foregoing. 6.1.2 Opinion of Counsel. Buyer shall have received from L. Russell Mitten II, Vice President and General Counsel of Seller, an opinion dated the Closing Date, in form and substance satisfactory to Buyer, to the effect set forth in Exhibit E hereto. 6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 50 California 6.1.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby, and such order shall not contain any restrictions or conditions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the Business in existence as of the date of this Agreement applicable to Seller be continued following the transactions contemplated hereby) which would have a Material Adverse Effect or a material adverse effect on any other regulated business of Buyer in the state in which the PUC has jurisdiction, and such order shall be final and unappealable; Seller shall have obtained all statutory, regulatory and other consents and approvals which are required in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business in the manner contemplated by Section 3.25 hereof other than those the failure of which to obtain would not have a Material Adverse Effect and other than with respect to the assumption of the California Water Debt. Seller shall have also obtained (i) all consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing, free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture) and (ii) all consents required under Contracts and Permits relating to Seller's water appropriation and flowage rights to the extent reasonably sufficient to enable Buyer to service the customers of the Business and to service future commitments under such Contracts. 6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Buyer's ownership of all or any material portion of the Acquired Assets, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which would reasonably be expected to materially limit or materially adversely affect Buyer's ownership of the Acquired Assets. 6.1.6 Documents. Seller and Citizens shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 2.7 hereof and shall have made arrangements reasonably satisfactory to Buyer to deliver to Buyer as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the Business. 6.1.7 Related Closings. Buyer shall be reasonably satisfied that the consummation of each of the asset purchase and sale transactions contemplated by those certain purchase agreements described on Schedule 6.1.7 (the "Related Purchase Agreements") will occur concurrently with the Closing. 6.2 Conditions Precedent to Obligations of Seller Parties. The obligations of the Seller Parties to cause the sale of the Acquired Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by the Seller Parties in their sole discretion): 51 California 6.2.1 Performance of Agreements; Representations and Warranties. Parent and Buyer shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Buyer and Parent shall be true and correct on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 4.2), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a material adverse effect on the respective ability of Buyer and Parent to perform their obligations under this Agreement and the Transaction Documents, provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso). Seller shall have been furnished with a certificate of the President or Vice President of Parent and Buyer, dated the Closing Date, certifying to the foregoing. 6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price & Rhoads, counsel to Parent and Buyer, an opinion dated the Closing Date, in form and substance satisfactory to Seller, to the effect set forth in Exhibit F hereto. 6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.2.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby and such order shall not contain any restrictions or conditions which would have a material adverse effect on Seller's business activities in the State in which the PUC has jurisdiction or any significant adverse effect on Citizens' acquisition and divestiture activities in that State (including divestiture of the Acquired Assets), and such order shall be final and unappealable; Seller shall have obtained all statutory and regulatory consents and approvals which are required in order to consummate the transactions contemplated hereby, other than those the failure of which to obtain would not have a material adverse effect on the Seller after the Closing. Seller shall have obtained (i) all consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing, free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture), and (ii) all other consents required or advisable in order for Seller to transfer Acquired Assets without incurring material liability under any Contract, Permit or Real Estate instrument. 52 California 6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Seller's ownership of all or any material portion of its properties, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which could reasonably be expected to materially limit or materially adversely affect Seller's ownership of any of its properties. 6.2.6 Documents. Parent and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Sections 2.7 and 5.27, and shall have taken such actions as Seller may have requested pursuant to Section 5.25 hereof. 6.2.7 Related Closings. Seller shall be reasonably satisfied that the consummation of each of the Related Purchase Agreements will occur concurrently with Closing. 6.3 Termination. This Agreement may be terminated at anytime prior to the Closing Date: 6.3.1 by mutual written consent of the Seller Parties, Buyer and Parent; 6.3.2 by any of the Seller Parties, Parent or Buyer if: (i) any governmental or regulatory body the consent of which is a condition to the obligations of the Seller Parties, Parent and Buyer to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful; (ii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, judgment or decree shall have become final and nonappealable; or (iii) the Closing shall not have occurred on or before March 31, 2001; provided, however, that the right to terminate this Agreement under this Section 6.3.2(iii) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; and provided, further, that if Closing has not occurred by such date because the conditions precedent to Closing set forth in the first sentence of Section 6.1.4 and the first sentence of Section 6.2.4 have not been fulfilled, then such date shall be automatically extended to September 30, 2001; or 6.3.3 If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Section 6.3, this Agreement shall become void and of no further force and effect, except for the provisions of Section 5.6 relating to publicity, Sections 3.24 and 4.6 relating to brokerage and Section 7.1 relating to expenses. Nothing in this Section 6.3 shall be deemed to release either party from any liability for any willful breach by such party of the terms and provisions of this Agreement. 53 California ARTICLE 7 CERTAIN ADDITIONAL COVENANTS 7.1 Certain Taxes and Expenses. Citizens shall be solely responsible for all state and local sales, use, transfer, real property transfer and other similar taxes, fees and charges that are calculated based on the value of the Acquired Assets being transferred arising from and with respect to the sale and purchase of the Acquired Assets and Buyer shall be solely responsible for all transfer, registration, documentary stamp, recording and other similar fees and charges arising from and with respect to the transfer and recording of title documentation relating to the Acquired Assets. Parent shall be responsible for all costs and expenses relating to the assumption by or assignment to Parent or Buyer of the Assumed Indebtedness. Except as otherwise provided in this Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 7.2 Maintenance of Books and Records. The Seller Parties, on the one hand, and Buyer and Parent, on the other hand, shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets or the Assumed Liabilities or the conduct of the Business (whether in the possession of the Seller Parties or Buyer or Parent). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least 30 days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 7.2 shall be during normal business hours and upon not less than two (2) business days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 7.3 Survival. 7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j), all representations, warranties, covenants and agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing: (a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the related indemnity obligations contained in Section 7.4 shall terminate 54 California on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (b) the covenants contained in Section 5.2 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; (c) the representations and warranties contained in Sections 3.12 and 3.16 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought following the expiration of the applicable statute of limitations (or extensions or waivers thereof); (d) the representations and warranties contained in Section 3.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (e) the representations and warranties contained in Section 3.10 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (f) the representations and warranties contained in Section 3.7 and 3.17 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (g) the representations and warranties contained in Sections 3.3, 3.5, 3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (h) the representations and warranties contained in Section 3.11 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (i) the representations and warranties contained in Section 4.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (j) the representations and warranties contained in Sections 4.3 and 4.4 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; 55 California (k) the representations and warranties contained in Section 4.5 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; and (l) all other representations and warranties contained in this Agreement and the related indemnity obligations contained in Section 7.4 shall terminate on and no further action or claim with respect thereto may be brought after, the second anniversary of the Closing Date; (m) such representations and warranties specified in the foregoing clauses (c) through (k), and the covenants contained in Section 5.1, 5.2, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such party has been given written notice setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims prior to the relevant anniversary of the Closing Date or the 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. If any claim for indemnification is asserted or could be asserted with respect to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and the Buyer or Parent is also entitled to indemnification in respect of that claim for breach or asserted breach of any other representation or warranty in this Agreement for which there is a shorter survival period, such shorter period will apply to such claim except to the extent that such claim is a product liability, toxic tort or similar claim (as described in Section 2.3.3(a)) brought by a private party litigant. 7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by Buyer or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C): (a) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), for any action or claim with respect to the Pre-Existing Conditions; (b) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), with respect to the presence of Hazardous Substances at any locations other than the Real Estate; and (c) after the third anniversary of the Closing Date, for any action or claim with respect to any other Retained Liability; Provided, however, that the foregoing time limitations shall not apply to any such claims which have been the subject of a written notice from Parent and/or Buyer to the Seller Parties prior to such period setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims; and, provided, further, that the foregoing 56 California time limitations shall also not apply to any such claims: (u) with respect to Taxes; (v) with respect to any liability of the types that appear as "Trade Payables" or "Other Current and Accrued Liabilities" (other than liabilities arising after the Closing Date and relating to the California Water Debt) on the financial statements of Seller; (w) not exclusively related to the Acquired Assets or not exclusively related to the Business; and (x) with respect to any of the matters discussed in Section 3.16 hereof. For purposes of Sections 7.3.2(a) and (b), a "Change of Control of Citizens" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), other than an underwriter engaged in a firm commitment underwriting on behalf of Citizens, is or becomes the beneficial owner (as such term is used in Rule 13D-3 and 13D-5 under the Exchange Act, except that for purposes of this clause (i) a person shall be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding shares of common stock of the Company; (ii) all or substantially all of Citizens' and its Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any person or group of persons acting in concert; (iii) Citizens is merged or consolidated with any other person, whether or not Citizens is the surviving corporation in such merger or consolidation; or (iv) Citizens is liquidated or dissolved or adopts a plan of liquidation. 7.4 Indemnification. Seller, Parent and Buyer agree as follows: 7.4.1 General Indemnification Obligations. (a) Seller shall indemnify Buyer and its directors, officers and other Affiliates (including Parent) and hold Buyer and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by the Seller Parties in this Agreement or in any document or certificate required to be furnished to Buyer by any of the Seller Parties pursuant to this Agreement (including the Transaction Documents); (B) subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; and (C) subject to Section 7.3.2, the ownership, operation or use of any of the businesses or assets of the Seller Parties or their Affiliates (other than the Business and the Acquired Assets) whether before, on or after the Closing Date. (b) Buyer and Parent shall indemnify Seller, and their directors, officers and other Affiliates (including Citizens) and hold Seller and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by Parent or Buyer in this Agreement or in any document or certificate required to be furnished to Seller by Parent or Buyer pursuant to this Agreement (including the Transaction Documents); (B) any Assumed Liabilities after the Closing Date, including the Assumed Indebtedness; (C) the ownership, operation or use of the Business or 57 California the Acquired Assets after the Closing Date (except to the extent resulting from Retained Liabilities or to the extent resulting from breaches by the Seller Parties of representations, warranties, covenants or agreements hereunder or in the other Transaction Documents); and (D) any claim by a Transferred Employee or a Former Employee referred to on Schedule 5.12 or the Beneficiary of any such employee or former employee for post-retirement health care or life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing. (c) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including any governmental penalty or punitive damages assessed or asserted against the party seeking indemnification and including costs of investigation, clean-up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and reasonable expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened, incident to the successful enforcement of this Agreement). For purposes of this Section 7.4, the determination of whether any breach of any representation, covenant or agreement has occurred, and the calculation of the amount of Damages incurred by the Indemnified Party arising out of or resulting from any breach of a representation, covenant or agreement by any party hereto, the references to a "Material Adverse Effect" or materiality (or other correlative terms) shall be disregarded, provided that no such breach shall be found to have occurred due to facts or circumstances arising from an occurrence or condition described in Section 1.1.61(a). Notwithstanding the foregoing, Damages shall not include the loss of profits of the party seeking indemnification, or punitive damages unless the party seeking indemnification has had punitive damages assessed or asserted against it. (d) Notwithstanding any language contained in any Transaction Document (including deeds to Real Estate and instruments delivered by Seller to the Title Company), representations and warranties as to Real Estate set forth in Section 3.10 and 3.11 will not be merged into any Transaction Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement, shall control. No provision set forth in any Transaction Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. 7.4.2 General Indemnification Procedures. (a) A party seeking indemnification pursuant to this Section 7.4 (an "Indemnified Party") shall give prompt written notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party 58 California shall have the right, exercisable by written notice to the Indemnified Party after receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided, that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, solely the Indemnifying Party shall be obligated to satisfy and discharge the Third Party Claim, (B) such Third Party Claim does not include a request or demand for injunctive or other equitable relief by an Authority and (C) the Indemnifying Party makes reasonably adequate provision to assure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that is reasonably likely to result. The Indemnifying Party shall be deemed to have satisfied the condition set forth in clause (C) of the proceeding sentence if it is a regulated utility. (b) Neither the Indemnified Party nor the Indemnifying Party shall settle any Third Party Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (d) Amounts paid in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price. (e) Subject to Section 7.4.2(f) and Section 7.4.2(i), neither Parent nor Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages incurred unless the aggregate amount of Damages incurred by Parent or Buyer (or the other Persons for which they can claim indemnification), together with all other claims for Damages under Section 7.4.2(e) of each of the Related Purchase Agreements, exceeds $6,123,000 in the aggregate (the "Threshold Amount"), in which case Seller shall then be liable for Damages in excess of the Threshold Amount. Subject to Section 7.4.2(f) and Section 7.4.2(i), the cumulative aggregate indemnity obligation of Citizens and its Affiliates under Section 7.4 of this Agreement and the Related Purchase Agreements shall not exceed $60,000,000 (the "Ceiling"). (f) Notwithstanding the foregoing, the parties acknowledge that Parent or Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages in respect of intentional and wilful breaches of covenants or agreements in this Agreement or any of the Retained Liabilities other than the Specified Liabilities irrespective of the Threshold Amount or the Ceiling (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful breach). As used herein, the "Specified Liabilities" shall mean the Retained Liabilities arising from claims made after the Closing 59 California Date which (i) do not relate to matters within the scope of clauses (u), (v), (w) and (x) of Section 7.3.2; (ii) were not known to the Seller Parties on or prior to Closing; and (iii) relate exclusively to the Acquired Assets or the Business prior to the Closing Date. Notwithstanding anything to the contrary in this Section 7.4, Parent or Buyer (or the other Persons for which they can claim indemnification) shall be entitled to indemnification for Damages in respect of a breach of Section 3.2, 3.12 or 3.16 irrespective of the Threshold Amount or the Ceiling. (g) The rights and remedies of Seller, Parent and Buyer under this Section 7.4 are exclusive and in lieu of any and all other rights and remedies which Seller, Parent and Buyer may have under this Agreement or otherwise for monetary relief with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by Seller, Parent or Buyer in or pursuant to this Agreement or any of the Transaction Documents or (y) any breach or failure to perform any covenant or agreements set forth in this Agreement or any of the Transaction Documents. (h) Except to the extent provided in Section 7.4.2(j) below, no right to indemnification under this Section 7.4 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto including, without limitation, the knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. (i) No party shall have any liability to another party under this Section 7.4 for Damages (and no cost or expense relating to such Damages shall be included in determining the extent of Damages incurred by such party for purposes of Section 7.4.2(e)) to the extent that: (A) the Indemnified Party recovers insurance proceeds covering the Damages or otherwise recovers payments in respect of such Damages from any other source (whether in a lump sum or stream of payments); or (B) the Indemnified Party's Tax liability is actually reduced as a result of a tax benefit to which the Indemnified Party becomes entitled in respect of the Damages. (j) Seller shall have no liability or obligation under this Section 7.4 for any Damages resulting from the inaccuracy or breach of any representation or warranty if such inaccuracy or breach is disclosed by Seller pursuant to and in accordance with Sections 5.3 and 8.4 hereof; (k) Buyer agrees to use its commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Buyer consistent with its customary risk management 60 California practices, appear likely to give rise to a claim against Buyer that is likely to involve one or more insurance policies of Buyer. Any such notice shall be given in good faith by Buyer without regard to the possibility of indemnification payments by Seller under this Section 7.4, and shall be processed by Buyer in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Buyer agrees that (i) if it is entitled to receive payment from Seller for Damages arising under or pursuant to a breach of the representation and warranty set forth in Section 3.10, and (ii) if Buyer has obtained title insurance which may cover the claim or matter giving rise to such Damages, then (iii) such title insurance shall be primary coverage and Buyer will make a claim under the title insurance if such claim can be made in good faith before enforcing its right to receive payment from Seller. Buyer shall be under no obligation to obtain title insurance or prosecute such claim (other than the initial filing of such claim). (l) If at any time subsequent to the receipt by an Indemnified Party of an indemnity payment hereunder, such Indemnified Party (or any Affiliate thereof) receives any recovery, settlement or other similar payment with respect to the Damages for which it received such indemnity payment (including insurance proceeds and other payments pursuant to Section 7.4.2(i)(A) and a tax benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified Party shall promptly pay to the Indemnifying Party an amount equal to the amount of such Recovery, less any expense incurred by such Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment; (m) In the event of any indemnification claim under this Section 7.4 involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Indemnifying Party in the defense of any such claim under this Section 7.4. Without limiting the generality of the foregoing, the Indemnified Party shall furnish the Indemnifying Party with such documentary or other evidence as is then in its or any of its Affiliates' possession as may reasonably be requested by the Indemnifying Party for the purpose of defending against any such claim. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 7.4.3 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 61 California 7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer all inquiries with respect to ownership of the Acquired Assets or the Business to Buyer. In addition, Seller will execute such documents and financing statements as Buyer may reasonably request from time to time to evidence transfer of the Acquired Assets to Buyer in accordance with this Agreement, including any necessary assignment of financing statements. 7.6 Financial Statements. In connection with the preparation and filing of any registration statement or periodic report of Buyer or its Affiliates pursuant to Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, Seller, at Buyer's expense, shall provide Buyer (a) by April 30, 2000 or within 120 days after Buyer's written request therefor if made after January 1, 2000, with the following audited financial statements: (i) a statement of net assets of the Business as of the end of the last fiscal year prior to Closing; and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business for the last fiscal year prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements), including opinions thereon of Seller's Accountants, and (b) within 90 days after Buyer's written request made therefor (provided such request is made after the end of the fiscal quarter described below), the following unaudited statements: (i) a statement of net assets of the Business as of the end of the last fiscal quarter prior to Closing (but only if such quarter is subsequent to the last fiscal year prior to Closing); and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business, for the period from the end of the last fiscal year through the end of the last fiscal quarter prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements). 7.7 Collection of Receivables. Seller agrees that it shall promptly (and in any event no later than five (5) Business Days following receipt) deliver all such payments with respect to accounts receivable from customers of the Business received on and after the Closing Date (including but not limited to negotiable instruments tendered in payment of accounts receivable assigned to Buyer hereunder which shall be duly endorsed by Seller to the order of Buyer) to Buyer. Seller shall cooperate with Buyer in coordinating the transfer of collection agents and customers of the Business who pay their bills through the Automated Clearinghouse (ACH) process to Buyer. ARTICLE 8 MISCELLANEOUS 8.1 Construction. Parent, Buyer and the Seller Parties have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Parent, Buyer and the Seller Parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the 62 California authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean including without limitation. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified. The word "or" shall not be exclusive. Provisions of this Agreement shall apply, when appropriate, to successive events and transactions. Section references refer to this Agreement unless otherwise specified. 8.2 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier addressed to the party at its address set forth below: If to Parent: American Water Works Company 1025 Laurel Oak Road P.O. Box 1770 Voorhees, New Jersey 08043 Fax: (609) 346-8229 Attention: General Counsel with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. 63 California If to Buyer: California-American Water Company 880 Kuhn Drive Chula Vista, CA 91914 Fax: (619) 656-2406 Attention: Corporate Counsel with a copy to Parent and a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Seller: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: Robert J. DeSantis Telecopier: (203) 614-4625 with copies to: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten, II Telecopier: (203) 614-4651 and Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: J. Michael Love Telecopier: (203) 614-5201 64 California and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 8.3 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto; provided that Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the Code. 8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be clearly related to any other paragraph or section, be deemed to be disclosed with respect to that other paragraph or section. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. 8.6 Dispute Resolution. Except as otherwise provided herein, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall 65 California not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"); provided, however, that at the election of either party, the arbitration shall take place before three (3) arbitrators, one arbitrator being selected by Parent, one arbitrator being selected by Citizen, and the third arbitrator, knowledgeable in the general subject matter of the dispute, controversy or claim, being selected by the other two arbitrators. Either party may demand such arbitration in accordance with the procedures set out in the Rules. The parties hereto shall use reasonable efforts to coordinate any arbitration commenced under this Agreement with any arbitration on the same or similar issues commenced under any of the Related Purchase Agreements so that the resolution under this Agreement and the similar issues under the Related Purchase Agreements can be resolved as expeditiously and efficiently as reasonably practicable. Reasonable efforts shall include use of a common arbitrator or panel of arbitrators where practicable. The arbitration shall take place in Newark, New Jersey. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator(s) shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator(s) shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator(s), present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator(s) shall not have the authority to award, exemplary or punitive damages. The arbitrator(s) shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrators' majority decision shall be binding and final. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator(s); provided, however, that if the arbitrator(s) determines that the position taken in the Dispute by the non-prevailing party taken as a whole is unreasonable, the arbitrator(s) may order the non-prevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator(s) shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator(s) and the American Arbitration Association. (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 8.6 and (ii) if any party, as 66 California party of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 8.6. 8.7 Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto and their successors and permitted assigns any rights or remedies under or by reason of this Agreement. 8.9 Entire Agreement. This Agreement, the Schedules and Exhibits hereto and the other Transaction Documents, and the Confidentiality Agreement dated August 2, 1999, between Citizens and Parent, (i) together constitute the entire understanding of the parties (and their affiliates) with respect to the subject matter hereof, and any related matter, (ii) supercede all prior agreements or understandings, written or oral, entered into by any of the parties that concern the subject matter hereof and (iii) are not intended to confer upon any Person other than the parties hereto any benefit, right or remedy. 8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (i) extend the time for the performance of any of the obligations of the other party; (ii) waive any inaccuracies in representations and warranties by the other party; (iii) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (iv) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or extension, as the case may be. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument.\ 8.12 Headings. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 67 California 8.13 Definitions. For purposes of this Agreement, references to the knowledge of the Seller Parties (including a reference to "the best of the knowledge of the Seller Parties" and similar references) shall mean the actual knowledge possessed by any of the following officers or employees of Citizens: Chief Financial Officer, Vice President and Treasurer; President, Citizens Public Services; Vice President, Corporate Human Resources; Secretary; Vice President, Water; and the general manager of the Business. 8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE, INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES, PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT, BUYER OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER PARTIES. 8.15 Construction of Certain Provisions. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. 8.16 Bulk Sales. Buyer agrees that it shall not make any filings under any tax bulk sales provisions with respect to the transactions contemplated by this Agreement. [Signatures appear on following page] 68 California IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. CITIZENS UTILITIES COMPANY By:___________________________________________________________ Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer CITIZENS BUSINESS SERVICES COMPANY CITIZENS RESOURCES COMPANY CITIZENS UTILITIES COMPANY OF CALIFORNIA By:___________________________________________________________ Robert J. DeSantis, Vice President AMERICAN WATER WORKS COMPANY, INC. By:___________________________________________________________ Joseph F. Hartnett, Jr., Treasurer CALIFORNIA-AMERICAN WATER COMPANY By:___________________________________________________________ Theodore Jones, Jr., President Illinois EXECUTION COPY ASSET AND STOCK PURCHASE AGREEMENT among CITIZENS UTILITIES COMPANY AND CERTAIN OF ITS AFFILIATES AND AMERICAN WATER WORKS COMPANY, INC. AND ILLINOIS-AMERICAN WATER COMPANY Dated as of October 15, 1999 Illinois TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Certain Definitions..............................................1 ARTICLE 2 THE TRANSACTION.................................................10 2.1 Sale and Purchase...............................................10 2.2 Excluded Assets.................................................11 2.3 Assumption of Certain Liabilities...............................12 2.4 Consent of Third Parties........................................15 2.5 Closing.........................................................16 2.6 Purchase Price..................................................16 2.6.1 Purchase Price............................................16 2.6.2 Payment of Initial Cash Payment...........................16 2.6.3 Estimated Closing Statement...............................17 2.6.4 Post-Closing Adjustment to Purchase Price.................17 2.6.5 Adjustment for Certain Liabilities........................19 2.6.6 Additional Adjustment to the Purchase Price...............19 2.7 Deliveries and Proceedings at Closing...........................19 2.7.1 Deliveries to each of Parent and IAWC....................19 2.7.2 Deliveries By Parent and IAWC to the Seller Parties......20 2.8 Tax Allocation of Consideration.................................21 2.9 Prorations......................................................21 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.......................22 3.1 Qualification; No Interest in Other Entities....................22 3.2 Authorization and Enforceability................................22 3.3 No Violation of Laws or Agreements..............................23 3.4 Financial Statements............................................23 3.5 No Changes......................................................23 3.6 Contracts.......................................................24 3.7 Permits and Compliance With Laws Generally......................25 3.8 Environmental Matters...........................................25 3.9 Consents........................................................27 3.10 Title...........................................................28 3.11 Real Estate.....................................................28 3.12 Taxes...........................................................28 3.13 Patents and Intellectual Property Rights........................29 3.14 Accounts Receivable.............................................29 3.15 Labor Relations.................................................29 3.16 Employee Benefit Plans..........................................29 3.17 Absence of Undisclosed Liabilities..............................31 3.18 No Pending Litigation or Proceedings............................31 3.19 Supply of Utilities.............................................32 3.20 Insurance.......................................................32 3.21 Relationship with Customers.....................................32 Illinois 3.22 WARN Act........................................................32 3.23 Condition of Assets.............................................32 3.24 Brokerage.......................................................32 3.25 All Assets......................................................33 3.26 Year 2000 Matters...............................................33 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND IAWC...............34 4.1 Organization and Good Standing..................................34 4.2 Authorization and Enforceability................................34 4.3 No Violation of Laws or Agreements..............................34 4.4 Consents........................................................35 4.5 Financing.......................................................35 4.6 Brokerage.......................................................35 4.7 Insurance.......................................................35 ARTICLE 5 ADDITIONAL COVENANTS............................................36 5.1 Conduct of Business.............................................36 5.2 Negotiations....................................................37 5.3 Disclosure Schedules............................................38 5.4 Mutual Covenants................................................38 5.5 Filings and Authorizations......................................39 5.6 Public Announcement.............................................39 5.7 Further Assurances..............................................40 5.8 Cooperation.....................................................40 5.9 Employees; Employee Benefits....................................41 5.10 Employee Pension Plan...........................................44 5.11 Employee Savings Plan...........................................44 5.12 Welfare Benefits................................................45 5.13 Taxes...........................................................46 5.14 Intentionally Omitted...........................................46 5.15 Citizens' Guarantees and Surety Instruments.....................46 5.16 Assumption of Seller Debt.......................................47 5.17 Schedule of Permits.............................................49 5.18 Title Information...............................................49 5.19 Transaction with Related Parties................................49 5.20 Approval by Citizens............................................50 5.21 Supplemental Information........................................50 5.22 Non-Competition.................................................50 5.23 Intentionally Omitted...........................................50 5.24 IDRB Obligations................................................51 5.25 Cooperation with Respect to Like-Kind Exchange..................51 5.26 Transition Plan.................................................52 5.27 Procedures regarding Refunds of Advances........................52 5.28 Title Insurance.................................................52 ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION...............................53 6.1 Conditions Precedent to Obligations of IAWC and Parent..........53 Illinois 6.1.1 Performance of Agreements; Representations and Warranties.53 6.1.2 Opinion of Counsel........................................53 6.1.3 HSR Act...................................................53 6.1.4 Required PUC and Other Consents...........................53 6.1.5 Injunction; Litigation....................................54 6.1.6 Documents.................................................54 6.1.7 Related Closings..........................................54 6.2 Conditions Precedent to Obligations of Seller Parties...........54 6.2.1 Performance of Agreements; Representations and Warranties.55 6.2.2 Opinion of Counsel........................................55 6.2.3 HSR Act...................................................55 6.2.4 Required PUC and Other Consents...........................55 6.2.5 Injunction; Litigation....................................56 6.2.6 Documents.................................................56 6.2.7 Related Closings..........................................56 6.3 Termination.....................................................56 ARTICLE 7 CERTAIN ADDITIONAL COVENANTS....................................57 7.1 Certain Taxes and Expenses......................................57 7.2 Maintenance of Books and Records................................57 7.3 Survival........................................................57 7.4 Indemnification.................................................60 7.4.1 General Indemnification Obligations.......................60 7.4.2 General Indemnification Procedures........................61 7.4.3 Indemnification for Negligence............................64 7.5 UCC Matters.....................................................64 7.6 Financial Statements............................................64 7.7 Collection of Receivables.......................................65 ARTICLE 8 MISCELLANEOUS...................................................65 8.1 Construction....................................................65 8.2 Notices.........................................................65 8.3 Successors and Assigns..........................................67 8.4 Exhibits and Schedules..........................................68 8.5 Governing Law...................................................68 8.6 Dispute Resolution..............................................68 8.7 Severability....................................................69 8.8 No Third Party Beneficiaries....................................69 8.9 Entire Agreement................................................69 8.10 Amendment and Waiver............................................70 8.11 Counterparts....................................................70 8.12 Headings........................................................70 8.13 Definitions.....................................................70 8.14 No Implied Representation.......................................70 8.15 Construction of Certain Provisions..............................71 8.16 Bulk Sales......................................................71 Illinois List of Schedules Schedule 1.1.1(a) ..................................................Real Estate Schedule 1.1.10 ...........................................Assumed Indebtedness Schedule 1.1.51 .................................................IDRB Documents Schedule 2.2.12 ................................................Excluded Assets Schedule 2.6 ....................................................Purchase Price Schedule 3.3 ................................No Violation of Laws or Agreements Schedule 3.4 ..............................................Financial Statements Schedule 3.5 ........................................................No Changes Schedule 3.6 .........................................................Contracts Schedule 3.7 ........................Permits and Compliance with Laws Generally Schedule 3.8 .................................Environmental Matters - Generally Schedule 3.8.10 ................................Compliance with Water Standards Schedule 3.8.11 ...............................................Deed Restriction Schedule 3.9 ..........................................Seller Parties' Consents Schedule 3.10 ............................................................Title Schedule 3.11 ..........................................Real Estate Proceedings Schedule 3.12 ............................................................Taxes Schedule 3.15 ..................................................Labor Relations Schedule 3.16.1 .........................................Employee Benefit Plans Schedule 3.16.4 ............................Employee Benefit Plans - Compliance Schedule 3.16.9 ................Employee Benefit Plans - Extraordinary Benefits Schedule 3.17 ...............................Absence of Undisclosed Liabilities Schedule 3.18 .............................No Pending Litigation or Proceedings Schedule 3.19 ..............................................Supply of Utilities Schedule 3.20 ...............................................Seller's Insurance Schedule 3.22 .........................................................WARN Act Schedule 3.23 ..............................................Condition of Assets Schedule 3.25 .......................................................All Assets Schedule 3.27 ................................................Product Liability Schedule 4.7 ..................................................IAWC's Insurance Schedule 5.1 ...............................................Conduct of Business Schedule 5.9.1 .......................................................Employees Schedule 5.9.2 ................................Collective Bargaining Agreements Schedule 5.12 .................................................Former Employees Schedule 5.15 .............................................Citizens' Guarantees Schedule 5.16 ..............................................Schedule of Permits Schedule 6.1.7 .....................................Related Purchase Agreements Illinois TABLE OF EXHIBITS Exhibit A - Form of Assumption Agreement Exhibit B - Form of Assignment and Bill of Sale Exhibit C - Intentionally Omitted Exhibit D - Form of Retained IDRB Obligations Agreement Exhibit E - Form of Seller's Opinion of Counsel Exhibit F - Form of Parent's and IAWC's Opinion of Counsel Illinois ASSET AND STOCK PURCHASE AGREEMENT THIS IS AN ASSET AND STOCK PURCHASE AGREEMENT (the "Agreement"), dated as of October 15, 1999, by and among Citizens Utilities Company, a Delaware corporation ("Citizens"), Citizens Resources Company, a Delaware corporation ("Citizens Resources"), Citizens Utilities Company of Illinois, an Illinois corporation ("CUCI"), Citizens Business Services Company, an Illinois corporation ("CBSC"), and Citizens Lake Water Company, an Illinois corporation ("CLWC" and, together with Citizens, Citizens Resources, CUCI and CBSC, "Seller" or the "Seller Parties"), and American Water Works Company, Inc., a Delaware corporation ("Parent"), and Illinois-American Water Company, an Illinois corporation ("IAWC"). Background 1. The Seller Parties are engaged, among other things, in the business of storing, supplying, distributing and selling water to the public, wholesale water transmission, wastewater treatment, and related services and activities in the State of Illinois (the "Business"). 2. CUCI is engaged, among other things, in that part of the Business that consists of storing, supplying, distributing and selling water to the public, wastewater treatment, and related services and activities, all in the State of Illinois. 3. Citizens owns all of the issued and outstanding shares of capital stock of CLWC (the "CLWC Stock"). CLWC is engaged in that part of the Business that consists of wholesale water transmission. 4. CBSC and Citizens Resources own certain assets, properties and rights that relate to the Business, in whole or in part. 5. Parent is a holding company that desires to purchase the CLWC Stock, substantially all of the assets, properties and rights of Citizens Resources relating to the Business, and those assets of CBSC that relate in part to the Business and in part to businesses being acquired under the Related Purchase Agreements (as that term is defined below). 6. Parent also desires to cause IAWC to purchase (and IAWC desires to Purchase) substantially all of the assets, properties and rights of CUCI and those assets, properties and rights of CBSC that primarily relate to the Business. 7. Citizens desires to sell the CLWC Stock and to cause the sale of such assets, properties and rights referred to above, on the terms and subject to the conditions set forth in this Agreement. Illinois Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: 1.1.1 "Acquired Assets" means, subject to Section 2.2, all of each Seller Party's right, title, and interest in, under and to all of the assets, properties and rights exclusively used in, or, in the case of Citizens Resources and CBSC, primarily related to, the Business as a going concern of every kind, nature and description existing on the Closing Date, wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the assets, properties and rights exclusively relating to the Business enumerated below: (a) all real property described in Schedule 1.1.1(a), together with all fixtures, fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, railroad crossing agreements, hereditaments, tenements, privileges and other appurtenances thereto or otherwise exclusively related to the Business (such as appurtenant rights in and to public streets) (the "Real Estate"); (b) to the extent not included in clause (a) above, all water tanks, reservoirs, water works, plant and systems, purification and filtration systems, pumping stations, pumps, wells, mains, water pipes, hydrants, equipment, machinery, vehicles, tools, dies, spare parts, materials, water supplies, fixtures and improvements, construction in progress, jigs, molds, patterns, gauges and production fixtures and other tangible personal property, in transit or otherwise, used exclusively in the Business (the "Equipment and Other Tangible Personal Property"); (c) notwithstanding the provisions of Section 2.2 but subject to Section 2.4, all water appropriation and flowage rights of Seller other than CLWC (it being intended that any such rights of CLWC will remain with CLWC whose stock is being acquired by Parent) to the extent not transferred to IAWC upon assignment of the Contracts and Permits to IAWC; (d) all notes receivable, accounts receivable, accrued utility revenues, materials and supplies (at average cost net of reserve for obsolescence) and prepayments attributable in each case exclusively to the Business; Illinois (e) all unamortized debt expense related to the Assumed Indebtedness, deferred capital costs, and other deferred charges (excluding deferred taxes collectable) attributable exclusively to the Business of which recovery in future rates is probable; (f) Intellectual Property and goodwill, licenses and sublicenses granted and obtained with respect thereto; (g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements and instruments relating to the sale of any assets, services, properties, materials or products, including all customer contracts, operating contracts and distribution contracts relating exclusively to the conduct of the Business; (ii) orders, contracts, supply agreements and other agreements relating exclusively to the purchase of any assets, services, properties, materials, or products for the Business; (iii) all leases of Real Estate exclusively related to the Business; (iv) all other contracts, agreements and instruments related exclusively to the Business (other than contracts, agreements and instruments included in the definition of Real Estate or Permits); and (v) any such contracts, agreements and other instruments referred to in clauses (i) - (iv) inclusive, entered into between the date hereof and the Closing Date which are consistent with the terms of this Agreement and are entered into in the ordinary course of business consistent with past practice, and including in the case of clauses (i) - (iv) all such contracts, agreements and instruments more specifically listed or described in Schedule 3.6 (but specifically excluding any contract, agreement and instrument listed or described on Schedule 2.2.12) (the "Contracts"); (h) subject to Section 2.4 hereof, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority relating exclusively to the conduct of the Business and all pending applications therefor (the "Permits"); (i) books, records, ledgers, files, documents (including originally executed copies of written Contracts, to the extent available, and copies to the extent not available), correspondence, Tax returns relating exclusively to the Business, memoranda, forms, lists, plats, architectural plans, drawings, and specifications, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the Transferred Employees (to the extent such transfer is not prohibited by law), photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent exclusively relating to the Business, the Acquired Assets or the Transferred Employees; (j) all rights or choses in action arising out of occurrences before or after the Closing Date and exclusively related to any of the Acquired Assets, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Seller; provided, however, that (notwithstanding the foregoing provisions of this Section 1.1.1(j)), to the extent that Seller pays or discharges a liability related to the Business or any of the Acquired Assets and related to such right 3 Illinois or chose in action (whether by reason of indemnification under this Agreement or otherwise), IAWC or Parent, as the case may be, will reassign or reconvey to Seller such right or chose in action to the extent that such right or chose in action relates to a recovery of amounts paid to IAWC or Parent, as the case may be; (k) all rights to insurance and condemnation proceeds (i) to the extent relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing but only to the extent that the proceeds exceed the amount of the write-down of the net book value of such Acquired Assets on the books and records of Seller as a result of such damage, destruction, taking or other impairment, (ii) to the extent they relate to amounts paid by IAWC or Parent, as the case may be, for Damages to the extent IAWC or Parent, as the case may be, does not receive payment pursuant to Section 7.4.1(a), but only to the extent IAWC or Parent, as the case may be, is entitled to indemnification by Seller pursuant to Sections 7.3 and 7.4, and (iii) as provided in Section 4 of the agreement attached as Exhibit D hereto; and (12) without limiting the foregoing, but for the avoidance of doubt, in any case, all of the assets reflected on the Interim Statement of Net Assets attached as Schedule 3.4. For purposes of this Agreement, "Citizens Assets" shall mean the CLWC Stock; "CUCI Assets" shall mean those Acquired Assets owned or held by CUCI; "Citizens Resources Assets"shall mean those Acquired Assets owned or held by Citizens Resources; "CBSC Assets" shall mean those Acquired Assets owned or held by CBSC; and "CLWC Assets" shall mean those Acquired Assets owned or held by CLWC. For the avoidance of doubt, the "Acquired Assets" include the Citizens Assets, CUCI Assets, CLWC Assets, Citizens Resources Assets and the CBSC Assets. 1.1.2 "Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.3 "Affected Participant" has the meaning set forth as Section 5.11.1 hereof. 1.1.4 "Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. 1.1.5 "Agreement" has the meaning set forth in the introduction hereof. 1.1.6 "American Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.7 "American Savings Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof. 4 Illinois 1.1.9 "Assumed Benefit Liabilities" has the meaning set forth in Section 3.16.6 hereof. 1.1.10 "Assumed Indebtedness" means the liabilities and obligations from and after the Closing Date (except as set forth below) with respect to the IDRB Financings and IDRB Documents set forth on Schedule 1.1.10. For purposes of clarity, except as set forth in the next sentence below, "Assumed Indebtedness" shall not include any liability or obligation to the extent accrued prior to the Closing Date or to the extent arising out of or relating to an event, circumstance or occurrence prior to the Closing Date. "Assumed Indebtedness" shall include the outstanding principal amount and the accrued but unpaid interest owed by Seller on the debt obligations set forth in the first sentence of this definition. 1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2 hereof. 1.1.13 "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof). 1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under a Benefit Plan. 1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof. 1.1.17 "Bonds" means any of the bonds issued pursuant to the Indentures of Trust, the proceeds from the issuance of which were advanced to Seller pursuant to any of the IDRB Documents. 1.1.18 "Business" has the meaning set forth in the Background section hereof. 1.1.19 "Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. 1.1.20 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.21 "CERCLA" has the meaning set forth in Section 3.8.2 hereof. 5 Illinois 1.1.22 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof. 1.1.23 "Citizens" has the meaning set forth in the introduction hereof. 1.1.24 "Closing" has the meaning set forth in Section 2.5 hereof. 1.1.25 "Closing Date" has the meaning set forth in Section 2.5 hereof. 1.1.26 "Closing Statement of Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.27 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.28 "Collective Bargaining Agreement" means the agreement identified as such on Schedule 3.6 hereto. 1.1.29 "Competing Transaction" has the meaning set forth in Section 5.2. 1.1.30 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof. 1.1.31 "Control" with respect to any Person means the ownership, directly or indirectly, of at least a majority of the voting power of each class of capital stock of such Person entitled to vote in the election of directors of such Person generally. 1.1.32 "Damages" has the meaning set forth in Section 7.4.1 hereof. 1.1.33 "Disclosure Schedules" means the Schedules referenced in Articles 3, 4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3. 1.1.34 "Dispute" has the meaning set forth in Section 8.6. 1.1.35 "Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.36 "Environmental Laws" has the meaning set forth in Section 3.8 hereof. 1.1.37 "Equipment and Other Tangible Personal Property" has the meaning set forth in Section 1.1.1(b) hereof. 1.1.38 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.39 "ERISA Affiliate" means (a) any corporation included with any of the Seller Parties in a controlled group of corporations within the meaning of Section 414(b) of the Code; (b) any trade or business (whether or not incorporated) which is under common control with any of the Seller Parties within the meaning of Section 414 of the Code; any member of an affiliated 6 Illinois service group of which any of the Seller Parties is a member within the meaning of Section 414(m) of the Code; or (d) any other person or entity treated as an affiliate of any of the Seller Parties under Section 414(o) of the Code. 1.1.40 "Excluded Assets" has the meaning set forth in Section 2.2 hereof. 1.1.41 "Financial Statements" has the meaning set forth in Section 3.4 hereof. 1.1.42 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof. 1.1.43 "Former Employees" means all salaried and hourly employees once employed by Seller or any of its Affiliates, but who are no longer so employed on the Closing Date. 1.1.44 "FTC" has the meaning set forth in Section 5.5 hereof. 1.1.45 "GAAP" has the meaning set forth in Section 3.4 hereof. 1.1.46 "Hazardous Substance" has the meaning set forth in Section 3.8 hereof. 1.1.47 "HSR Act" has the meaning set forth in Section 3.9 hereof. 1.1.48 "IAWC" has the meaning set forth in the introduction hereof. 1.1.49 "IAWC's IDRB Obligations" means the obligations of Parent and IAWC set forth in Section 5.24 (a) and in the instruments to be executed and delivered by Parent and IAWC on or prior to the Closing Date in accordance with Section 5.24 (a). 1.1.50 "IAWC's Accountants" means PricewaterhouseCoopers LLP or any firm of independent public accountants hereafter designated by IAWC for purposes of this Agreement. 1.1.51 "IDRB Documents" shall mean the Loan Agreements, the Tax Regulatory Agreements, the Project Tax Certificates, and the other Contracts related thereto to which Citizens is a party and which are listed on Schedule 1.1.51. 1.1.52 "IDRB Financings" shall mean the indebtedness arising under the Loan Agreements included among the IDRB Documents. 1.1.53 "Indemnified Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.54 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a) hereof. 7 Illinois 1.1.55 "Intellectual Property" means the trademarks, patents, trade names and copyrights and applications therefor, inventions, trade secrets, and confidential business information (including know-how, formulas, water filtration, purification and pumping processes and techniques, technical data, designs, drawings, customer and supplier lists, and business and marketing plans and proposals), all computer software (including data and related documentation and object and source codes), whether in magnetic format or hard copy, and tangible embodiments thereof (in whatever form or medium) of Seller, in each case, utilized exclusively in the Business. 1.1.56 "Interim Statement of Net Assets" means the Citizens Water Resources Statement of Net Assets-Illinois, which is attached hereto as Schedule 3.4. 1.1.57 "Interim Statement of Net Assets Date" means June 30, 1999. 1.1.58 "IRS" has the meaning set forth in Section 3.16.2 hereof. 1.1.59 "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). 1.1.60 "Material Adverse Effect" means a change or effect (or series of related changes or effects) which has or is reasonably likely to have a material adverse change in or effect upon the business, assets, condition (financial or otherwise), or results of operations of the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Parent or Affiliates of Parent pursuant to the Related Purchase Agreements. For purpose of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect (a) if it arises from general business, economic or financial market conditions, from conditions generally effecting the industries in which Seller competes, or from the transactions contemplated by this Agreement, or (b) to the extent that it consists of strikes, work stoppages, walk-outs, slow-downs or other business interruption at the facilities in Illinois that are part of the Acquired Assets, or (c) solely with respect to matters arising prior to Closing, to the extent that either (i) Seller realizes the benefit of insurance maintained by Citizens on or prior to the Closing Date and IAWC or Parent, as the case may be, receives the cash proceeds of such insurance to the extent required by Section 1.1.1(k), or (ii) Seller arranges for IAWC or Parent , as the case may be, to recover payments in respect of such occurrence or condition from any other source (whether in a lump sum or stream of payments), it being understood and agreed that a Material Adverse Effect may have occurred irrespective of such insurance recovery if the occurrence or condition giving rise to such recovery also causes a non-monetary material adverse change in or effect upon the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Parent or Affiliates of Parent pursuant to the Related Purchase Agreements. 1.1.61 "Mortgage Indenture" means Indenture of Mortgage and Deed of Trust between BNY Western Trust Company (successor in interest to Wells Fargo Bank, N.A.) and 8 First Interstate Bank of California (as successor trustee to Marine Midland, N.A., formerly the Marine Midland Trust Company of New York). 1.1.62 "OSHA" has the meaning set forth in Section 3.7.1 hereof. 1.1.63 "PCBs" has the meaning set forth in Section 3.8.6 hereof. 1.1.64 "Permits" has the meaning set forth in Section 1.1.1(h) hereof. 1.1.65 "Permitted Exceptions" has the meaning set forth in Section 3.10 hereof; provided, however, that from and after the Closing, Permitted Exceptions shall not include any Lien arising under or resulting from the Mortgage Indenture. 1.1.66 "Person" means an individual, a corporation, a partnership, an association, an Authority, a trustor other entity or organization. 1.1.67 "Pre-Existing Conditions" has the meaning set forth in Section 2.3.1(d). 1.1.68 "Prime Rate" means the rate per annum announced from time to time during the reference period by Citibank N.A. as its United States prime, reference or base rate for commercial loans. 1.1.69 "PUC" has the meaning set forth in Section 5.5 hereof. 1.1.70 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.71 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof. 1.1.72 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof. 1.1.73 "Related Purchase Agreements" as the meaning set forth in Section 6.1.7 hereof. 1.1.74 "Release" or "Released" has the meaning set forth in Section 3.8 hereof. 1.1.75 "Remedial Action" has the meaning set forth in Section 3.8 hereof. 1.1.76 "Retained IDRB Indebtedness" means the indebtedness of the Seller owing to the issuers of the Bonds and arising under the Loan Agreements included among the IDRB Documents but only to the extent not included in the Assumed Indebtedness. 1.1.77 "Retained Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.78 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof. 9 Illinois 1.1.79 "SEC" means the U.S. Securities and Exchange Commission. 1.1.80 "Securities Filings" has the meaning set forth in Section 5.8.2 hereof. 1.1.81 "Seller" and "Seller Parties" have the respective meaning set forth in the introduction hereof. 1.1.82 "Seller's Accountants" means KPMG LLP or any other firm of independent public accountants hereafter designated by Seller for purposes of this Agreement. 1.1.83 "Seller's Adjusted Amount" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.84 "Seller's Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.85 "Seller's 401(k) Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.86 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f) hereof. 1.1.87 "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall profits, social security (or similar unemployment), disability, transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise and other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 1.1.88 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.89 "Threshold Amount" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.90 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i) hereof. 1.1.91 "Transferred Accounts" has the meaning set forth in Section 5.11.2 hereof. 1.1.92 "Transaction Documents" has the meaning set forth in Section 3.2 hereof. 10 Illinois 1.1.93 "Transferred Employees" has the meaning set forth in Section 5.9.2 hereof. 1.1.94 "Union Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.95 "VEBAs" has the meaning set forth in Section 5.12 hereof. 1.1.96 "WARN Act" means the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. section 2102- 2109, as amended. ARTICLE 2 THE TRANSACTION 2.1 Sale and Purchase. 2.1.1 Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 2.5 below: (i) Citizens shall cause CUCI to, and CUCI shall, sell, assign, transfer, deliver and convey the CUCI Assets to IAWC, and Parent shall cause IAWC to, and IAWC shall, purchase the CUCI Assets; (ii) Citizens shall cause CBSC to, and CBSC shall, sell, assign, transfer, deliver and convey to IAWC, and Parent shall cause IAWC to, and IAWC shall, purchase the CBSC Assets primarily related to the Business (for the avoidance of doubt, such CBSC Assets primarily related to the Business described in this subsection (ii) shall not include any CBSC Assets described in subsection (iii) of this Section 2.1.1); (iii) Citizens shall cause CBSC to, and CBSC shall, sell, transfer, deliver and convey to Parent, and Parent shall purchase, the CBSC Assets that relate in part to the Business and in part to businesses being acquired under the Related Purchase Agreements; (iv) Citizens shall cause Citizens Resources to, and Citizens Resources shall, sell assign, transfer deliver and convey the Citizens Resources Assets to Parent, and Parent shall purchase the Citizens Resources Assets; and (v) Citizens shall sell, assign transfer, deliver and convey the Citizens Assets to Parent, and Parent shall purchase the Citizens Assets (for the avoidance of doubt, "Citizens Assets" is defined in Section 1.1.1 as the CLWC Stock). 11 Illinois 2.2 Excluded Assets. The following assets of Seller shall be excluded from the Acquired Assets (the "Excluded Assets"): 2.2.1 assets of the Seller used in both the Business and in Citizens' gas, electric or communications businesses, the material items of which are described on Schedule 2.2.12; 2.2.2 cash and cash equivalents in transit, in hand or in bank accounts. 2.2.3 except as otherwise set forth herein, assets attributable or related to any Benefit Plan; 2.2.4 the stock record and minute books of Seller (other than the stock record and minute books of CLWC); 2.2.5 Acquired Assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; 2.2.6 except to the extent set forth in Section 2.9, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member, and which are treated as Retained Liabilities under Section 2.3.3(b) below. 2.2.7 customer and other deposits held in Seller's accounts; 2.2.8 accounts owing by and among Seller and its Affiliates; 2.2.9 notes receivable and other receivables (other than note and accounts receivable attributable exclusively to the Business); 2.2.10 all deferred tax assets or collectibles; 2.2.11 duplicate copies of all books and records transferred to IAWC or Parent, as the case may be; and 2.2.12 those certain items listed on Schedule 2.2.12. 2.3 Assumption of Certain Liabilities. 2.3.1 Neither Parent nor IAWC shall assume any liabilities of Citizens, CUCI, Citizens Resources, CBSC, CLWC or any of their Affiliates, except that IAWC or Parent, as the case may be, shall assume the following specific liabilities and obligations from their respective Seller Parties: (a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; 12 Illinois (b) except as set forth in Section 2.3.3(b), all liabilities and obligations of Seller in respect of the Contracts and Permits assigned or transferred to IAWC or Parent, as the case may be, pursuant to this Agreement in accordance with the respective terms thereof, except that neither Parent nor IAWC shall assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (c) the Assumed Indebtedness and the IAWC's IDRB Obligations; (d) any liability, obligation or responsibility of Seller for conditions at the Real Estate, whether based on statutory or common law, now or hereafter in effect, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment at the Real Estate or into or from any building, structure, pipeline or other facility at the Real Estate, or from violation of any law relating to the foregoing, including without limitation, any CERCLA or similar liability under any federal or state law or regulation, except to the extent Parent or IAWC has given written notice of a claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to the expiration of the claims period set forth in Section 7.3.2(a) or (b) (and if Parent or IAWC has given written notice prior to the expiration of such claims period, to the extent that such claim is not entitled to indemnification under Sections 7.3 and 7.4) (the foregoing, the "Pre-Existing Conditions"); (e) all liabilities and obligations of Seller related to unperformed service obligations, easement and right-of-way relocation obligations, and construction work in progress, and all engineering and construction required to complete scheduled construction and other capital projects for the Business, in each case relating to the Business and outstanding on or arising after the Closing Date except that neither Parent nor IAWC shall assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (f) liability for accrued but unused vacation pay for the Transferred Employees to the extent provided in Section 5.9.2; (g) any liability, obligation or responsibility relating to customer deposits held by Seller on the Closing Date and relating to the Business; and (h) all liabilities and obligations imposed on Parent or IAWC by any PUC in connection with the operation of the Business or the ownership of the Acquired Assets, including with respect to any liability of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the financial statements of Seller. 2.3.2 Any liabilities or obligations which are assumed by Parent or IAWC pursuant to Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities." At the 13 Illinois Closing, each of Parent and IAWC shall (and Parent shall cause IAWC to) execute and deliver to Seller an assumption agreement, in substantially the form of the Assumption Agreement attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which Parent and IAWC shall assume their respective Assumed Liabilities. Each of Parent and IAWC hereby irrevocably and unconditionally waives and releases the Seller Parties from all Assumed Liabilities and all liabilities or obligations exclusively relating to the Business or, the Acquired Assets to the extent arising from events or occurrences after the Closing or to the extent otherwise relating to the period after the Closing, including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Parent and IAWC on the one hand, and the Seller Parties on the other hand). 2.3.3 Neither Parent nor IAWC shall assume any liabilities, commitments or obligations (contingent or absolute and whether or not determinable as of the Closing) of any of the Seller Parties or any of their Affiliates except for the Assumed Liabilities as specifically and expressly provided for above, whether such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Parent or IAWC hereunder as Assumed Liabilities are being retained by the Seller Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby irrevocably and unconditionally waives and releases Parent and IAWC from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Parent and IAWC on the one hand, and the Seller Parties on the other hand). Without limitation to the foregoing, all of the following shall be considered Retained Liabilities and not Assumed Liabilities (except as specified below) for the purposes of this Agreement: (a) any product liability, toxic tort or similar claim for injury to person or property, regardless of when made or asserted, to the extent that it arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any of the Seller Parties or any of their Affiliates prior to Closing, or alleged to have been made by any of such Persons, or to the extent that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product distributed or sold by or on behalf of any of the Seller Parties or any of their Affiliates prior to Closing, including any claim referred to above in this Section 2.3.3(a) relating to water quality standards, any claim relating to any product delivered in connection with the performance of services provided by Seller and any claim seeking recovery for consequential damages, lost revenue or income; (b) all refund obligations relating to the advances existing on the Closing Date for construction of facilities relating to the Business; (c) except to the extent set forth in Section 2.9, any federal, state, foreign or local income or other Tax payable with respect to the business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member. 14 Illinois (d) any liability or obligation associated with or in connection with any common plant assets of Seller (other than the liabilities and obligations exclusively related to any common plant assets included among the Acquired Assets); (e) except as provided in Section 2.3.1 above, any liability or obligation with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any of the Seller Parties or any of their Affiliates, whether or not employed by Parent or IAWC after the Closing, that arises out of or relates to events or conditions to the extent occurring before the Closing Date; (f) except to the extent set forth in Section 2.3.1(d), any liability, obligation or responsibility of any of the Seller Parties, or any of their Affiliates or predecessors, whether based on statutory or common law, but only as any such law is interpreted, amended and in effect on the Closing Date, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment or into or from any building, structure, pipeline or other facility or relating to or arising from the generation, use, storage, treatment, disposal, transport or other handling of Hazardous Substances or sale or product containing Hazardous Substances from violation of any law relating to the foregoing (but only as such law is interpreted, amended and in effect on the Closing Date) including without limitation (A) any CERCLA or similar liability under any federal or state law or regulation as interpreted, amended and in effect on the Closing Date or (B) any such liability associated with businesses or assets of the Seller Parties other than the Business or the Acquired Assets; (g) liabilities and obligations relating to the Business to the extent arising prior to Closing (unless otherwise constituting Assumed Liabilities) arising by operation of law under any common law or statutory doctrine (including successor liability or de facto merger); (h) any obligation or liability arising under any contract, commitment, instrument or agreement (1) except for IAWC's IDRB Obligations (subject to the penultimate sentence of Section 2.4) that are not transferred to Parent or IAWC as part of the Acquired Assets, or (2) that relates to any breach or default (or to the extent that it relates to an event which would, with the passing of time or the giving of notice, or both, constitute a default) under any Contract, instrument or agreement or to any services to be provided by Seller under any such Contract, instrument or agreement to the extent that such services were performed or were required to have been performed on or prior to the Closing Date; (i) any liability or obligation in respect of the Excluded Assets; (j) any liability or obligation of any of the Seller Parties or any of their Affiliates existing as a result of any act, failure to act or other state of facts or occurrence which constitutes a breach or violation of any of Seller's representations, warranties, covenants or agreements contained in this Agreement, except to the extent set forth in Section 7.4; 15 Illinois (k) except for the Assumed Liabilities as specifically and expressly set forth herein, any liability to the extent arising out of or relating to the ownership or operation of the Acquired Assets or the Business prior to the Closing Date (including any predecessor operations), any claims, obligations or litigation to the extent arising out of or relating to events or conditions occurring before the Closing Date, and any liability associated with any business other than the Business; or (l) for the avoidance of doubt, even though Parent is acquiring the CLWC Stock and is not directly acquiring the assets of CLWC, all liabilities of CLWC other than those referred to in the last sentence of Section 3.28 shall be considered Retained Liabilities subject to the indemnification provisions of clause (B) of Section 7.4.1(a). 2.4 Consent of Third Parties. On the Closing Date, Citizens and each of the other Seller Parties shall, and Citizens shall cause each of the other Seller Parties to, assign or transfer to Parent or IAWC, and Parent and IAWC shall assume (and Parent shall cause IAWC to assume) the Contracts and the Permits which are to be transferred to Parent and IAWC respectively as provided in this Agreement by means of the Assumption Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent (or result in a breach or violation thereof) of the other party thereto or any other third party, and such consent shall not be obtained prior to Closing, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets. In order, however, to provide IAWC or Parent, as the case may be, the full realization and value of every Contract of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Parent or IAWC, in the name of Seller or otherwise as Parent or IAWC shall specify, take all reasonable actions (including without limitation the appointment of IAWC or Parent, as the case may be, as attorney-in-fact for Seller to proceed at Parent's or IAWC's sole cost and expense) and do or cause to be done all such things as shall in the reasonable opinion of IAWC or Parent, as the case may be, be necessary (a) to assure that the rights of Seller or its Affiliates under such Contracts shall be preserved for the benefit of IAWC or Parent, as the case may be, and (b) to facilitate receipt of the consideration to be received by Seller or its Affiliates in and under every such Contract. To the extent that IAWC or Parent, as the case may be, does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract "assigned or transferred to IAWC or Parent, as the case may be, pursuant to this Agreement" within the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in any way diminish the obligations of Seller to obtain consents and approvals under this Agreement. 2.5 Closing. Subject to the terms and conditions of this Agreement, the closing of the sale and purchase described in Section 2.1 hereof (the "Closing") shall take place at 10 a.m., East Coast time, on a date mutually satisfactory to Parent, IAWC and Seller Parties which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in Sections 6.1 and 6.2 hereof (other than those conditions which require the delivery of any documents or the taking of other action, at the Closing) at the offices of Fleischman and Walsh, LLP, 1400 Sixteenth Street, N.W., Washington, D.C. 20036, or on such other date and at such other time or place as may be mutually agreed upon by the parties hereto (the "Closing Date"). Upon payment 16 Illinois of the Initial Cash Payment by IAWC and Parent and confirmed receipt thereof by Seller or the Escrow Agent pursuant to Section 2.6.2 below, Seller shall operate the Business at the direction of and under the control of Parent or IAWC as to the respective Acquired Assets acquired by each. Notwithstanding the foregoing, the Closing shall be deemed to be effective as of 11:59 p.m. on the Closing Date for all purposes. 2.6 Purchase Price. 2.6.1 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price to be paid by Parent and IAWC for the purchase of their respective Acquired Assets (including the CLWC Stock) (the "Purchase Price") shall be: (i) $253,160,000 in cash representing the sum of the amounts owing by Parent and IAWC, respectively, set forth on Schedule 2.6 (the "Base Cash Purchase Price," the Base Cash Purchase Price as adjusted in accordance with Section 2.6.3, Section 2.6.5 and Section 2.6.6 is referred to as the "Initial Cash Payment"), subject to adjustment pursuant to the provisions of this Agreement (including Section 2.6.3, Section 2.6.4, Section 2.6.5, Section 2.6.6 and Section 2.9 of this Agreement) and (ii) the assumption by IAWC or Parent, as the case may be, of the Assumed Liabilities. 2.6.2 Payment of Initial Cash Payment. Subject to the terms and conditions of this Agreement, the Initial Cash Payment shall be paid by Parent and IAWC for the respective Acquired Assets being acquired by each on the Closing Date by federal or other wire transfer of immediately available funds to the account designated by Seller in writing at least two (2) Business Days prior to the Closing Date. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Parent and IAWC shall deliver the Initial Cash Payment to Parent's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. The Escrow Agent shall keep amounts deposited by Parent and IAWC in separate accounts. Upon receipt, the Escrow Agent shall invest the Initial Cash Payment in an interest-bearing account mutually agreed upon by Seller, Parent and IAWC. At Closing, Parent and IAWC shall sign and deliver to Citizens a statement which confirms that the Closing has occurred and which instructs the Escrow Agent to transfer to Citizens the funds representing the Initial Cash Payment, plus an amount representing the interest earned after the Closing Date until the date the funds are transferred, to an account that Citizens shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to IAWC and Parent from their respective accounts. The fees and expenses of Escrow Agent shall be paid by Parent and IAWC in proportion to the amount deposited by each. 2.6.3 Estimated Closing Statement. At least five (5) business days prior to the Closing Date, Citizens shall deliver to Parent and IAWC a statement of net assets (the "Estimated Statement of Net Assets") reflecting its good faith calculation of the Acquired Assets of the Business as of the last day of the latest calendar month for which financial statements of Seller are available (the "Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall be prepared in the same manner and utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999). The Base Cash Purchase Price shall be increased 17 Illinois or decreased on a dollar for dollar basis by the amount, if any, by which the Estimated Adjusted Net Assets is greater than or less than $163,999,975 (such increases or decreases, as the case may be, are collectively referred to herein as the "Estimated Net Asset Adjustment"). For the avoidance of doubt, the increase or decrease in the Base Cash Purchase Price described in this Section 2.6.3 shall be applied to the amounts owing by Parent and IAWC as referenced on Schedule 2.6 as such increase or decrease relates to the Acquired Assets being acquired by each of Parent and IAWC, respectively. 2.6.4 Post-Closing Adjustment to Purchase Price. (a) Within 90 days after the Closing, Citizens shall prepare and deliver to Parent and IAWC a Statement of Net Assets (the "Closing Statement of Net Assets") which reflect the Acquired Assets, as of 11:59 p.m. on the Closing Date, based on actual financial performance and calculated in the same manner, utilizing the same accounting principles, policies and methods utilized in preparing the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999), together with (A) an audit report of Seller's Accountants stating that the Closing Statement of Net Assets have been prepared utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets and (B) a calculation of Citizens' determination of the amount of increase or decrease in the amount of the Acquired Assets of the Business from the Interim Statement of Net Assets Date to the Closing Date which is derived from the Closing Statement of Net Assets ("Seller's Adjustment Amount"). The Closing Statement of Net Assets shall not give effect to any purchase accounting treatment arising from Parent's and IAWC's purchase of their respective Acquired Assets. IAWC and Parent shall pay the fees and expenses of Seller's Accountants incurred in connection with this Section 2.6.4, each bearing the same proportion of such fees and expenses as its respective portion of the Purchase Price bears to the total Purchase Price. Parent and IAWC agree to cooperate, and agree to cause IAWC's Accountants to cooperate, with Citizens and Seller's Accountants in connection with the preparation of the Closing Statement of Net Assets, and related information, and shall provide to Citizens and Seller's Accountants such books, records and information as may be reasonably requested from time to time, including the work papers of IAWC's Accountants. Citizens will give Parent and IAWC and their representatives access during the normal business hours of Citizens to the personnel, books and records of Citizens and the work papers of Seller's Accountants to assist Parent and IAWC in the review of the Closing Statement of Net Assets and related matters. Parent and IAWC agree that, following the Closing through the date on which the Closing Statement of Net Assets are delivered, they will not take any actions with respect to any accounting books, records, policies or procedures on which the Closing Statement of Net Assets are to be based that would make it impossible or impracticable to calculate the Acquired Assets in the manner and utilizing the methods required hereby. Without limiting the generality of the foregoing, no changes shall be made in any reserve or other account existing as of the date of the Interim Statement of Net Assets except in the ordinary course or as a result of events occurring after the date of the Interim Statement of Net Assets and, in such event, only in a manner consistent with past practices of Seller. (b) Parent and IAWC may dispute any amounts reflected on the Closing Statement of Net Assets, in the Seller's Adjustment Amount or in the Statement of Certain Assumed Liabilities, provided, however, that Parent or IAWC shall notify Citizens in writing of each 18 Illinois disputed amount, and specify the amount thereof in dispute and the basis of such dispute, within 30 days of the Parent's or IAWC's receipt of the Closing Statement of Net Assets and the Seller's Adjustment Amount (such 30 day period hereinafter referred to as the "Review Period"). In the event of a dispute with respect to the Closing Statement of Net Assets, the Seller's Adjustment Amount or the Statement of Certain Assumed Liabilities, Parent, IAWC and Seller shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Parent, IAWC and Seller are unable to reach a resolution of such differences within 30 days of receipt of Parent's or IAWC's written notice of dispute to Seller, then Parent, IAWC and Seller shall submit the amounts remaining in dispute (together with any amounts remaining in dispute pursuant to Section 2.6.4(b) of each of the Related Purchase Agreements) for resolution to an independent accountant firm of national reputation mutually appointed by Seller, Parent, and IAWC (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall be requested to determine and report to the parties, within 30 days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Parent and IAWC on the one hand and Seller Parties on the other hand so that the Seller Parties' share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Parent and IAWC to the Third Accounting Firm that is unsuccessfully disputed by Parent and IAWC (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed amounts so submitted by Parent and IAWC to the Third Accounting Firm. Parent and IAWC shall pay the fees and expenses of IAWC's Accountants incurred in connection with this Section 2.6.4(b). Seller's Adjustment Amount, if there are no disputes with respect thereto, or Seller's Adjustment Amount as adjusted after the resolution of all disputes with respect thereto in accordance herewith, shall be referred to as the "Final Net Asset Adjustment." (c) If the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment exceeds the Initial Cash Payment, then within five (5) business days after final determination thereof Parent and IAWC shall pay Seller the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. If the Initial Cash Payment exceeds the sum of the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment, then within five (5) business days after final determination thereof Seller shall pay Parent and IAWC the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. The amount paid by or to Parent and/or IAWC under this Section 2.6.5(c) shall be based on the appropriate adjustments to the prices of the Acquired Assets being acquired by each of Parent and IAWC, respectively. 2.6.5 Adjustment for Certain Liabilities. Concurrent with the delivery of the Estimated Statement of Net Assets, Citizens also shall deliver to Parent and IAWC a statement reflecting (i) the customer and other deposits held by Seller on the Closing Date and relating to the Business, (ii) the total amount of the Assumed Indebtedness that will be outstanding immediately 19 Illinois after the Closing Date, (iii) the items specified in Section 2.9 to the extent set forth therein, and (iv) without duplications of any amount included in clause (i) above any payments received by Seller under the Contracts and Permits for obligations not performed as of the Closing Date (the "Statement of Certain Assumed Liabilities"). The Statement of Certain Assumed Liabilities shall reflect Citizens' good faith calculation of such liabilities as of the Closing Date. The Base Cash Purchase Price shall be decreased by the net amount set forth in the Statement of Certain Assumed Liabilities. Concurrent with the delivery of the Closing Statement of Net Assets, Citizens also shall deliver to Parent and IAWC a statement showing any adjustments to the Statement of Certain Assumed Liabilities and the Base Cash Purchase Price shall be further adjusted to give effect to any such adjustments to the Statement of Certain Assumed Liabilities. 2.6.6 Additional Adjustment to the Purchase Price. The aggregate amount of the Base Cash Purchase Price (and the portion thereof to be paid by IAWC in accordance with Section 2.6) shall be decreased by an amount equal to the proceeds of Seller's sale of the property described in Item 7 of Schedule 3.5 (net of expenses) (which property, for the avoidance of doubt, was property previously used by IAWC in connection with the Business) less the sum of (i) the federal and state income taxes payable by Seller in respect of those proceeds and (ii) the book value of such property, as of June 30, 1999, on Seller's books. 2.7 Deliveries and Proceedings at Closing. Subject to the terms and conditions of this Agreement, at the Closing: 2.7.1 Deliveries to each of Parent and IAWC. Citizens shall, and shall cause Seller to, deliver to each of Parent and IAWC with respect to the Acquired Assets acquired by each: (a) bills of sale and instruments of assignment to the Acquired Assets, duly executed by Citizens, CUCI, CBSC and Citizens Resources, as the case may be, substantially in the form of Exhibit B hereto and; (b) the consents to transfer, of all transferable or assignable Contracts, Intellectual Property, Permits (including Environmental Permits), to the extent specifically required hereunder; (c) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Citizens, CUCI, CBSC and Citizens Resources, as the case may be (together with any other transfer forms necessary to transfer title to such vehicles); (d) special warranty deeds of conveyance with respect to the parcels of Real Estate owned in fee simple by Citizens, CUCI and Citizens Resources, as the case may be (or, with respect to any such parcel which was acquired by Citizens, CUCI and Citizens Resources (or its predecessor in interest, in cases involving mergers) by deed without covenant or warranty of title, a quit claim deed without covenant or warranty of title) to Parent or IAWC, as the case may be, duly executed and acknowledged by Citizens, CUCI and Citizens Resources as appropriate, and in recordable form; 20 Illinois (e) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Real Estate, duly executed by Citizens, CUCI and Citizens Resources, as appropriate (the "FIRPTA Affidavit"); (f) the certificates, opinions and other documents required to be delivered by the Seller Parties pursuant to Section 6.1 hereof and certified resolutions evidencing the authority of the Seller Parties as set forth in Section 3.2 hereof; (g) all agreements and other documents required by this Agreement; (h) a receipt for the payment of the Initial Cash Payment duly executed by Citizens; (i) the CLWC Stock by delivering the certificate representing the CLWC Stock, endorsed or accompanied by a stock power (in form reasonably satisfactory to counsel to Parent), in favor of Parent; (j) duly executed letters of resignation, effective as of the Closing Date, of all the officers and directors of CLWC; and (k) all such other instruments of conveyance as shall, in the reasonable opinion of Parent, IAWC and their counsel, be necessary to transfer to Parent and IAWC, as the case may be, the Acquired Assets being acquired by each in accordance with this Agreement and where necessary or desirable, in recordable form. 2.7.2 Deliveries By Parent and IAWC to the Seller Parties. Each of Parent and IAWC shall, and Parent shall cause IAWC to, deliver to the Seller Parties: (a) wire transfer of immediately available funds in an amount equal to the Initial Cash Payment payable by each; (b) Assumption Agreements, duly executed by IAWC and Parent, with respect to the liabilities being assumed by each; (c) the certificates, opinions and other documents required to be delivered by Parent and/or IAWC pursuant to Section 6.2 hereof; (d) all of the instruments contemplated by Section 5.24(a) to the extent not previously executed and delivered by Parent; and (e) all such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Parent and IAWC to assume the Assumed Liabilities in accordance with this Agreement. 21 Illinois 2.8 Tax Allocation of Consideration. Parent, IAWC and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price but excluding amounts attributable to the CLWC Stock) to the individual assets or classes of assets other than the CLWC Stock within the meaning of Section 1060 of the Code. If Parent, IAWC and Seller agree to such Allocation on or before ninety (90) days after the Closing Date, Parent, IAWC and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) none of Parent, IAWC or Seller will take any position before any Authority or in any proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Parent, IAWC and Seller cannot agree to an Allocation on or before ninety (90) days after the Closing Date, Parent, IAWC and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Parent, IAWC and Seller's good faith Allocations, unless otherwise required because of a change in any legal requirement. 2.9 Prorations. The parties hereto agree that the following expenses shall be calculated and pro rated as of the Closing Date, with Seller responsible for such expenses and to receive the benefit for the same for the period through and including the Closing Date, and Parent and IAWC to be responsible for and to receive the benefit of the same after the Closing Date with respect to the Acquired Assets being acquired by each: 2.9.1 personal and real property taxes (on the basis on which the same were assessed and paid) and sales, occupation and use taxes, in each case, to the extent relating to the Business and except as otherwise provided in Section 7.1; 2.9.2 electric, fuel, gas, telephone, sewer and utility charges, in each case, to the extent relating to the Business; 2.9.3 rentals and other charges under Contracts to be assumed by Parent or IAWC, as the case may be, pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h)); and 2.9.4 charges under maintenance and service contracts and other Contracts (except to the extent provided in Section 2.3.3(h)), and fees under Permits to be transferred to Parent or IAWC, as the case may be, as part of the Acquired Assets; 2.9.5 water, sewer and other similar types of taxes, and installments on special benefit assessments; and 2.9.6 payroll expenses, payroll taxes, reimbursable employee business expenses and the financial cost of the accrued vacation of each Transferred Employee. 2.10 Intercompany Accounts. Notwithstanding any other provision of this 22 Illinois Agreement, any amounts due to CLWC from any of its Affiliates as of the Closing Date (collectively, "Affiliate Receivables") shall be netted against any amounts due from CLWC to any of its Affiliates as of the Closing Date (collectively, "Affiliate Payables"). Seller shall arrange for the elimination of any net excess of Affiliate Receivables due to CLWC, or any net excess of Affiliate Payables due from CLWC, so that the balances of the Affiliate Receivables and Affiliate Payables of CLWC as of the Closing Date shall be zero. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Each of the Seller Parties jointly and severally represent and warrant to Parent and IAWC as follows: 3.1 Qualification; No Interest in Other Entities. 3.1.1 Each of the Seller Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as presently being conducted. Each of the Seller Parties is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of the business conducted by it or such Seller Party's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of the Seller Parties do not have a Material Adverse Effect. 3.1.2 Except for the CLWC Stock, no shares of any corporation or any ownership or other investment interest, either of record, beneficially or equitably, in any Person are included in the Acquired Assets. 3.2 Authorization and Enforceability. Each of the Seller Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements and instruments to be executed by them in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents"). The execution, delivery and performance by each of the Seller Parties of this Agreement and the Transaction Documents to which such Seller Party is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by each of the Seller Parties, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by the Seller Parties. This Agreement is a legal, valid and binding obligation of each Seller Party, enforceable against them in accordance with its terms except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which each of the Seller Parties is a party will be duly executed and delivered by each of the Seller Parties and will constitute the legal, valid and binding obligations of each of the Seller Parties, enforceable against them in accordance with its respective terms, except as such enforceability may 23 Illinois be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 3.3 No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the Transaction Documents by each of the Seller Parties do not, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents by the Seller Parties, will not: (a) contravene any provision of the Restated Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of the other Seller Parties; or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or the CLWC Stock or give to others any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which any of the Seller Parties is a party, or by which the Business or any of the Acquired Assets may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, Liens, interests or rights which, individually and in the aggregate, do not have a Material Adverse Effect or will be cured, waived or terminated prior to the Closing Date, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, to which any of the Seller Parties is subject, other than those violations or conflicts which individually and in the aggregate would not have a Material Adverse Effect. 3.4 Financial Statements. Citizens has previously delivered to Parent and IAWC the statement of income of the Business (the "Income Statement") and the Interim Statement of Net Assets contained in Schedule 3.4 (collectively, the "Financial Statements"). The Income Statement (a) fairly presents in all material respects the results of operations of the Business in accordance with generally accepted accounting principles ("GAAP") consistently applied except for the omission of full footnotes to the Income Statement and (b) has in all material respects been derived from the books and records of Seller and reflects the separation of the operation associated with the Business from other operations of Citizens. The Interim Statement of Net Assets (a) has in all material respects been derived from the books and records of Seller and reflects the separation of the operations associated with the Business from other operations of Citizens; (b) fairly presents in all material respects the Acquired Assets as of the Interim Statement of Net Assets Date; and (c) has in all material respects been prepared in accordance with GAAP consistently applied except for the omission of full footnotes to such Interim Statement of Net Assets. The financial statements included in the Annual Report to each PUC for the year ended December 31, 1998 were prepared in all material respects in accordance with the rules and regulations of such PUC. 3.5 No Changes. Since the Interim Statement of Net Assets Date to the date hereof, except as disclosed in Schedule 3.5, the Seller Parties have conducted the Business as presently operated only in the ordinary course of business consistent with past practice. Since the 24 Illinois Interim Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has not been: 3.5.1 any Material Adverse Effect; 3.5.2 prior to the date of this Agreement, any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any Transferred Employee, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the Transferred Employees participate) to which any of the Transferred Employees may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan other than in any such case (i) in the ordinary course consistent with past practice, (ii) as required by law, or (iii) as required by the Collective Bargaining Agreement; 3.5.3 any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or the provision of discounts, rebates or allowances; 3.5.4 any disposition of or failure to keep in effect any rights in, to or for the use of any Permit of the Business which individually or in the aggregate would have a Material Adverse Effect; 3.5.5 any damage, destruction or loss affecting the Business which individually or in the aggregate would have a Material Adverse Effect whether or not covered by insurance; 3.5.6 prior to the date of this Agreement, any change by Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP and as set forth on Schedule 3.5; or 3.5.7 prior to the date of this Agreement, any sale, transfer or other disposition of any material assets, properties or rights of the Business, except in the ordinary course of business consistent with past practice. 3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a list of all Contracts (other than (i) with respect to which the Business' total annual liability or expense is less than (a) $250,000 per such Contract and (b) $6,123,000 per all such Contracts (when taken together with similar contracts omitted from Schedule 3.6 of the Related Purchase Agreements), and (ii) Contracts that may be terminated by Seller, without penalty, on notice of 90 days or less) except line extension agreements and similar agreements and construction and design contracts. Seller has furnished to Parent or IAWC a correct and complete copy of each written agreement listed in Schedule 3.6. Except as disclosed on Schedule 3.6, with respect to each Contract, neither Seller nor, to the Seller Parties' knowledge, any other party thereto, is in breach or default, and to the Seller Parties' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the Contract, except in each case where such breaches, terminations, modifications, accelerations or defaults, individually or in the aggregate, do not have a Material Adverse Effect. Except as set forth in Schedule 3.6, there 25 Illinois are no disputes pending or to the best of the Seller Parties' knowledge, threatened, under or in respect of any of the Contracts, other than those that individually and in the aggregate do not have a Material Adverse Effect. 3.7 Permits and Compliance With Laws Generally. 3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes, including Environmental Laws (as defined below), except to the extent that any failure to possess, or to comply with, any Permit, laws, rules, regulations or orders would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in Schedule 3.7, the Business is conducted by Seller in compliance with all applicable laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA"), zoning, building and similar laws and Environmental Laws), rules, regulations, ordinances, codes, judgments and orders, except for such failures to comply which do not individually or in the aggregate have a Material Adverse Effect. Except as disclosed on Schedule 3.7, all Permits of Seller relating to the operation of the Business are in full force and effect, other than those the failure of which to be in full force and effect would not individually or in the aggregate have a Material Adverse Effect. There are no proceedings pending or, to the Seller Parties' knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Permits presently possessed by Seller other than those revocations, cancellations, suspensions or modifications which do not individually or in the aggregate have a Material Adverse Effect. 3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the knowledge of the Seller Parties, threatened, by any Authority or other Person with respect to any alleged (i) violation by Seller or any Affiliate of Seller relating to the Business of any law, ordinance, rule, regulation, code or order of any Authority; or (ii) failure by Seller or any Affiliate to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets), except, in each case, where such violations or failures, individually or in the aggregate, would not have a Material Adverse Effect. 3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and with such exceptions as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect: 3.8.1 Seller has not disposed of or arranged for the disposal of or Released any Hazardous Substances, other than in conformity with Environmental Laws, at any Real Estate, or, in connection with the Business or Acquired Assets, at any other facility, location, or other site. 3.8.2 Seller has not received any written notice or request for information with respect to, and to the best of the Seller Parties' knowledge, Seller has not been designated a potentially liable party for Remedial Action, in connection with any Real Estate, or, as of the date 26 Illinois hereof, with respect to the Business or Acquired Assets, at any other facility, location, or other site under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or comparable state statutes. 3.8.3 To the best of the Seller Parties' knowledge, except for such use or storage of Hazardous Substances as is incidental to the conduct of the Business, which use and storage is or has been in compliance with Environmental Laws, and which use and storage has not caused any condition that requires Remedial Action, no Real Estate has been used for the storage, treatment, generation, processing, production or disposal of any Hazardous Substances or as a landfill or other waste disposal site in violation of any Environmental Law. 3.8.4 To the best of the Seller Parties' knowledge, underground storage tanks are not, and have not in the past been, located on or under any Real Estate. 3.8.5 There are no pending or unresolved claims against Seller or the Business for investigatory costs, cleanup, removal, remedial or response costs, or natural resource damages arising out of any Releases or threat of Release of any Hazardous Substances at any Real Estate or, as of the date hereof, with respect to the Business or the Acquired Assets or at any other facility, location, or other site. 3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing materials are located at or in any Real Estate in violation of Environmental Laws or which require Remedial Action. \ 3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance managed or generated by or on behalf of Seller at the Real Estate or in connection with the Business or Acquired Assets has come to be located at any site that is listed or formally proposed for listing under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), or any similar state list or that is the subject of federal, state, or local enforcement actions or investigations. 3.8.8 The Seller Parties know of no facts or circumstances related to environmental matters (i) in connection with the operation of the Business or (ii) concerning the Real Estate, that are reasonably likely to result in any material reduction in the quality or quantity of water available for supply to the Seller Parties' customers. 3.8.9 The Seller Parties will within thirty (30) days of the date hereof provide Parent or IAWC with copies of all written environmental audits or investigations of which they are aware (after due inquiry) prepared for the Real Estate or operations of the Business. 3.8.10 Except as set forth in Schedule 3.8.10 or Citizens' Annual Report on Form 10-K for the year ended December 31, 1998: 27 Illinois (a) The Seller Parties (including for purposes of Section 3.8.10(a) and (b), Affiliates and predecessors of the Seller Parties) are and have been for the past three years in full compliance with all federal and state primary drinking water standards; (b) The Seller Parties are and have been for the past three years in full compliance with all federal and state secondary drinking water standards; and (c) As to all outstanding violations of state or federal drinking water standards, as of the date hereof, the Seller Parties have completed or are in the process of completion in accordance with all applicable deadlines, all actions required by Environmental Law or Authorities to correct or otherwise respond to such violations. 3.8.11 Except as set forth in Schedule 3.8.11, none of the Seller Parties will be required to place any notice or restriction relating to the presence of Hazardous Substances in the deed to any Real Estate, or in any written instrument accompanying this Agreement, and no Real Estate has such a notice or restriction in its deed or any other written instrument relating to the purchase, lease or rental of such property. For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way respond to any presence, Release or threat of Release of Hazardous Substances; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substances so it does not endanger or threaten to endanger public or employee health or welfare or the environment; or (z) perform studies, investigations or monitoring necessary or required to investigate the foregoing; (B) "Environmental Laws" means any common law or federal, state or local law, statutes, rule, regulation, ordinance, code, judgment or order relating to the protection of the environment or human health and safety and includes, but is not limited to, CERCLA (42 U.S.C. section 9601, et seq.), the Clean Water Act (33 U.S.C. section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. section 2701 et seq.), each as has been or may be interpreted or amended as of the Closing Date and the regulations promulgated pursuant thereto and in effect as of the Closing Date; (C) "Released" means released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or polluting substance or waste or contaminant under or pursuant to any Environmental Law, including petroleum products, PCBs and radioactive materials. 3.9 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by the Selling Parties of this Agreement, the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by the Seller Parties, including without limitation in connection with the assignment or transfer of the Contracts and Permits contemplated hereby, except (i) as required by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) as specified on Schedule 3.9, (iii) as required by the IDRB Documents, and (iv) for such other consents, approvals, authorizations, registrations or filings the failure of 28 Illinois which to obtain or make would not individually or in the aggregate have a Material Adverse Effect or which are obtained by the Closing Date. 3.10 Title. Seller has good and valid title to all of the Acquired Assets constituting personal property, good and marketable title in fee simple to all of the owned Acquired Assets constituting Real Estate and good and valid leasehold title to all of the leased Acquired Assets constituting Real Estate, in each case, free and clear of Liens subject only to the Permitted Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set forth in Schedule 3.10 hereto, (b) Liens securing Taxes, assessments, governmental charges or levies, or the claims of materialmen, mechanics, carriers and like persons, all of which are not yet due and payable or which are being contested in good faith or (c) such other Liens which, individually or in the aggregate, do not have a Material Adverse Effect (it being understood that to the extent a Permitted Exception relates to or arises from a Retained Liability, Seller shall still be liable for such Retained Liability to the extent set forth herein). 3.11 Real Estate. 3.11.1 As of the date hereof, Seller has not received any written or oral notice for assessments for public improvements against the Real Estate which remains unpaid, and to the best knowledge of the Seller Parties, no such assessment has been proposed. Except as set forth on Schedule 3.11, as of the date hereof, there is no pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate and to the best knowledge of the Seller Parties no such proceeding is threatened. 3.11.2 Except as disclosed on Schedule 3.6, as of the date hereof, Seller is not a lessee under any Contract relating to the use or occupancy of the Real Estate involving annual payments in excess of $100,000. 3.11.3 Each parcel of the Real Estate has physical and, to Seller's knowledge, legal vehicular and pedestrian access to and from public roadways as may be reasonably necessary to the operation of the Business except where the failure to have such access does not have a Material Adverse Effect. To Seller's knowledge, no fact or condition exists which would result in the termination of (a) the current access from each parcel of the Real Estate, and (b) continued use, operation, maintenance, repair and replacement of all existing and currently committed water lines used by Seller in connection with the Business, except where such termination would not have a Material Adverse Effect. 3.12 Taxes. The Seller Parties have (a) timely filed all material returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (b) paid all Taxes that are shown to have come due pursuant to such returns or reports and (c) paid all other material Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due. To the best of the Seller Parties' knowledge, all such returns or reports have 29 Illinois been prepared in accordance with all applicable laws and requirements in all material respects. Except to the extent disclosed on Schedule 3.12, none of the assets of the Business or constituting any of the Acquired Assets (a) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (b) is "tax-exempt use property" within the meaning of Section 168(h) of the Code or (c) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. 3.13 Patents and Intellectual Property Rights. To the best of the Seller Parties' knowledge, the operations of Seller do not make any unauthorized use of any Intellectual Property except for any such unauthorized uses which do not have a Material Adverse Effect. Assuming the consents listed as item XII on Schedule 3.9 are obtained, neither Parent nor IAWC will lose any of Seller's rights to, or be required to pay increased royalties for, any Intellectual Property included in the Acquired Assets being acquired by it as a result of the Closing and the consummation of the transactions contemplated by this Agreement, except for any such rights or such increased royalties the loss or payment of which would, individually or in the aggregate, not have a Material Adverse Effect. 3.14 Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Interim Statement of Net Assets or arising since the date thereof have arisen out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; the allowance for collection losses on the Interim Statement of Net Assets has been determined in accordance with GAAP consistent with past practice. 3.15 Labor Relations. As of the date hereof, except as set forth in Schedule 3.15, to best of the knowledge of the Seller Parties, there has been no union organizing efforts with respect to the Business conducted within the last three (3) years and there are none now being conducted with respect to the Business. Except as set forth in Schedule 3.15, Seller has not at any time during the three (3) years prior to the date of this Agreement had, nor, to the best of the Seller Parties' knowledge, is there now threatened, a strike, work stoppage or work slow down with respect to or affecting the Business which had or could reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as set forth in Schedule 3.15, (i) no Employee is represented by any union or other labor organization and (ii) there is no unfair labor practice charge pending or, to the best knowledge of the Seller Parties, threatened against Seller relating to any of the Employees as related to the Business which could reasonably be expected to have a Material Adverse Effect. 3.16 Employee Benefit Plans. 3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive, deferred compensation, excess benefit, employment 30 Illinois contract, stock purchase, stock ownership, stock option, supplemental unemployment, vacation, sabbatical, sick-day, severance or other material employee benefit plan, program or arrangement (other than those required to be maintained by law), whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic, (i) maintained by, or contributed to by Citizens or any of its Affiliates, in respect of any Employee or Former Employee, or (ii) with respect to which Citizens or any of its Affiliates has any liability in respect of any Employee or Former Employee (the"Benefit Plans"). Except as disclosed on Schedule 3.16.1, neither Citizens nor any of its Affiliates maintains any bonus, pension or welfare benefit plan, program or arrangement, including any deferred compensation arrangement, for directors, consultants or independent contractors of the Business. 3.16.2 A true and complete copy of each Benefit Plan and related trust agreements and (to the extent applicable) a copy of each Benefit Plan's current summary plan description and in the case of an unwritten Benefit Plan, a written description thereof, has been furnished to Parent or IAWC. In addition, to the extent applicable, Parent or IAWC has been provided a copy of the most recent Internal Revenue Service ("IRS") determination letter issued to each Benefit Plan and a copy of the most recent IRS Form 5500 together with all schedules and accountants' statement filed, and actuarial reports prepared, on behalf of each Benefit Plan. 3.16.3 Each Benefit Plan which is intended to be qualified under Section 401(a) of the Code (as designated on Schedule 3.16.1) is so qualified, and will remain so qualified upon the timely making of certain amendments required by law during the applicable remedial amendment period, and any trust forming a part of such a Benefit Plan is tax exempt under Section 501(a) of the Code. Each such Benefit Plan has been amended, as and when necessary, to comply with the Tax Reform Act of 1986 and upon timely filing of an Application for Determination with the Internal Revenue Service, will be eligible to make further such amendments under the"remedial amendment period." 3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code. 3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the Code or ERISA. 3.16.6 Neither Citizens nor any ERISA Affiliate and, to the knowledge of the Seller Parties, no other Person, has taken any action or failed to take any action with respect to any Benefit Plan that may subject Parent or IAWC or any Benefit Plan under which liabilities may be assumed by Parent or IAWC under Sections 5.10, 5.11 or 5.12 ("Assumed Benefit Liabilities") to any material liability or Tax under the Code or ERISA. 3.16.7 Neither Citizens nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Benefit Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, including any contingent liability under Section 4204 of ERISA or withdrawal liability arising from the actions of Citizens or any ERISA Affiliate 31 Illinois contemplated by this Agreement. All contributions that Citizens or any ERISA Affiliate have been obliged to make to any Benefit Plan, including any multiemployer plan, have been duly and timely made. 3.16.8 There are no pending or, to the knowledge of the Seller Parties, threatened claims (other than routine claims for benefits), assessments, complaints, proceedings or investigations of any kind in any court or governmental agency with respect to any Benefit Plan which could reasonably be expected to give rise to a material liability to IAWC. 3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides benefits, including without limitation, death or medical benefits, beyond termination of service or retirement other than (i) coverage mandated by law, or (ii) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code. Seller's Retiree Medical Plan contains provisions permitting Seller to modify or terminate retiree medical benefits at any time, without prior notice to any covered individual. Except with respect to retirees, "grandfathered" employees and collectively bargained employees, Seller knows of no reason why its ability to effect those provisions would be limited. 3.16.10 With respect to each Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, Citizens and each ERISA Affiliate have complied in all material respects with the continuation coverage requirements of the Code and ERISA. 3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.17, Seller has no liabilities with respect to the Business which would constitute Assumed Liabilities, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, except: 3.17.1 the Assumed Indebtedness and those other liabilities which would decrease the Base Cash Purchase Price pursuant to Section 2.6.5 to the extent assumed by Parent or IAWC at Closing; 3.17.2 liabilities arising in the ordinary course of business under any Contract or Permit or with respect to any agreement or instrument included within the definition of Real Estate; and 3.17.3 those liabilities incurred, consistent with past business practice, in or as a result of the normal and ordinary course of business and reflected in the books and records related to the Business; 3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; and 3.17.5 those other liabilities, which individually and in the aggregate, would not have a Material Adverse Effect. 32 Illinois 3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule 3.18, there are no actions, suits, investigations or proceedings pending against or, to the best of the Seller Parties' knowledge, threatened, against or affecting, Seller, the Business or any of the Acquired Assets before any court or arbitrator or Authority which individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there are currently no outstanding judgments, decrees or orders of any court or Authority against any of the Seller Parties, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets (other than any PUC order relating to rates, tariffs and similar matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. 3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real Estate has adequate arrangements for supplies of electricity, gas, oil, coal and/or sewer for all operations at the 1998 or current operating levels, whichever is greater. Except as set forth on Schedule 3.19, there are no actions or proceedings pending or, to the best of the Seller Parties' knowledge, threatened, that would adversely affect the supply of electricity, gas, coal or sewer to the Real Estate except for those which individually and in the aggregate would not have a Material Adverse Effect. 3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by Seller, together with the risks insured against, coverage limits and deductible amounts. 3.21 Relationship with Customers. As of the date hereof, CUCI does not have any current customer which accounted for more than 5% of the net sales of the Business (taken together with the businesses being acquired by Parent or IAWC or Affiliates of Parent pursuant to the Related Purchase Agreements) for the immediately preceding 12-month period. 3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth in Schedule 3.22 hereto, within six months prior to the date hereof, (i) Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; or (b) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; (ii) Seller has not been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar state or local law; and (iii) none of Seller's employees who are employed in connection with the Business has suffered an "employment loss" (as defined in the WARN Act). 3.23 Condition of Assets. Except as set forth on Schedule 3.23, the buildings, machinery, equipment, tools, furniture, improvements and other fixed tangible assets of the Business included in the Acquired Assets, taken as a whole and taken together with the similar assets included among the assets being acquired by Parent or IAWC or Affiliates of Parent pursuant to the Related 33 Purchase Agreements, are in good operating condition and repair, reasonable wear and tear excepted. 3.24 Brokerage. None of the Seller Parties or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to IAWC or its Affiliates. 3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded Assets, the Acquired Assets include all assets, rights, properties and contracts the use of which is necessary to the continued conduct of the Business by Parent or IAWC, as the case may be, substantially in the manner as it was conducted prior to the Closing Date, including the service of all utility customers in substantially the same manner and at substantially the same service levels as provided by Seller on the date hereof. 3.26 Year 2000 Matters. Citizens has (1) initiated a review and assessment of all mission critical areas within the Business and related operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by any Seller Party (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in Citizens' Annual report on Form 10-K for the fiscal year ended December 31, 1998 and Citizens' Quarterly reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in accordance with that timetable. Seller has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to Seller after making reasonable inquiries of such suppliers and vendors. Seller makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. 3.27 Product Liability. Except as disclosed in Schedule 3.27 and except for those liabilities which individually or in the aggregate would not have a Material Adverse Effect, there are no (a) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties, unasserted, with respect to any product liability or similar claim that relates to any product or service sold by Seller or the Business to others or (b) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties unasserted, with respect to any claim for the breach of any express or implied product warranty or a similar claim with respect to any product or service sold by Seller or the Business to others. 3.28 Capitalization of CLWC; Title to CLWC Stock. There are 100 shares of CLWC common stock authorized and 100 shares of CLWC common stock issued and outstanding. The CLWC Stock comprises all of the shares of capital stock of CLWC that are issued and outstanding. All shares of CLWC Stock are duly authorized, validly issued and outstanding, fully 34 Illinois paid and nonassessable. All CLWC Stock is owned by Citizens. By delivery of payment for the CLWC Stock and by delivery of the certificate representing the CLWC Stock as provided for in this Agreement, Parent shall acquire good title to the CLWC Stock, free and clear of all Liens. There are no outstanding subscriptions, options, warrants, conversion rights, convertible securities, preemptive rights, preferential rights, or other rights (contractual or otherwise) or agreements of any kind for the purchase or acquisition from (or the purchase, sale or issuance by) Citizens or CLWC of any shares of CLWC Stock or other equity or ownership interests in CLWC, and no outstanding authorization therefor has been given. CLWC has no liabilities other than those that, if outstanding as of the Closing Date, would have been included among the Assumed Liabilities under the terms of Section 2.3 had Parent purchased the assets of CLWC rather than its stock. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND IAWC Parent and IAWC jointly and severally represent and warrant to Seller as follows: 4.1 Organization and Good Standing. 4.1.1 Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.1.2 IAWC is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and each of Parent and IAWC has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business being acquired by it hereunder. Each of Parent and IAWC is qualified to do business and is in good standing in all jurisdictions wherein the nature of the business conducted by it or its ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such failures of such Parent and IAWC do not have a material adverse effect on its ability to perform each of their obligations under this Agreement and the Transaction Documents. 4.2 Authorization and Enforceability. Each of IAWC and Parent has full corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which either of them is a party. The execution, delivery and performance by IAWC and Parent of this Agreement and the Transaction Documents to which IAWC and/or Parent is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by IAWC and Parent, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by IAWC and Parent. This Agreement is a legal, valid and binding obligation of IAWC and Parent, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the 35 Illinois discretion of a court. As of the Closing Date, each of the other Transaction Documents to which IAWC and Parent is a party will be duly executed and delivered by IAWC and Parent and will constitute the legal, valid and binding obligations of IAWC and Parent, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 4.3 No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Transaction Documents by IAWC and/or Parent do not, and the consummation of the transactions contemplated hereby and thereby will not, (a) contravene any provision of the Articles of Incorporation or Bylaws of IAWC or the Certificate of Incorporation or Bylaws of Parent; or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, authorization, proof of dedication or other agreement or commitment, oral or written, to which Parent or IAWC is a party, or by which any of their assets or properties may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, interests or rights which, individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation to which IAWC or Parent is subject other than those violations and conflicts which individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.4 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by IAWC and Parent of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by IAWC or Parent except (i) as required by the HSR Act, (ii) as specified on Schedule 3.9 and (iii) for such consents, approvals, authorizations, registrations or filings, the failure to obtain or make would not individually or in the aggregate have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.5 Financing. IAWC and Parent have, and at the Closing Date, will have sufficient resources to pay the Purchase Price, and Parent, IAWC or the other Affiliates of Parent that are buyers of the assets and businesses being acquired pursuant to the Related Purchase Agreements have, and at the Closing Date, will have sufficient resources to pay the purchase prices set forth in the Related Purchase Agreements. 4.6 Brokerage. None of Parent, IAWC or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's 36 Illinois or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to the Seller Parties. 4.7 Insurance. Schedule 4.7 lists the policies and contracts in effect as of the date hereof for casualty and property insurance covering IAWC's assets and properties and the operation of IAWC's business, together with the risks insured against, coverage limits and deductible amounts. 4.8 Purchase for Investment. Parent acknowledges that the CLWC Stock has not been registered under the Securities Act of 1933, as amended (the "Act"), or qualified or registered under any state securities law and that no public market now exists for the CLWC Stock and a public market may never exist therefore. Parent has no Contract with any Person to sell, transfer or pledge to such Person, or to any other Person, the CLWC Stock, and Parent has no present plans or intentions to enter into any such Contract. Parent is acquiring the CLWC Stock for its own account, for investment only, without a view to distribution, as that phrase has meaning under the Act, and rules and regulations of the SEC. Parent understands that the effect of the foregoing representation and warranty is that the CLWC Stock must be held by it indefinitely unless subsequently registered under the Act or unless an exemption from registration is available at the time of any proposed sale or other transfer thereof. Parent agrees to indemnify and hold harmless Seller against all liabilities, costs and expenses, including reasonable attorneys' fees, and other Damages incurred by Seller as a result of any sale, transfer or other disposition by Parent of all or any part of the CLWC Stock in violation of the Act or applicable state securities laws. ARTICLE 5 ADDITIONAL COVENANTS 5.1 Conduct of Business. Except (i) as otherwise specifically permitted by this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the prior written consent of Parent and IAWC, from and after the date of this Agreement and up to and including the Closing Date, each of the Seller Parties agree that: 5.1.1 Seller shall conduct the Business as presently operated and only in the ordinary course of business consistent with past practice. 5.1.2 They shall promptly inform Parent and IAWC in writing of any specific event or circumstance of which they are aware, or of which they receive notice, that has or is likely to have, individually or in the aggregate, taken together with the other events or circumstances, a Material Adverse Effect on the Acquired Assets or the Assumed Liabilities. 5.1.3 Seller shall not: (a) change or modify in any material respect existing credit and collection policies, procedures and practices with respect to accounts receivable; 37 Illinois (b) enter into any contract or commitment, waive any right or enter into any other transaction (except in the ordinary course of business) which would have a Material Adverse Effect; (c) except in the event of service interruption, emergency or casualty loss, commit to acquire subsequent to the Closing Date on behalf of the Business any capital asset or group of capital assets costing in excess of $1,000,000 that is not included in the capital budget of Seller for fiscal year 2000 and which, if so acquired, would be included in the Acquired Assets; commencing December 1, 1999, accept or receive customer advances for construction in excess of $9,000,000 when combined with customer advances relating to the businesses being acquired by IAWC or Affiliates of IAWC pursuant to the Related Purchase Agreements per each of the next four consecutive three-month periods unless pursuant to an existing tariff, Contract or Permit of Seller; or sell or lease or agree to sell or lease or otherwise dispose of any assets included in the Acquired Assets except in the ordinary course of the conduct of the Business, consistent with past practice; (d) except in the ordinary course of business, consistent with past practice or as required under any of Seller's debt instruments or indentures, mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets (including the CLWC Stock); (e) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any Transferred Employee except (i) as required by law, (ii) in the ordinary course, consistent with past practice and (iii) as required by the Collective Bargaining Agreement in existence on the date hereof; provided, however, no individual Employee shall in any event receive a compensation increase in excess of seven percent (7%) except as required by the Collective Bargaining Agreement in existence on the date hereof; (f) other than in the ordinary course of business consistent with past practice, sell or otherwise transfer any assets necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; (g) change the Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP or any Authority; (h) intentionally and wilfully take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 3.25 hereof (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful omission to take action); 38 Illinois (i) prepay, redeem, retire, refund or otherwise extinguish any of the Assumed Indebtedness; or (j) permit CLWC to amend its articles of incorporation or bylaws, to issue any shares of its capital stock or to enter into any Contract calling for the issuance of any such shares, to merge or consolidate with any other Person or to acquire any stock, securities, or business assets of any other Person. 5.2 Negotiations. Neither Citizens nor any Person controlled by Citizens or under common control with Citizens (each such person being a "Section 5.2 Affiliate"), nor any officer, director, employee, representative or agent of Citizens or any of their Section 5.2 Affiliates, shall, directly or indirectly, solicit or initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into an agreement with any Person or group of Persons (other than Parent, IAWC or any Person controlled by Parent or IAWC or under common control with Parent, IAWC or any Persons providing financing to the parties hereto in connection with facilitating the consummation of the transactions contemplated by this Agreement) concerning any acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) that would result in the transfer to any such Person or group of Persons of ten percent (10%) of the Acquired Assets (as measured by net book value of such assets on the date of each such transaction) or the acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) involving the Seller Parties, if such acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) would be inconsistent, in any respect, with the obligations of the Seller Parties hereunder (any of the foregoing transactions, a "Competing Transaction"). 5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties will provide Parent and IAWC with a supplement or amendment to the Disclosure Schedules with respect to any matter, condition or occurrence which is required to be set forth or described in the Disclosure Schedules. For the avoidance of doubt, a matter, condition or occurrence shall only be "required" to be set forth or described in the Disclosure Schedules if the failure to be so disclosed would result in a breach of the applicable representation or warranty (qualified by Material Adverse Effect where applicable) on the date hereof or on the Closing Date. In addition, Seller shall have the right at any time and from time to time prior to the Closing to supplement or amend the Disclosure Schedules. Seller may provide Disclosure Schedules with respect to any representation or warranty of this Agreement whether or not a specific schedule is referred to therein. In the event that any supplement or amendment of such Disclosure Schedules shall be provided later than five (5) business days prior to the Closing Date, Parent or IAWC shall have the right to delay the Closing for a period of five (5) business days in order for Parent and IAWC to review such supplement or amendment. No such supplement or amendment shall be deemed to cure any breach of or alter any representation or warranty made in this Agreement so as to permit the Closing to occur unless Parent and IAWC specifically agree thereto in writing. The Seller Parties shall promptly inform Parent and IAWC, and Parent and IAWC will promptly inform the Seller Parties of any fact or event which comes to their attention, the existence of which constitutes or likely will constitute a breach in any material respects of any representation or warranty in this Agreement. In addition, Parent will, within five (5) days 39 Illinois of receipt thereof, forward to Seller (i) any title report Parent or IAWC receives from a title company with respect to the Real Estate and (ii) any written communication regarding a specific Lien or title defect affecting a specifically identified parcel of the Real Estate sent to the President, Treasurer or General Counsel of Parent or the President or Corporate Counsel of IAWC, and sent by a party other than the Seller Parties, their legal counsel, financial advisors or representatives. 5.4 Mutual Covenants. The parties mutually covenant from the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement, including Section 5.8 hereof): 5.4.1 to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents; 5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but not waiver) of the conditions to the Closing of the transactions contemplated herein (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and 5.4.3 to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 5.5 Filings and Authorizations. The parties hereto will as promptly as practicable, make or cause to be made all such filings and submissions under laws, rules and regulations applicable to it or its Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act and with the applicable public utility commission (each, a "PUC"). Any such filings and supplemental information will be in substantial compliance with the requirements of the applicable law, rule or regulation. Each of Parent and IAWC, on the one hand, and the Seller Parties, on the other, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission to the PUC or which is necessary under the HSR Act. The Seller Parties, on the one hand and IAWC and Parent, on the other, shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Authority, including the PUC, the United States Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division"), and shall comply promptly with any such inquiry or request. Each of Citizens, Seller, Parent and IAWC will use its reasonable efforts to obtain any clearance required under the HSR Act and from the PUC for the purchase and sale of the Acquired Assets (including the CLWC Stock) in accordance with the terms and conditions hereof. Notwithstanding the foregoing, nothing contained in this Agreement will require or obligate any party or their respective Affiliates: (i) to initiate, pursue or defend any litigation (or threatened litigation) to which any Authority (including the PUC, the Antitrust Division and the FTC) is a party; (ii) to agree or otherwise become subject to any material limitations on (A) the right of Parent and IAWC effectively to control or operate the Business being acquired by each or the right of Seller or its 40 Illinois Affiliates effectively to control or operate Citizens' other businesses, (B) the right of Parent and IAWC or its Affiliates to acquire or hold the Business being acquired by each or the right of Seller or its Affiliates to hold the Excluded Assets or Citizens' other businesses, or (C) the right of Parent and IAWC to exercise full rights of ownership of the Business or all or any material portion of the Acquired Assets being acquired by each or the right of Citizens to exercise full rights of ownership of Citizens' other businesses or all or any material portion of the Excluded Assets; or (iii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, assets or operations of Citizens, Seller, Parent, IAWC, any Affiliate of Parent or the Business. The parties agree that no representation, warranty or covenant of IAWC, Parent, or Citizens contained in this Agreement shall be breached or deemed breached as a result of the failure by Parent and IAWC on the one hand or the Seller Parties, on the other, to take any of the actions specified in the preceding sentence. 5.6 Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law (in which case the parties shall make reasonable efforts to consult with each other prior to such required announcement). 5.7 Further Assurances. Each of Citizens, Parent, IAWC and Seller, from time to time after the Closing, at Parent's, IAWC's or Seller's request, will execute, acknowledge and deliver to the applicable person such other instruments of conveyance and transfer and will take such other actions and execute such other documents, certifications, and further assurances as Parent, IAWC or Seller, as the case may be, may reasonably require in order to transfer, in accordance with the terms and conditions of this Agreement, more effectively in Parent or IAWC or to put Parent or IAWC more fully in possession of any of the Acquired Assets being acquired by each or better to enable Parent or IAWC to complete, perform and discharge any of the Assumed Liabilities being assumed by each. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.8 Cooperation. 5.8.1 Parent, IAWC, Citizens and Seller shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Seller to Parent and IAWC to the extent being acquired by each and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 5.8.2 Without limiting the foregoing, neither Parent and IAWC, nor Citizens and Seller (nor any of their respective Affiliates) shall make any filings pursuant to federal or state securities laws ("Securities Filings") or make any consent solicitations to holders of Assumed Indebtedness which include any information about Seller, IAWC (or their respective 41 Illiniois Affiliates) or the transactions contemplated hereby without consulting with the other party and providing the other party a reasonable opportunity to review and comment on such information, it being understood and agreed that any party may so disclose such information in its reasonable judgment to the extent such party's counsel advises it that such disclosure is advisable under applicable law. Each of Parent, IAWC, Citizens and Seller shall, and shall cause their respective Affiliates to, comply with all applicable federal and state securities laws in connection with this Agreement and the transactions contemplated hereby (including any solicitation of consents of holders of Assumed Indebtedness), and all information supplied by any party for inclusion in any Securities Filing or consent solicitation, including, without limitation, any proxy or information statement, or any registration statement on Form S-4 shall be true and correct in all material respect and shall not contain any untrue statement of a material fact or omit to state any material fact which is required to be stated therein or which is necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. 5.8.3 During the first 90 days after the Closing Date (180 days for Trademarks on tanks), Parent and IAWC shall have the right to use all of the logos, trademarks and trade identification of Seller as are located at the Real Estate or on the Acquired Assets (collectively, the "Trademarks"). Parent's and IAWC's use of the Trademarks shall be in accordance with such reasonable quality control standards as may be promulgated by Seller and provided to Parent and IAWC. If Seller shall notify Parent and IAWC in writing of Parent's or IAWC's (as the case may be) material failure to comply with such reasonable quality control standards and Parent or IAWC continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Seller shall have the right to terminate Parent's and IAWC's right under this Section 5.8.3 to use the Trademarks. 5.8.4 Seller shall give Parent and IAWC and its representatives (including IAWC's Accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, full access to the properties, contracts, employees, books, records and affairs of Seller to the extent relating to the Business and the Acquired Assets, and shall cause its officers, employees, agents and representatives to furnish to Parent and IAWC all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as Parent and IAWC may reasonably request. Except to the extent disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4, no investigation or receipt of information by Parent or IAWC pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller Parties under this Agreement or the conditions to the obligations of Parent or IAWC under this Agreement. All information provided to Parent or IAWC under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement dated August 2, 1999 between Citizens and Parent. 5.9 Employees; Employee Benefits. 5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and hourly employees actively employed (as of the date of this Agreement) in each division by Seller or any of its Affiliates whose primary responsibilities relate to the Business. Schedule 5.9.1 lists job 42 Illinois classifications and number of employees in each job classification of those employees whose terms and conditions of employment are subject to the Collective Bargaining Agreement ("Union Employees"). All individuals referred to on Schedule 5.9.1 are herein referred to as the "Employees." For the avoidance of doubt, it is understood that no employees of CBSC or Citizens Resources are included in Schedule 5.9.1. No later than March 1, 2000, IAWC and Seller shall determine the number of Employees to whom IAWC will offer employment, which number shall be at least equal to 250 (when combined with offers made by IAWC or Affiliates of IAWC to employees of Affiliates of Seller in connection with the Related Purchase Agreements) (the "Base Number"), and such additional number of Employees, if any, whom IAWC also wishes to employ. Upon determination of such Employees, Seller will supplement Schedule 5.9.1 with the name, job title, unused vacation, current base salary or hourly wage, date of hire and assigned location of each Transferred Employee (as that term is defined below). At the Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose all the information required under the preceding sentence as of the most recent practicable date prior to Closing. 5.9.2 Effective as of the Closing, IAWC shall offer employment to at least the Base Number of those employees included on Schedule 5.9.1. All Employees to whom IAWC offers employment and who accept such employment are herein referred to as the "Transferred Employees." In the event any Employees do not accept IAWC's offer of employment, IAWC shall offer employment to such additional employees (the identity of whom shall be determined by IAWC and Seller) as are necessary to bring the total number of Transferred Employees to the Base Number. Subject to the provisions of this Section 5.9 and Section 5.12, IAWC shall provide each Non-Union Transferred Employee with base compensation at least equal to that provided by Seller on the Closing Date, and employee benefits which are substantially comparable to those provided by IAWC to its other similarly situated employees. Except as otherwise provided under the terms of Section 5.12, IAWC shall provide each Union Transferred Employee with compensation at least equal to that provided by Seller immediately prior to the Closing Date and with the benefits provided to IAWC's similarly situated collectively bargained employees. Each collective bargaining agreement pertaining to Transferred Employees shall be identified on a Schedule 5.9.2 to be prepared by Seller and submitted to IAWC on or before the Closing Date. Seller shall cooperate with IAWC in IAWC's efforts to contact the unions representing Transferred Employees. IAWC agrees (i) to credit the service of each Transferred Employee with Seller and its Affiliates before the Closing, for all purposes under all employee benefit plans and arrangements maintained by IAWC (and/or any of its Affiliates) for the benefit of any Transferred Employee (including without limitation for purposes of attainment of retirement dates and payment of optional forms of benefits), other than for purposes of benefit accrual under any "defined benefit plan", within the meaning of Section 3(35) of ERISA, (ii) to provide accrued vacation to Transferred Employees in the year in which the Closing occurs, equal to the excess, if any, of the accrued vacation to which the Transferred Employee would otherwise be entitled under Seller's vacation plan during that year over the amount of accrued vacation the Transferred Employee had taken during that year, and, thereafter, to provide vacation to Transferred Employees on the same basis as provided to similarly situated employees of IAWC, with service credit as provided in (i) hereof, (iii) to provide severance benefits to Transferred Employees terminated by IAWC that are substantially comparable to those benefits provided by IAWC to similarly situated employees, and (iv) to comply with all applicable legal requirements 43 Illinois with respect to the Union Employees (including without limitation any applicable duty to bargain with those employees' bargaining representative). IAWC shall be responsible for providing to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of Closing reduced by the number of vacation days such Transferred Employee has taken on or before Closing. Nothing in this Section 5.9 shall limit IAWC's authority to terminate the employment of any Transferred Employee at any time and for whatever reason. Until the second anniversary of the Closing Date, neither Seller nor any of its Affiliates shall directly or indirectly solicit or offer employment to any Transferred Employee then employed by IAWC or its Affiliates. 5.9.3 Except as specifically provided in Sections 5.9 and 5.12, Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by IAWC as the result of any claims against IAWC or its Affiliates that are made by any Employees or Former Employees (or the Beneficiary of any Employee or Former Employee) who are not made offers to become employees of IAWC or its Affiliates including, without limitation, claims asserted against IAWC as a result of their termination by Seller or its Affiliates. 5.9.4 Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation claims or the benefits provided under the Benefit Plans, whether paid before or after the Closing) owed to any Transferred Employee or the Beneficiary of any Transferred Employee or any Water Sector Retiree or the Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Seller or any of its Affiliates and such Transferred Employee or Beneficiary or (ii) any benefit claim or expense (including medical expenses) incurred before Closing under any Benefit Plan. For purposes of this Agreement, a medical expense shall be deemed to be incurred when the services giving rise to a claim are rendered, regardless of when billed or paid. Without limiting the foregoing, Seller shall be responsible for the payment of any employee benefits that become due to any Transferred Employees as a result of their termination by Seller. 5.9.5 Except as otherwise specifically provided in Section 5.9, 5.11 or 5.12, IAWC shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation, claims or the benefits provided under any employee benefit plan or arrangement of IAWC incurred after Closing) owed to any Transferred Employee or Beneficiary of any Transferred Employee or any Water Sector Retiree or Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between IAWC or any of its Affiliates and any Transferred Employee or (ii) any benefit claim or expense (including medical expense) incurred after Closing under any employee benefit plan sponsored or contributed to by IAWC or an ERISA Affiliate after Closing. Notwithstanding the foregoing, IAWC shall not be responsible for the payment of any employee benefits that become due to any Transferred Employees under any Benefit Plan (other than the Assumed Benefit Liabilities). 44 Illinois 5.9.6 IAWC agrees to reimburse Seller for its proportionate share (as defined below) of any amount in excess of $1,000,000 paid by Seller as severance under Citizens' severance plan as in effect on the date hereof to any Employees (when such amount paid by Seller is aggregated with amounts paid by Citizens to other employees as referenced in Section 5.9.6 of the Related Purchase Agreements) provided (i) IAWC does not hire such Employees in accordance with the provisions of Sections 5.9, 5.11 and 5.12 and (ii) Seller provides notice to those Employees on or before the Closing Date to the effect that their employment will be terminated on or shortly after the Closing Date. IAWC will pay such reimbursement to Citizens within 5 days after receipt of a list of the Employees showing which are entitled to severance pay, the amounts of that severance pay and certifying that those amounts have been paid. The IAWC's "proportionate share" means the amount obtained by multiplying the amount in excess of $1,000,000 by a fraction, the numerator of which is the amount of severance paid by Seller to Employees under Section 5.9.6 of this Agreement and the denominator of which is the sum of (i) the amount paid by Seller to Employees under Section 5.9.6 of this Agreement and (ii) the aggregate amount paid by Citizens under Section 5.9.6 of each of the Related Purchase Agreements. 5.9.7 Until the second anniversary of the Closing Date, IAWC shall not directly or indirectly solicit or offer employment to any active employee of Seller, other than the Transferred Employees. 5.10 Employee Pension Plan. 5.10.1 At least fifteen days prior to the Closing Date, Seller shall take any and all actions necessary to cease benefit accruals and fully vest all Transferred Employees in their accrued benefits under the Citizens Pension Plan ("Seller's Pension Plan" or "Citizens Pension Plan"). Seller shall retain liability and related assets for benefits accrued through the Closing Date by Transferred Employees under Seller's Pension Plan. 5.10.2 As of the Closing Date, Transferred Employees shall be covered under the American Pension Plan, and shall be given credit for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, subsidized benefits, and entitlement to optional forms of payment, but not for accrual of benefits. 5.11 Employee Savings Plan. 5.11.1 Effective upon the date of the transfer described in Section 5.11.2, subject to the terms and conditions of this Agreement, Parent shall cause the Savings Plan for Employees of American Water Works Company, Inc. (the "American Savings Plan") to assume the liability of the Seller's 401(k) Plan for the account balances of those Transferred Employees participating in the Seller's 401(k) Plan on the Closing Date (the "Affected Participants") that are transferred to the American Savings Plan. As of the Closing Date, Affected Participants shall be 100% vested in their account balances under the Seller's 401(k) Plan. Transferred Employees shall be given credit under the American Savings Plan for service with Seller and its Affiliates for 45 Illinois eligibility, vesting, attainment of retirement dates, contribution levels and optional forms of benefit payment, to the same extent that credit for such service has been given by Seller and its Affiliates. 5.11.2 Parent shall deliver to Seller as soon as practicable, but in no event later than ninety (90) days after Closing (i) a certified copy of the American Savings Plan and any amendment necessary to effectuate the transfer of assets and the assumption of account balances in accordance with this Section 5.11, (ii) a certified copy of the trust agreement for the American Savings Plan; (iii) the most recent favorable determination letter from the IRS with respect to the American Savings Plan; and (iv) an opinion from Parent's legal counsel acceptable to Seller that the American Savings Plan, as so amended, complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of, and the transfer of assets and assumption of benefit liabilities by, the American Savings Plan. Seller shall deliver to Parent as soon as practicable, but in no event later than ninety (90) days after Closing, an opinion from Seller's legal counsel acceptable to Parent that the Seller's 401(k) Plan complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of the Seller's 401(k) Plan, and the transfer of assets to, and assumptions of benefit limitations by, the American Savings Plan. As soon as practicable, but in any event within 120 days after Closing, Seller shall cause the trustee of the Seller's 401(k) Plan to transfer in cash and promissory notes representing outstanding loans to Affected Participants to the trustee of the American Savings Plan an amount equal to the sum of the account balances of the Transferred Employees (the "Transferred Accounts") calculated as of the most recent valuation date under the Seller's 401(k) Plan (which shall, in any event, be within thirty (30) days of the transfer). Both the Seller Parties and Parent will file any IRS Form 5310A that is required with respect to the transfer contemplated by this Section 5.11 date at least 30 days prior to the transfer. Upon the transfer described in this Section 5.11, Parent and the American Savings Plan shall be responsible for all benefits attributable to the Transferred Accounts to which Transferred Employees were entitled under the Seller's 401(k) Plan as of such date, and Seller and the Seller's 401(k) Plan shall cease to have any liability, contingent or otherwise, for such benefits. 5.12 Welfare Benefits. 5.12.1 Within sixty (60) days after the Closing, Seller agrees to transfer to trusts established by Parent under Section 501(c)(9) of the Code ("Parent's VEBAs") the amount held under any trust established by Seller under Section 501(c)(9) of the Code ("Seller's VEBAs") to fund post-retirement health care and life insurance benefits attributable to the Business, including Former Employees identified on Schedule 5.12 (the "Water Sector Retirees") and any "grandfathered" Transferred Employees as set forth on Schedule 5.12. For the avoidance of doubt, it is understood that no employees of CBSC or Citizens Resources are included in Schedule 5.12. Parent agrees to provide post-retirement health care and life insurance benefits to the Water Sector Retirees and, as applicable, Transferred Employees who become eligible for such benefits after Closing and further agrees that Parent's VEBAs will apply an amount at least equal to the sum of the assets (and earnings thereon calculated at the rate of return generated by Parent's VEBAs) transferred from Seller's VEBAs to provide post-retirement health care and life insurance benefits for such employees. Upon Closing, Parent shall be responsible for all obligations of the Seller Parties to provide post-retirement health care and life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the 46 Illinois Closing and the Seller Parties shall cease to have any liability, contingent or otherwise, for such benefits. In consideration of such transfer, Parent agrees not to terminate or materially modify those post-retirement health and life benefit provisions applicable to such grandfathered Transferred Employees and Water Sector Retirees as such provisions are in effect immediately prior to the Closing Date. 5.12.2 Parent shall take all action necessary and appropriate to ensure that, as of the Closing Date, Parent provides medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefits (including retiree medical benefits) to Transferred Employees that, in the case of Non-Union Transferred Employees and Union Transferred Employees are substantially similar to those benefits provided by Parent under its corresponding welfare benefit plans (the "Parent's Welfare Plans"). For purposes of determining eligibility to participate, and entitlement to benefits, in each Parent Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, waiting periods, and requirements for evidence of insurability under the Parent Welfare Plans shall be waived in Parent's Welfare Plans for Transferred Employees and retirees of the Water Sector and their respective Beneficiaries, and Transferred Employees and retirees of the Water Sector and their respective Beneficiaries shall receive credit under the Parent Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable after the Closing Date, Seller shall deliver to Parent a list of the Transferred Employees and retirees of the Water Sector and their respective Beneficiaries who had credited service under a Seller Welfare Plan, together with each such individual's service, copayment, deductible and out-of-pocket payment amounts under such plan. 5.12.3 Seller shall transfer to Parent's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the Closing Date. Seller shall provide to Parent prior to the Closing Date a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such Account, and balances standing to their credit as of the Closing Date. 5.13 Taxes. The Seller Parties, on the one hand, and Parent and IAWC, on the other, shall (a) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (b) each retain and provide the other with any records or other information which may be relevant to such return, audit, examination or proceeding, and (c) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Parent and IAWC, on the one hand, and the Seller Parties, on the other, shall retain, until the applicable statutes of limitations (including all extensions) have 47 Illinois expired, copies of all Tax returns, supporting workpapers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 5.14 Intentionally Omitted. 5.15 Citizens' Guarantees and Surety Instruments. Each of Parent and IAWC shall use its reasonable efforts to assist Citizens in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed on Schedule 5.15. For purposes of this Section 5.15 and Section 5.16, reasonable efforts: (a) shall include Parent's or IAWC's assumption of the Assumed Indebtedness, the Contracts and the Permits on the terms set forth in this Agreement; (b) shall include an obligation on the part of Parent or IAWC to provide a guarantee, letter of credit, bond or other required surety instrument at Closing to the extent required by any Contract or Permit and in general to provide an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business; and (c) shall include the obligation of IAWC and/or Parent to provide a debt obligation (including obtaining a minimum credit rating necessary to prevent any change to the tax-exempt status of any of the Assumed Indebtedness and providing credit enhancements such as bond insurance) to the issuer of any Bonds relating to the Assumed Indebtedness satisfactory to such issuer in replacement of and in substitution for Citizens' obligations to such issuer under the Assumed Indebtedness, all to enable Parent or IAWC to assume the Assumed Indebtedness. 5.16 Assumption of Seller Debt. 5.16.1 Each of IAWC and Parent shall use its reasonable efforts (as defined in Section 5.15) to assist Seller in obtaining all consents and opinions and taking such other actions as may be required to enable IAWC or Parent, as the case may be, to assume at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 2.3. If, after using such reasonable efforts, the parties reasonably conclude that all such required consents and opinions will not be obtained by the date that the conditions to Closing set forth in the first sentences of Sections 6.1.4 and 6.2.4 are expected to be satisfied, then Citizens, Parent and IAWC will use their reasonable efforts and take such other actions as may be required to enable Citizens to assign at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 2.3, including complying with the provisions of Section 5.24 to the extent applicable to such assignment of the Assumed Indebtedness. 5.16.2 Representations Re: Assumed Indebtedness. (a) The Seller Parties represent that each of the Bonds which make up the Assumed Indebtedness is a bond issue which was used to finance sewage facilities within the meaning of Section 103(b)(4)(E) of the Internal Revenue Code of 1954 as amended ("1954 Code") or Section 142(a)(5) of the Code, as the case may be, or facilities for the furnishing of water within the meaning of Section 103(b)(4)(G) of the 1954 Code or Section 142(a)(4) and 48 Illinois Section 142(e) of the Code, as the case may be, and that the interest of such Bonds was as of their date of issue, excludable from the gross income of the holders of such Bonds for federal or state (other than Illinois) income tax purposes pursuant to such sections of the IRC or the Code. In the case of the facilities for the furnishing of water (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. (b) The Seller Parties represent that they have complied with all of their duties and obligations under the IDRB Documents, including their obligations relating to the use of the proceeds of the bonds and the ownership, operation, use and maintenance of the Assets financed with the proceeds of the Bonds. Citizens and the other Seller Parties represent that the representations and warranties of "Company" in the IDRB Documents remain true and correct, and that they have not taken nor permitted to be taken any action which would have the effect of subjecting the interest on any of such Bonds to federal or state (other than Illinois) income taxation, except as otherwise contemplated or permitted by the IDRB Documents. (c) The Seller Parties represent that as of Closing all the proceeds of the Bonds will have been spent in accordance with the IDRB Documents, the construction of the projects to be financed with the Bonds will have been completed, that there are no reserve funds associated with the Trust Indentures for such Bonds, and that all of the proceeds of such Bonds were invested in tax-exempt obligations of state and local governments (except to the extent used to acquire or construct the facilities financed by such Bonds) and, that therefore, the Seller Parties do not have any arbitrage profits subject to the rebate requirements of Section 148 of the Code. (d) The Seller Parties represent that there is and has been no audit or other examination by any taxing authority relating to the Bonds. (e) The Seller Parties further represent the following with respect to the Bonds: (1) The Assets financed by the Bonds are sewage facilities or facilities for the furnishing of water, which means that (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof; 49 Illinois (2) They have not caused or permitted to be caused any reissuance of the Bonds under Section 1001 of the Code, without first obtaining a "no adverse effect" opinion of bond counsel; (3) They have not caused an extension of the maturity of such Bonds without first obtaining a "no adverse effect" opinion of bond counsel; (4) They have not taken or caused to be taken any action that would cause the Bonds to be arbitrage bonds under Section 148 of the Code, including, but not limited to, the failure to rebate arbitrage profits, if any, as required by Section 148(f) of the Code; (5) They have not taken any action that would cause the Bonds not to be registered in accordance with Section 149(a) of the Code; and (6) They have not permitted the Bonds to become directly or indirectly "federally guaranteed" under Section 149 of the Code. 5.16.3 Covenants of Parent and IAWC. Each of Parent and IAWC covenants and agrees, so long as any Assumed IDRB Indebtedness is outstanding, to cause the Assets that were acquired, constructed, improved or equipped with the proceeds of such Assumed IDRB Indebtedness to be used as sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code or Section 142(a)(5) of the Code, as the case may be, and facilities for the furnishing of water within the meaning of Section 103(b)(4)(G) of the 1954 Code or 142(a)(4) and Section 142(e) of the Code, as the case may be, which means in the case of the facilities for the furnishing of water that (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. Each of Parent and IAWC further covenants and agrees, so long as any Assumed IDRB Indebtedness is outstanding, the following: (a) It will not cause or permit to be caused any reissuance under Section 1001 of the Code without first obtaining a "no adverse effect" opinion of bond counsel; (b) It will not cause an extension of the maturity of the Bonds without first obtaining a "no adverse effect" opinion of bond counsel; (c) It will not take or cause to be taken any action that would cause the Bonds to be arbitrage bonds under Section 148 of the Code, including, but not limited to, the failure to rebate arbitrage profits, if any, as required by Section 148(f) of the Code; 50 Illinois (d) It will not take any action that would cause the Bonds not to be registered in accordance with Section 149(a) of the Code; (e) It will not permit the Bonds to become directly or indirectly "federally guaranteed" under Section 149 of the Code; and (f) It will comply with each representation, warranty, covenant or other agreement or obligation set out by the IDRB Documents as in effect on the date of execution of this Agreement. 5.17 Schedule of Permits. No later than March 13, 2000, Seller shall deliver to Parent and IAWC a schedule, to be identified as Schedule 5.17, which sets forth all material Permits required for the use of the Acquired Assets being acquired by each and the operation of the Business by Parent and IAWC substantially in the manner as it was conducted prior to the date hereof. For purposes of this Section 5.17, material Permits shall include those required for the service of all utility customers at substantially the same service levels as provided by Seller on the date of this Agreement. All Permits listed on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule 3.9 shall be so designated. Seller has made or will make prior to the Closing Date timely applications for renewals of all such Permits listed on Schedule 5.17, which under applicable law must be filed prior to the Closing Date to maintain the Permits listed on Schedule 5.17 in full force and effect. 5.18 Title Information. No later than March 13, 2000, Seller shall use its reasonable efforts to deliver to Parent or IAWC true, correct and complete copies of all existing title policies, surveys, leases, deeds, instruments and agreements in Seller's possession relating to title to the Real Estate that will be acquired by each. 5.19 Transaction with Related Parties. Effective as of the Closing Date, except as otherwise provided in Sections 5.9 through 5.12, 5.15, 5.24, 5.26, 5.27 and 2.7.1(j) of this Agreement, Seller shall have terminated and canceled all contracts, commitments and agreements (including employment relationships) relating to the Acquired Assets or the Business, between Seller, any Affiliate of Seller (including Citizens), any officer or director of any Seller Party, or any Affiliate of the foregoing. Seller shall be solely liable for any contractual or other claims, express or implied arising out of the termination and cancellation of any of the foregoing raised by any party thereto. 5.20 Approval by Citizens. Citizens shall, as the sole owner of common stock of each other Seller Party, vote all of such shares of common stock to approve this Agreement and the transactions contemplated hereby. 5.21 Supplemental Information. 5.21.1 Citizens shall provide IAWC, within fifteen (15) days after the execution or the date of receipt thereof, a copy of (a) each Contract (other than with respect to which the Business' total annual liability or expense is less than $100,000 per such Contract) entered into by Seller after the date hereof and prior to the Closing Date; (b) a copy of any written notice for 51 Illinois assessments for public improvements against the Real Estate received after the date hereof and prior to the Closing Date; (c) a copy of the filing of any condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate received after the date hereof but prior to the Closing Date; and (d) a copy of any Contract where Seller is a lessee relating to the use or occupancy of the Real Estate and where such Contract involves annual payments in excess of $100,000 entered into by Seller after the date hereof and prior to the Closing Date. Citizens will also provide the copies referred to in clauses (b), (c) and (d) of this Section 5.2.1.1 to Parent if the copies relate to Real Estate being purchased by Parent. 5.21.2 Within fifteen (15) days after the receipt of notice of violation, Citizens shall notify Parent and IAWC of any violations of state or federal drinking water standards which, if such violations existed on the date hereof, would be required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly notify Parent and IAWC of the actions proposed to be taken by Seller to correct or otherwise respond to such violations. 5.22 Non-Competition. The Seller Parties agree that for a period of fifteen (15) years after the Closing Date no Seller Party nor any Affiliate of a Seller Party shall directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of or be otherwise connected in any substantial manner with any entity (other than IAWC and its successors and assigns) engaged in the business of storing, supplying and distributing water in the States in which IAWC acquires any Acquired Assets, whether or not such business is subject to regulation by a PUC (it being understood that the individual directors of Seller and Citizens are not Affiliates of a Seller Party). 5.23 Intentionally Omitted. 5.24 IDRB Obligations. (a) IAWC's IDRB Obligations. Each party acknowledges that (x) Citizens is and after the Closing Date shall continue to be and shall remain the primary obligor with respect to the Retained IDRB Indebtedness outstanding immediately after the Closing Date to the same extent as though no sale of the Acquired Assets had been made and that Parent and IAWC shall have no payment obligations with respect to such Retained IDRB Indebtedness and (y) the IDRB Documents require Citizens not to take or permit to be taken any action which would have the effect, directly or indirectly, of subjecting the interest on any of the Bonds to federal or state (other than Illinois) income taxation. Accordingly, Parent and IAWC covenant and agree (i) at Closing to execute and deliver to Citizens an agreement substantially in the form attached hereto as Exhibit D, with respect to each issuer of Bonds relating to Retained IDRB Documents that will be outstanding after the Closing Date, and (ii) so long as any such Bonds are outstanding, to cause the Acquired Assets that were acquired, constructed, improved or equipped with the proceeds of such Bonds to be used as facilities for the furnishing of water (that is, (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the 52 Illinois furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof) or sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code, or Section 142(a)(5) of the Code as the case may be. (b) IDRB Construction Funds. Citizens hereby represents that there will be no construction funds or unspent bond proceeds available after the Closing Date that are held by the trustees of the Bonds relating to the Retained IDRB Indebtedness. (c) Consents and Opinions. The parties shall use their respective best commercially reasonable efforts to obtain all consents and legal opinions as may be required under the Retained IDRB Documents to enable Seller to retain all Retained IDRB Indebtedness and to sell the Acquired Assets to IAWC or Parent. 5.25 Cooperation with Respect to Like-Kind Exchange. Parent and IAWC agree that Seller may, at Seller's written election delivered to Parent and IAWC no later than five (5) days prior to the Closing Date, direct that all or a portion of the Initial Cash Payment be delivered to a "qualified intermediary" as defined in Treasury Regulation ss.1.1031(k) - (g)(4) as to enable Seller's relinquishment of the Acquired Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Parent and IAWC shall reasonably cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller reasonably requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions reasonably required to facilitate the use of a "qualified intermediary"), and Parent and IAWC agree that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the Code. Parent, IAWC and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Parent, IAWC or Seller; provided that such efforts shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. Seller shall indemnify and hold Parent and IAWC harmless from any cost, expense or liability arising from its cooperating under this Section 5.25. 5.26 Transition Plan. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a transitional services team, which shall include expertise from various functional specialties associated with or involved in providing billing, payroll and other support services provided to Seller by any automated or manual process using facilities or employees that are not included among the Acquired Assets or Transferred Employees. Such team will be responsible for preparing, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. The transition plan will set forth reasonable arrangements 53 Illinois providing IAWC, at IAWC's sole expense, with appropriate access to Seller's relevant computer systems to allow for a full conversion of the relevant data and functionality to IAWC's systems on the Closing Date. Parent, IAWC and Seller shall use their commercially reasonable efforts to cause their representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan no later than 60 days prior to the Closing Date. 5.27 Procedures regarding Refunds of Advances. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a working group of appropriate subject matter experts to determine the appropriate obligations of Parent and IAWC regarding notification and the provision of other accurate and timely data to Citizens to enable Citizens timely and accurately to satisfy the refund obligations described in Section 2.3.3(b). Such working group will be responsible for preparing a comprehensive agreement no later than March 13, 2000, which agreement shall be executed by the parties at Closing. Among other arrangements, the parties would require that the customers and developers owed refunds provide joint notices to IAWC and Citizens. 5.28 Title Insurance. Prior to Closing, Seller shall cooperate with Parent and IAWC and use commercially reasonable efforts to assist each of Parent and IAWC if either of them desires to obtain ALTA title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issuing ALTA (or its local equivalent) form of title insurance policies insuring good, valid, indefeasible fee simple title to the Real Estate in IAWC or Parent, as the case may be, in all cases, at IAWC's and Parent's sole expense and in the respective amounts that IAWC or Parent, as the case may be, requests prior to Closing, subject to no Liens or other exceptions to title other than Permitted Exceptions (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and IAWC's and Parent's request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION 6.1 Conditions Precedent to Obligations of IAWC and Parent. The obligations of IAWC and Parent to consummate the transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by IAWC and Parent in their sole discretion): 6.1.1 Performance of Agreements; Representations and Warranties. Seller shall have performed or complied in all material respects with all agreements and covenants required 54 Illinois by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Seller shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 3.25), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a Material Adverse Effect; provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso); and provided further, that the representation and warranty set forth in Section 3.5.1 shall be deemed to be true and correct on and as of the Closing Date if any Material Adverse Effect that may have arisen or occurred between the execution date of this Agreement and the Closing Date shall have been cured or remedied such that such Material Adverse Effect is not continuing as of the Closing Date. IAWC and Parent shall have been furnished with a certificate of the Chief Financial Officer or other Vice President of Citizens dated the Closing Date, certifying to the foregoing. 6.1.2 Opinion of Counsel. IAWC and Parent shall have received from L. Russell Mitten II, Vice President and General Counsel of Seller, an opinion dated the Closing Date, in form and substance satisfactory to IAWC and Parent, to the effect set forth in Exhibit E hereto. 6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.1.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby, and such order shall not contain any restrictions or conditions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the Business in existence as of the date of this Agreement applicable to Seller be continued following the transactions contemplated hereby) which would have a Material Adverse Effect or a material adverse effect on any other regulated business of Parent or IAWC in the state in which the PUC has jurisdiction, and such order shall be final and unappealable; Seller shall have obtained all statutory, regulatory and other consents and approvals which are required in order to consummate the transactions contemplated hereby and to permit IAWC and Parent to conduct the Business being acquired by each in the manner contemplated by Section 3.25 hereof other than those the failure of which to obtain would not have a Material Adverse Effect. Seller shall have also obtained (i) all consents and legal opinions required to enable Parent or IAWC to assume (or for Citizens to assign to Parent or IAWC) the Assumed Indebtedness (without any change in the tax-exempt status of such Assumed Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)) and all other consents and legal opinions required to enable Seller to sell to Parent and IAWC the Acquired Assets being acquired by each at the Closing (without any change in the tax-exempt status of such Assumed Indebtedness and without 55 Illinois any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture) and (ii) all consents required under Contracts and Permits relating to Seller's water appropriation and flowage rights to the extent reasonably sufficient to enable IAWC to service the customers of the Business and to service future commitments under such Contracts. 6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect IAWC's and Parent's respective ownership of all or any material portion of the Acquired Assets, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which would reasonably be expected to materially limit or materially adversely affect IAWC's and Parent's respective ownership of the Acquired Assets. 6.1.6 Documents. Seller and Citizens shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 2.7 hereof and shall have made arrangements reasonably satisfactory to Parent and IAWC to deliver to Parent and IAWC as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the respective portion of the Business being acquired by each. 6.1.7 Related Closings. Parent and IAWC shall be reasonably satisfied that the consummation of each of the asset purchase and sale transactions contemplated by those certain purchase agreements described on Schedule 6.1.7 (the "Related Purchase Agreements") will occur concurrently with the Closing. 6.2 Conditions Precedent to Obligations of Seller Parties. The obligations of the Seller Parties to cause the consummation of the transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by the Seller Parties in their sole discretion): 6.2.1 Performance of Agreements; Representations and Warranties. Parent and IAWC shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by IAWC and Parent shall be true and correct on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 4.2), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a material adverse effect on the respective ability of IAWC and Parent to perform their obligations under this Agreement and the Transaction Documents, provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material 56 Illinois adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso). Seller shall have been furnished with a certificate of the President or Vice President of Parent and IAWC, dated the Closing Date, certifying to the foregoing. 6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price & Rhoads, counsel to IAWC and Parent, an opinion dated the Closing Date, in form and substance satisfactory to Seller, to the effect set forth in Exhibit F hereto. 6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.2.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby and such order shall not contain any restrictions or conditions which would have a material adverse effect on Seller's business activities in the State in which the PUC has jurisdiction or any significant adverse effect on Citizens' acquisition and divestiture activities in that State (including divestiture of the Acquired Assets), and such order shall be final and unappealable; Seller shall have obtained all statutory and regulatory consents and approvals which are required in order to consummate the transactions contemplated hereby, other than those the failure of which to obtain would not have a material adverse effect on the Seller after the Closing. Seller shall have obtained (i) all consents and legal opinions required to enable Parent or IAWC to assume (or Citizens to assign to Parent or IAWC) the Assumed Indebtedness without any change in the tax-exempt status thereof and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F), (ii) all consents and legal opinions required under the Retained IDRB Documents to enable Seller to retain the Retained IDRB Indebtedness until maturity and to sell to Parent and IAWC the Acquired Assets being acquired by each at the Closing (in each case without any change in the tax-exempt status of the Assumed Indebtedness or the Retained IDRB Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture), and (iii) all other consents required or advisable in order for Seller to transfer Acquired Assets without incurring material liability under any Contract, Permit or Real Estate instrument. 6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Seller's ownership of all or any material portion of its properties, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which could reasonably be expected to materially limit or materially adversely affect Seller's ownership of any of its properties. 57 Illinois 6.2.6 Documents. Parent and IAWC shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Sections 2.7, 5.24 and 5.27, and shall have taken such actions as Seller may have requested pursuant to Section 5.25 hereof. 6.2.7 Related Closings. Seller shall be reasonably satisfied that the consummation of each of the Related Purchase Agreements will occur concurrently with Closing. 6.3 Termination. This Agreement may be terminated at anytime prior to the Closing Date: 6.3.1 by mutual written consent of the Seller Parties, IAWC and Parent; 6.3.2 by any of the Seller Parties, Parent or IAWC if: (i) any governmental or regulatory body the consent of which is a condition to the obligations of the Seller Parties, Parent and IAWC to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful; (ii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, judgment or decree shall have become final and nonappealable; or (iii) the Closing shall not have occurred on or before March 31, 2001; provided, however, that the right to terminate this Agreement under this Section 6.3.2(iii) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; and provided, further, that if Closing has not occurred by such date because the conditions precedent to Closing set forth in the first sentence of Section 6.1.4 and the first sentence of Section 6.2.4 have not been fulfilled, then such date shall be automatically extended to September 30, 2001; or 6.3.3 If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Section 6.3, this Agreement shall become void and of no further force and effect, except for the provisions of Section 5.6 relating to publicity, Sections 3.24 and 4.6 relating to brokerage and Section 7.1 relating to expenses. Nothing in this Section 6.3 shall be deemed to release either party from any liability for any willful breach by such party of the terms and provisions of this Agreement. ARTICLE 7 CERTAIN ADDITIONAL COVENANTS 7.1 Certain Taxes and Expenses. Citizens shall be solely responsible for all state and local sales, use, transfer, real property transfer and other similar taxes, fees and charges that are calculated based on the value of the Acquired Assets being transferred arising from and with respect to the sale and purchase of the Acquired Assets and each of Parent and IAWC shall be solely responsible for all transfer, registration, documentary stamp, recording and other similar fees and 58 Illinois charges arising from and with respect to the transfer and recording of title documentation relating to the Acquired Assets being acquired by each. Parent shall be responsible for all costs and expenses relating to the assumption by or assignment to Parent or IAWC of the Assumed Indebtedness. Except as otherwise provided in this Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 7.2 Maintenance of Books and Records. The Seller Parties, on the one hand, and IAWC and Parent, on the other hand, shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets or the Assumed Liabilities or the conduct of the Business (whether in the possession of the Seller Parties or IAWC or Parent). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least 30 days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 7.2 shall be during normal business hours and upon not less than two (2) business days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 7.3 Survival. 7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j), all representations, warranties, covenants and agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing: (a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (b) the covenants contained in Section 5.2 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; (c) the representations and warranties contained in Sections 3.12 and 3.16 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no 59 Illinois action or claim with respect thereto may be brought following the expiration of the applicable statute of limitations (or extensions or waivers thereof); (d) the representations and warranties contained in Section 3.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (e) the representations and warranties contained in Section 3.10 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (f) the representations and warranties contained in Section 3.7 and 3.17 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (g) the representations and warranties contained in Sections 3.3, 3.5, 3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (h) the representations and warranties contained in Section 3.11 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (i) the representations and warranties contained in Section 4.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (j) the representations and warranties contained in Sections 4.3 and 4.4 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (k) the representations and warranties contained in Section 4.5 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; and (l) all other representations and warranties contained in this Agreement and the related indemnity obligations contained in Section 7.4 shall terminate on and no further action or claim with respect thereto may be brought after, the second anniversary of the Closing Date; (m) such representations and warranties specified in the foregoing clauses (c) through (k), and the covenants contained in Section 5.1, 5.2, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such party has been given written notice setting forth the facts upon which the claim for indemnification 60 Illinois is based and, if possible, a reasonable estimate of the amount of the claims prior to the relevant anniversary of the Closing Date or the 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. If any claim for indemnification is asserted or could be asserted with respect to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and the IAWC or Parent is also entitled to indemnification in respect of that claim for breach or asserted breach of any other representation or warranty in this Agreement for which there is a shorter survival period, such shorter period will apply to such claim except to the extent that such claim is a product liability, toxic tort or similar claim (as described in Section 2.3.3(a)) brought by a private party litigant. 7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by IAWC or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C): (a) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), for any action or claim with respect to the Pre-Existing Conditions; (b) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), with respect to the presence of Hazardous Substances at any locations other than the Real Estate; and (c) after the third anniversary of the Closing Date, for any action or claim with respect to any other Retained Liability; Provided, however, that the foregoing time limitations shall not apply to any such claims which have been the subject of a written notice from Parent and/or IAWC to the Seller Parties prior to such period setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims; and, provided, further, that the foregoing time limitations shall also not apply to any such claims: (u) with respect to Taxes; (v) with respect to any liability of the types that appear as "Trade Payables" or "Other Current and Accrued Liabilities" on the financial statements of Seller; (w) not exclusively related to the Acquired Assets or not exclusively related to the Business; and (x) with respect to any of the matters discussed in Section 3.16 hereof. For purposes of Sections 7.3.2(a) and (b), a "Change of Control of Citizens" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), other than an underwriter engaged in a firm commitment underwriting on behalf of Citizens, is or becomes the beneficial owner (as such term is used in Rule 13D-3 and 13D-5 under the Exchange Act, except that for purposes of this clause (i) a person shall be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding shares of common stock of the Company; (ii) all or substantially all of Citizens' and its Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any person or group of persons acting in concert; (iii) Citizens 61 Illinois is merged or consolidated with any other person, whether or not Citizens is the surviving corporation in such merger or consolidation; or (iv) Citizens is liquidated or dissolved or adopts a plan of liquidation. 7.4 Indemnification. Seller, Parent and IAWC agree as follows: 7.4.1 General Indemnification Obligations. (a) Seller shall indemnify Parent and IAWC and their directors, officers and other Affiliates and hold Parent and IAWC and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by the Seller Parties in this Agreement or in any document or certificate required to be furnished to Parent or IAWC by any of the Seller Parties pursuant to this Agreement (including the Transaction Documents); (B) subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; (C) subject to Section 7.3.2, the ownership, operation or use of any of the businesses or assets of the Seller Parties or their Affiliates (other than the Business, the Acquired Assets or the CLWC Stock) whether before, on or after the Closing Date; and (D) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Retained IDRB Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement. (b) IAWC and Parent shall indemnify Seller, and their directors, officers and other Affiliates (including Citizens) and hold Seller and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by Parent or IAWC in this Agreement or in any document or certificate required to be furnished to Seller by Parent or IAWC pursuant to this Agreement (including the Transaction Documents), including the IAWC's IDRB Obligations; (B) any Assumed Liabilities after the Closing Date, including the Assumed Indebtedness; (C) the ownership, operation or use of the Business, the Acquired Assets or the CLWC Stock after the Closing Date (except to the extent resulting from Retained Liabilities or to the extent resulting from breaches by the Seller Parties of representations, warranties, covenants or agreements hereunder or in the other Transaction Documents); (D) any claim by a Transferred Employee or a Former Employee referred to on Schedule 5.12 or the Beneficiary of any such employee or former employee for post-retirement health care or life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing; (E) any violation by Parent or IAWC, or any assignee, lessee or successor of Parent or IAWC, of the covenants and agreements as provided by Section 5.16.3 hereof and Section 5 of Exhibit D hereto; and (F) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Assumed Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement and/or the assignment or assumption of the Assumed Indebtedness. (c) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including any governmental penalty or punitive damages assessed or asserted against the party seeking indemnification and including costs of 62 Illinois investigation, clean-up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and reasonable expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened, incident to the successful enforcement of this Agreement). For purposes of this Section 7.4, the determination of whether any breach of any representation, covenant or agreement has occurred, and the calculation of the amount of Damages incurred by the Indemnified Party arising out of or resulting from any breach of a representation, covenant or agreement by any party hereto, the references to a "Material Adverse Effect" or materiality (or other correlative terms) shall be disregarded, provided that no such breach shall be found to have occurred due to facts or circumstances arising from an occurrence or condition described in Section 1.1.60(a). Notwithstanding the foregoing, Damages shall not include the loss of profits of the party seeking indemnification, or punitive damages unless the party seeking indemnification has had punitive damages assessed or asserted against it. (d) Notwithstanding any language contained in any Transaction Document (including deeds to Real Estate and instruments delivered by Seller to the Title Company), representations and warranties as to Real Estate set forth in Section 3.10 and 3.11 will not be merged into any Transaction Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement, shall control. No provision set forth in any Transaction Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. 7.4.2 General Indemnification Procedures. (a) A party seeking indemnification pursuant to this Section 7.4 (an "Indemnified Party") shall give prompt written notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party after receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided, that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, solely the Indemnifying Party shall be obligated to satisfy and discharge the Third Party Claim, (B) such Third Party Claim does not include a request or demand for injunctive or other equitable relief by an Authority and (C) the Indemnifying Party makes reasonably adequate provision to assure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that is reasonably likely to result. The Indemnifying Party shall be deemed to have satisfied the condition set forth in clause (C) of the proceeding sentence if it is a regulated utility. 63 Illinois (b) Neither the Indemnified Party nor the Indemnifying Party shall settle any Third Party Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (d) Amounts paid in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price. (e) Subject to Section 7.4.2(f) and Section 7.4.2(i), neither Parent nor IAWC (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages incurred unless the aggregate amount of Damages incurred by Parent and IAWC (or the other Persons for which they can claim indemnification), together with all other claims for Damages under Section 7.4.2(e) of each of the Related Purchase Agreements, exceeds $6,123,000 in the aggregate (the "Threshold Amount"), in which case Seller shall then be liable for Damages in excess of the Threshold Amount. Subject to Section 7.4.2(f) and Section 7.4.2(i), the cumulative aggregate indemnity obligation of Citizens and its Affiliates under Section 7.4 of this Agreement and the Related Purchase Agreements shall not exceed $60,000,000 (the "Ceiling"). (f) Notwithstanding the foregoing, the parties acknowledge that Parent and IAWC (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages in respect of intentional and wilful breaches of covenants or agreements in this Agreement or any of the Retained Liabilities other than the Specified Liabilities irrespective of the Threshold Amount or the Ceiling (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful breach). As used herein, the "Specified Liabilities" shall mean the Retained Liabilities arising from claims made after the Closing Date which (i) do not relate to matters within the scope of clauses (u), (v), (w) and (x) of Section 7.3.2; (ii) were not known to the Seller Parties on or prior to Closing; and (iii) relate exclusively to the Acquired Assets or the Business prior to the Closing Date. Notwithstanding anything to the contrary in this Section 7.4, Parent and IAWC (or the other Persons for which they can claim indemnification) shall be entitled to indemnification for Damages in respect of a breach of Section 3.2, 3.12 or 3.16 irrespective of the Threshold Amount or the Ceiling. (g) The rights and remedies of Seller, Parent and IAWC under this Section 7.4 are exclusive and in lieu of any and all other rights and remedies which Seller, Parent and IAWC may have under this Agreement or otherwise for monetary relief with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by Seller, Parent or IAWC in or pursuant to this Agreement or any of the Transaction Documents or (y) any breach or failure to perform any covenant or agreements set forth in this Agreement or any of the Transaction Documents. 64 Illinois (h) Except to the extent provided in Section 7.4.2(j) below, no right to indemnification under this Section 7.4 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto including, without limitation, the knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. (i) No party shall have any liability to another party under this Section 7.4 for Damages (and no cost or expense relating to such Damages shall be included in determining the extent of Damages incurred by such party for purposes of Section 7.4.2(e)) to the extent that: (A) the Indemnified Party recovers insurance proceeds covering the Damages or otherwise recovers payments in respect of such Damages from any other source (whether in a lump sum or stream of payments); or (B) the Indemnified Party's Tax liability is actually reduced as a result of a tax benefit to which the Indemnified Party becomes entitled in respect of the Damages. (j) Seller shall have no liability or obligation under this Section 7.4 for any Damages resulting from the inaccuracy or breach of any representation or warranty if such inaccuracy or breach is disclosed by Seller pursuant to and in accordance with Sections 5.3 and 8.4 hereof; (k) Parent and IAWC agree to use commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Parent or IAWC consistent with its customary risk management practices, appear likely to give rise to a claim against Parent or IAWC that is likely to involve one or more insurance policies of Parent or IAWC. Any such notice shall be given in good faith by Parent or IAWC, as the case may be, without regard to the possibility of indemnification payments by Seller under this Section 7.4, and shall be processed by Parent or IAWC, as the case may be, in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Each of Parent and IAWC agree that (i) if it is entitled to receive payment from Seller for Damages arising under or pursuant to a breach of the representation and warranty set forth in Section 3.10, and (ii) if Parent or IAWC has obtained title insurance which may cover the claim or matter giving rise to such Damages, then (iii) such title insurance shall be primary coverage and Parent or IAWC, as the case may be, will make a claim under the title insurance if such claim can be made in good faith before enforcing its right to receive payment from Seller. Neither Parent nor IAWC shall be under any obligation to obtain title insurance or prosecute such claim (other than the initial filing of such claim). (l) If at any time subsequent to the receipt by an Indemnified Party of an indemnity payment hereunder, such Indemnified Party (or any Affiliate thereof) receives 65 Illinois any recovery, settlement or other similar payment with respect to the Damages for which it received such indemnity payment (including insurance proceeds and other payments pursuant to Section 7.4.2(i)(A) and a tax benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified Party shall promptly pay to the Indemnifying Party an amount equal to the amount of such Recovery, less any expense incurred by such Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment; (m) In the event of any indemnification claim under this Section 7.4 involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Indemnifying Party in the defense of any such claim under this Section 7.4. Without limiting the generality of the foregoing, the Indemnified Party shall furnish the Indemnifying Party with such documentary or other evidence as is then in its or any of its Affiliates' possession as may reasonably be requested by the Indemnifying Party for the purpose of defending against any such claim. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 7.4.3 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer to Parent or IAWC all inquiries with respect to ownership of the Acquired Assets and the Business being acquired by each, and will refer to Parent all inquiries with respect to the ownership of the CLWC Stock. In addition, Seller will execute such documents and financing statements as Parent or IAWC may reasonably request from time to time to evidence transfer of the Acquired Assets to Parent or IAWC in accordance with this Agreement, including any necessary assignment of financing statements. 7.6 Financial Statements. In connection with the preparation and filing of any registration statement or periodic report of Parent or its Affiliates pursuant to Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, Seller, at Parent's expense, shall provide Parent (a) by April 30, 2000 or within 120 days after Parent's written request therefor if made after January 1, 2000, with the following audited financial statements: (i) a statement of net assets of the Business as of the end of the last fiscal year prior to Closing; and (ii) a statement of 66 Illinois income of the Business and a statement of cash flows or its equivalent of the Business for the last fiscal year prior to Closing (in each case combined with the businesses being acquired by Parent, IAWC and Affiliates of Parent pursuant to the Related Purchase Agreements), including opinions thereon of Seller's Accountants, and (b) within 90 days after Parent's written request made therefor (provided such request is made after the end of the fiscal quarter described below), the following unaudited statements: (i) a statement of net assets of the Business as of the end of the last fiscal quarter prior to Closing (but only if such quarter is subsequent to the last fiscal year prior to Closing); and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business, for the period from the end of the last fiscal year through the end of the last fiscal quarter prior to Closing (in each case combined with the businesses being acquired by Parent, IAWC and Affiliates of Parent pursuant to the Related Purchase Agreements). 7.7 Collection of Receivables. Seller agrees that it shall promptly (and in any event no later than five (5) Business Days following receipt) deliver all such payments with respect to accounts receivable from customers of the Business received on and after the Closing Date (including but not limited to negotiable instruments tendered in payment of accounts receivable assigned to IAWC hereunder which shall be duly endorsed by Seller to the order of IAWC) to IAWC. Seller shall cooperate with IAWC in coordinating the transfer of collection agents and customers of the Business who pay their bills through the Automated Clearinghouse (ACH) process to IAWC. ARTICLE 8 MISCELLANEOUS 8.1 Construction. Parent, IAWC and the Seller Parties have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Parent, IAWC and the Seller Parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean including without limitation. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified. The word "or" shall not be exclusive. Provisions of this Agreement shall apply, when appropriate, to successive events and transactions. Section references refer to this Agreement unless otherwise specified. 8.2 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing 67 Illinois and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier addressed to the party at its address set forth below: If to Parent: American Water Works Company 1025 Laurel Oak Road P.O. Box 1770 Voorhees, New Jersey 08043 Fax: (609) 346-8299 Attention: General Counsel with a copy to: Illinois-American Water Company 300 N. Water Works Drive P.O. Box 24040 Belleville, IL 62223-9040 Fax: (618) 236-1186 Attention: Corporate Counsel and: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to IAWC: Illinois-American Water Company 300 N. Water Works Drive P. O. Box 24040 Belleville, IL 62223-1186 Fax: (618) 236-1186 Attention: Corporate Counsel with a copy to Parent and a copy to: Dechert Price & Rhoads 68 Illinois 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Seller: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: Robert J. DeSantis Telecopier: (203) 614-4625 with copies to: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten, II Telecopier: (203) 614-4651 and Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: J. Michael Love Telecopier: (203) 614-5201 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 8.3 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto; provided, that (a) Parent may assign this Agreement, without the prior written consent of Seller, to any direct or indirect subsidiary of Parent provided such subsidiary assumes in writing all the duties and 69 Illinois obligations of Parent hereunder and, if such assignment requires the approval of the PUC, such assignment was described in the initial filing made by the parties pursuant to Section 5.5 (provided that no such assignment by Parent shall in any way operate to enlarge, alter or change any obligation due to Seller or relieve Parent of its obligations hereunder if such subsidiary fails to perform such obligations, with the understanding that Parent shall be jointly and severally liable with such subsidiary for any non-performance of Parent's obligations hereunder); and (b) Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the Code. 8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be clearly related to any other paragraph or section, be deemed to be disclosed with respect to that other paragraph or section. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. 8.6 Dispute Resolution. Except as otherwise provided herein, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"); provided, however, 70 Illinois that at the election of either party, the arbitration shall take place before three (3) arbitrators, one arbitrator being selected by Parent and IAWC, one arbitrator being selected by Citizens, and the third arbitrator, knowledgeable in the general subject matter of the dispute, controversy or claim, being selected by the other two arbitrators. Either party may demand such arbitration in accordance with the procedures set out in the Rules. The arbitration shall take place in Newark, New Jersey. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator(s) shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator(s) shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator(s), present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator(s) shall not have the authority to award, exemplary or punitive damages. The arbitrator(s) shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrators' majority decision shall be binding and final. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator(s); provided, however, that if the arbitrator(s) determines that the position taken in the Dispute by the non-prevailing party taken as a whole is unreasonable, the arbitrator(s) may order the non-prevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator(s) shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator(s) and the American Arbitration Association. (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 8.6 and (ii) if any party, as party of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 8.6. 8.7 Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto 71 Illinois and their successors and permitted assigns any rights or remedies under or by reason of this Agreement. 8.9 Entire Agreement. This Agreement, the Schedules and Exhibits hereto and the other Transaction Documents, and the Confidentiality Agreement dated August 2, 1999, between Citizens and Parent, (i) together constitute the entire understanding of the parties (and their affiliates) with respect to the subject matter hereof, and any related matter, (ii) supercede all prior agreements or understandings, written or oral, entered into by any of the parties that concern the subject matter hereof and (iii) are not intended to confer upon any Person other than the parties hereto any benefit, right or remedy. 8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (i) extend the time for the performance of any of the obligations of the other party; (ii) waive any inaccuracies in representations and warranties by the other party; (iii) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (iv) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or extension, as the case may be. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.12 Headings. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 8.13 Definitions. For purposes of this Agreement, references to the knowledge of the Seller Parties (including a reference to "the best of the knowledge of the Seller Parties" and similar references) shall mean the actual knowledge possessed by any of the following officers or employees of Citizens: Chief Financial Officer, Vice President and Treasurer; President, Citizens Public Services; Vice President, Corporate Human Resources; Secretary; Vice President, Water; and the general manager of the Business. 8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE, INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION 72 Illinois AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES, PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT, IAWC OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER PARTIES. 8.15 Construction of Certain Provisions. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. 8.16 Bulk Sales. Each of Parent and IAWC agrees that it shall not make any filings under any tax bulk sales provisions with respect to the transactions contemplated by this Agreement. [Signatures appear on following page.] 73 Illinois IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. CITIZENS UTILITIES COMPANY By:_____________________________________ Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer CITIZENS BUSINESS SERVICES COMPANY CITIZENS LAKE WATER COMPANY CITIZENS RESOURCES COMPANY CITIZENS UTILITIES COMPANY OF ILLINOIS By:_____________________________________ Robert J. DeSantis, Vice President AMERICAN WATER WORKS COMPANY, INC. By:_____________________________________ Joseph F. Hartnett, Jr., Treasurer ILLINOIS-AMERICAN WATER COMPANY By:_____________________________________ Terry L. Gloriod, President Indiana EXECUTION COPY ASSET PURCHASE AGREEMENT among CITIZENS UTILITIES COMPANY AND FLOWING WELLS, INC. AND AMERICAN WATER WORKS COMPANY, INC. AND INDIANA-AMERICAN WATER COMPANY Dated as of October 15, 1999 Indiana TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Certain Definitions..............................................1 ARTICLE 2 THE TRANSACTION..................................................9 2.1 Sale and Purchase of Assets......................................9 2.2 Excluded Assets..................................................9 2.3 Assumption of Certain Liabilities...............................10 2.4 Consent of Third Parties........................................13 2.5 Closing.........................................................14 2.6 Purchase Price..................................................14 2.6.1 Purchase Price............................................14 2.6.2 Payment of Initial Cash Payment...........................14 2.6.3 Estimated Closing Statement...............................15 2.6.4 Post-Closing Adjustment to Purchase Price.................15 2.6.5 Adjustment for Certain Liabilities........................17 2.7 Deliveries and Proceedings at Closing...........................17 2.7.1 Deliveries to Buyer.......................................17 2.7.2 Deliveries By Buyer to the Seller Parties.................18 2.8 Allocation of Consideration.....................................18 2.9 Prorations......................................................18 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.......................19 3.1 Qualification; No Interest in Other Entities....................19 3.2 Authorization and Enforceability................................19 3.3 No Violation of Laws or Agreements..............................20 3.4 Financial Statements............................................20 3.5 No Changes......................................................21 3.6 Contracts.......................................................21 3.7 Permits and Compliance With Laws Generally......................22 3.8 Environmental Matters...........................................22 3.9 Consents........................................................24 3.10 Title...........................................................25 3.11 Real Estate.....................................................25 3.12 Taxes...........................................................25 3.13 Patents and Intellectual Property Rights........................26 3.14 Accounts Receivable.............................................26 3.15 Labor Relations.................................................26 3.16 Employee Benefit Plans..........................................26 3.17 Absence of Undisclosed Liabilities..............................28 3.18 No Pending Litigation or Proceedings............................28 3.19 Supply of Utilities.............................................29 3.20 Insurance.......................................................29 3.21 Relationship with Customers.....................................29 3.22 WARN Act........................................................29 Indiana 3.23 Condition of Assets.............................................29 3.24 Brokerage.......................................................29 3.25 All Assets......................................................29 3.26 Year 2000 Matters...............................................30 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER..............30 4.1 Organization and Good Standing..................................30 4.2 Authorization and Enforceability................................31 4.3 No Violation of Laws or Agreements..............................31 4.4 Consents........................................................32 4.5 Financing.......................................................32 4.6 Brokerage.......................................................32 4.7 Insurance.......................................................32 ARTICLE 5 ADDITIONAL COVENANTS............................................32 5.1 Conduct of Business.............................................32 5.2 Negotiations....................................................34 5.3 Disclosure Schedules............................................34 5.4 Mutual Covenants................................................35 5.5 Filings and Authorizations......................................35 5.6 Public Announcement.............................................36 5.7 Further Assurances..............................................36 5.8 Cooperation.....................................................36 5.9 Employees; Employee Benefits....................................37 5.10 Employee Pension Plan...........................................39 5.12 Welfare Benefits................................................41 5.13 Taxes...........................................................42 5.14 Intentionally Omitted...........................................42 5.15 Citizens' Guarantees and Surety Instruments.....................42 5.16 Intentionally Omitted. .........................................42 5.17 Schedule of Permits.............................................42 5.18 Title Information...............................................42 5.19 Transaction with Related Parties................................43 5.20 Approval by Citizens............................................43 5.21 Supplemental Information........................................43 5.22 Non-Competition.................................................43 5.23 Intentionally Omitted...........................................43 5.24 Intentionally Omitted...........................................44 5.25 Cooperation with Respect to Like-Kind Exchange..................44 5.26 Transition Plan.................................................44 5.27 Procedures regarding Refunds of Advances........................44 5.28 Title Insurance.................................................45 ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION...............................45 6.1 Conditions Precedent to Obligations of Buyer and Parent.........45 6.1.1 Performance of Agreements; Representations and Warranties.45 6.1.2 Opinion of Counsel........................................46 6.1.3 HSR Act...................................................46 Indiana 6.1.4 Required PUC and Other Consents...........................46 6.1.5 Injunction; Litigation....................................46 6.1.6 Documents.................................................46 6.1.7 Related Closings..........................................47 6.2 Conditions Precedent to Obligations of Seller Parties...........47 6.2.1 Performance of Agreements; Representations and Warranties.47 6.2.2 Opinion of Counsel........................................47 6.2.3 HSR Act...................................................47 6.2.4 Required PUC and Other Consents...........................47 6.2.5 Injunction; Litigation....................................48 6.2.6 Documents.................................................48 6.2.7 Related Closings..........................................48 6.3 Termination.....................................................48 ARTICLE 7 CERTAIN ADDITIONAL COVENANTS....................................49 7.1 Certain Taxes and Expenses......................................49 7.2 Maintenance of Books and Records................................49 7.3 Survival........................................................49 7.4 Indemnification.................................................52 7.4.1 General Indemnification Obligations.......................52 7.4.2 General Indemnification Procedures........................53 7.4.3 Indemnification for Negligence............................56 7.5 UCC Matters.....................................................56 7.6 Financial Statements............................................56 7.7 Collection of Receivables.......................................57 ARTICLE 8 MISCELLANEOUS...................................................57 8.1 Construction....................................................57 8.2 Notices.........................................................57 8.3 Successors and Assigns..........................................59 8.4 Exhibits and Schedules..........................................59 8.5 Governing Law...................................................60 8.6 Dispute Resolution..............................................60 8.7 Severability....................................................61 8.8 No Third Party Beneficiaries....................................61 8.9 Entire Agreement................................................61 8.10 Amendment and Waiver............................................61 8.11 Counterparts....................................................62 8.12 Headings........................................................62 8.13 Definitions.....................................................62 8.14 No Implied Representation.......................................62 8.15 Construction of Certain Provisions..............................62 8.16 Bulk Sales......................................................63 Indiana List of Schedules Schedule 1.1.1(a) ................................................. Real Estate Schedule 2.2.12 ................................................Excluded Assets Schedule 3.3 ................................No Violation of Laws or Agreements Schedule 3.4 ..............................................Financial Statements Schedule 3.5 ........................................................No Changes Schedule 3.6 .........................................................Contracts Schedule 3.7 ........................Permits and Compliance with Laws Generally Schedule 3.8 .................................Environmental Matters - Generally Schedule 3.8.10 ................................Compliance with Water Standards Schedule 3.8.11 ...............................................Deed Restriction Schedule 3.9 ..........................................Seller Parties' Consents Schedule 3.10 ............................................................Title Schedule 3.11 ..........................................Real Estate Proceedings Schedule 3.12 ............................................................Taxes Schedule 3.15 ..................................................Labor Relations Schedule 3.16.1 .........................................Employee Benefit Plans Schedule 3.16.4 ............................Employee Benefit Plans - Compliance Schedule 3.16.9 ................Employee Benefit Plans - Extraordinary Benefits Schedule 3.17 ...............................Absence of Undisclosed Liabilities Schedule 3.18 .............................No Pending Litigation or Proceedings Schedule 3.19 ..............................................Supply of Utilities Schedule 3.20 ...............................................Seller's Insurance Schedule 3.22 .........................................................WARN Act Schedule 3.23 ..............................................Condition of Assets Schedule 3.25 .......................................................All Assets Schedule 3.27 ................................................Product Liability Schedule 4.7 .................................................Buyer's Insurance Schedule 5.1 ...............................................Conduct of Business Schedule 5.9.1 .......................................................Employees Schedule 5.9.2 ................................Collective Bargaining Agreements Schedule 5.12 .................................................Former Employees Schedule 5.15 ............................................ Citizens' Guarantees Schedule 5.16 ..............................................Schedule of Permits Schedule 6.1.7 .....................................Related Purchase Agreements Indiana TABLE OF EXHIBITS Exhibit A - Form of Assumption Agreement Exhibit B - Form of Assignment and Bill of Sale Exhibit C - Intentionally Omitted. Exhibit D - Intentionally Omitted. Exhibit E - Form of Seller's Opinion of Counsel Exhibit F - Form of Buyer's Opinion of Counsel Indiana ASSET PURCHASE AGREEMENT THIS IS AN ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of October 15, 1999, by and among Citizens Utilities Company, a Delaware corporation ("Citizens"), and Flowing Wells, Inc., an Indiana corporation and a wholly-owned subsidiaries of Citizens (collectively with Citizens, "Seller" or the "Seller Parties"), and American Water Works Company, Inc., a Delaware corporation ("Parent"), and Indiana-American Water Company, Inc., an Indiana corporation ("Buyer"). Background 1. Flowing Wells, Inc., is a public utility engaged in the business of storing, supplying, distributing and selling water to the public and related services and activities in the State of Indiana, (the "Business"). 2. Parent is a holding company which desires to cause the Buyer to purchase substantially all of the assets, properties and rights of the Seller Parties relating to the Business, and Seller desires to sell, and to cause the sale of, such assets, properties and rights, on the terms and subject to the conditions set forth in this Agreement. Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: 1.1.1 "Acquired Assets" means, subject to Section 2.2, all of each Seller Party's right, title, and interest in, under and to all of the assets, properties and rights exclusively used in the Business as a going concern of every kind, nature and description existing on the Closing Date, wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the assets, properties and rights exclusively relating to the Business enumerated below: (a) all real property described in Schedule 1.1.1(a), together with all fixtures, fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, railroad crossing agreements, hereditaments, tenements, privileges and other appurtenances thereto or otherwise exclusively related to the Business (such as appurtenant rights in and to public streets) (the "Real Estate"); Indiana (b) to the extent not included in clause (a) above, all water tanks, reservoirs, water works, plant and systems, purification and filtration systems, pumping stations, pumps, wells, mains, water pipes, hydrants, equipment, machinery, vehicles, tools, dies, spare parts, materials, water supplies, fixtures and improvements, construction in progress, jigs, molds, patterns, gauges and production fixtures and other tangible personal property, in transit or otherwise, used exclusively in the Business (the "Equipment and Other Tangible Personal Property"); (c) notwithstanding the provisions of Section 2.2 but subject to Section 2.4, all of Seller's water appropriation and flowage rights to the extent not transferred to Buyer upon assignment of the Contracts and Permits to Buyer; (d) all notes receivable, accounts receivable, accrued utility revenues, materials and supplies (at average cost net of reserve for obsolescence) and prepayments attributable in each case exclusively to the Business; (e) all deferred capital costs and other deferred charges (excluding deferred taxes collectable) attributable exclusively to the Business of which recovery in future rates is probable; (f) Intellectual Property and goodwill, licenses and sublicenses granted and obtained with respect thereto; (g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements and instruments relating to the sale of any assets, services, properties, materials or products, including all customer contracts, operating contracts and distribution contracts relating exclusively to the conduct of the Business; (ii) orders, contracts, supply agreements and other agreements relating exclusively to the purchase of any assets, services, properties, materials, or products for the Business; (iii) all leases of Real Estate exclusively related to the Business; (iv) all other contracts, agreements and instruments related exclusively to the Business (other than contracts, agreements and instruments included in the definition of Real Estate or Permits); and (v) any such contracts, agreements and other instruments referred to in clauses (i) - (iv) inclusive, entered into between the date hereof and the Closing Date which are consistent with the terms of this Agreement and are entered into in the ordinary course of business consistent with past practice, and including in the case of clauses (i) - (iv) all such contracts, agreements and instruments more specifically listed or described in Schedule 3.6 (but specifically excluding any contract, agreement and instrument listed or described on Schedule 2.2.12) (the "Contracts"); (h) subject to Section 2.4 hereof, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority relating exclusively to the conduct of the Business and all pending applications therefor (the "Permits"); (i) books, records, ledgers, files, documents (including originally executed copies of written Contracts, to the extent available, and copies to the extent not available), correspondence, Tax returns relating exclusively to the Business, memoranda, forms, lists, plats, architectural plans, drawings, and specifications, new product development materials, creative 2 Indiana materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the Transferred Employees (to the extent such transfer is not prohibited by law), photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent exclusively relating to the Business, the Acquired Assets or the Transferred Employees; (j) all rights or choses in action arising out of occurrences before or after the Closing Date and exclusively related to any of the Acquired Assets, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Seller; provided, however, that (notwithstanding the foregoing provisions of this Section 1.1.1(j)), to the extent that Seller pays or discharges a liability related to the Business or any of the Acquired Assets and related to such right or chose in action (whether by reason of indemnification under this Agreement or otherwise), Buyer will reassign or reconvey to Seller such right or chose in action to the extent that such right or chose in action relates to a recovery of amounts paid to Buyer; and (k) all rights to insurance and condemnation proceeds (i) to the extent relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing but only to the extent that the proceeds exceed the amount of the write-down of the net book value of such Acquired Assets on the books and records of Seller as a result of such damage, destruction, taking or other impairment and (ii) to the extent they relate to amounts paid by Buyer for Damages to the extent Buyer does not receive payment pursuant to Section 7.4.1(a), but only to the extent Buyer is entitled to indemnification by Seller pursuant to Sections 7.3 and 7.4. 1.1.2 "Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.3 "Affected Participant" has the meaning set forth as Section 5.11.1 hereof. 1.1.4 "Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. 1.1.5 "Agreement" has the meaning set forth in the introduction hereof. 1.1.6 "American Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.7 "American Savings Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof 3 Indiana 1.1.9 "Assumed Benefit Liabilities" has the meaning set forth in Section 3.16.6 hereof. 1.1.10 Intentionally Omitted. 1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2 hereof. 1.1.13 "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof). 1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under a Benefit Plan. 1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof. 1.1.17 Intentionally Omitted. 1.1.18 "Business" has the meaning set forth in the Background section hereof. 1.1.19 "Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. 1.1.20 "Buyer" has the meaning set forth in the introduction hereof. 1.1.21 Intentionally Omitted. 1.1.22 "Buyer's Accountants" means PricewaterhouseCoopers LLP or any firm of independent public accountants hereafter designated by Buyer for purposes of this Agreement. 1.1.23 Intentionally Omitted. 1.1.24 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.25 "CERCLA" has the meaning set forth in Section 3.8.2 hereof. 1.1.26 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof. 4 Indiana 1.1.27 "Citizens" has the meaning set forth in the introduction hereof. 1.1.28 "Closing" has the meaning set forth in Section 2.5 hereof. 1.1.29 "Closing Date" has the meaning set forth in Section 2.5 hereof. 1.1.30 "Closing Statement of Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.31 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.32 Intentionally Omitted. 1.1.33 "Competing Transaction" has the meaning set forth in Section 5.2. 1.1.34 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof. 1.1.35 "Control" with respect to any Person means the ownership, directly or indirectly, of at least a majority of the voting power of each class of capital stock of such Person entitled to vote in the election of directors of such Person generally. 1.1.36 "Damages" has the meaning set forth in Section 7.4.1 hereof. 1.1.37 "Disclosure Schedules" means the Schedules referenced in Articles 3, 4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3. 1.1.38 "Dispute" has the meaning set forth in Section 8.6. 1.1.39 "Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.40 "Environmental Laws" has the meaning set forth in Section 3.8 hereof. 1.1.41 "Equipment and Other Tangible Personal Property" has the meaning set forth in Section 1.1.1(b) hereof. 1.1.42 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.43 "ERISA Affiliate" means (a) any corporation included with any of the Seller Parties in a controlled group of corporations within the meaning of Section 414(b) of the Code; (b) any trade or business (whether or not incorporated) which is under common control with any of the Seller Parties within the meaning of Section 414 of the Code; any member of an affiliated service group of which any of the Seller Parties is a member within the meaning of Section 414(m) of the Code; or (d) any other person or entity treated as an affiliate of any of the Seller Parties under Section 414(o) of the Code. 5 Indiana 1.1.44 "Excluded Assets" has the meaning set forth in Section 2.2 hereof. 1.1.45 "Financial Statements" has the meaning set forth in Section 3.4 hereof. 1.1.46 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof. 1.1.47 "Former Employees" means all salaried and hourly employees once employed by Seller or any of its Affiliates, but who are no longer so employed on the Closing Date. 1.1.48 "FTC" has the meaning set forth in Section 5.5 hereof. 1.1.49 "GAAP" has the meaning set forth in Section 3.4 hereof. 1.1.50 "Hazardous Substance" has the meaning set forth in Section 3.8 hereof. 1.1.51 "HSR Act" has the meaning set forth in Section 3.9 hereof. 1.1.52 Intentionally Omitted. 1.1.53 Intentionally Omitted. 1.1.54 "Indemnified Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.55 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.56 "Intellectual Property" means the trademarks, patents, trade names and copyrights and applications therefor, inventions, trade secrets, and confidential business information (including know-how, formulas, water filtration, purification and pumping processes and techniques, technical data, designs, drawings, customer and supplier lists, and business and marketing plans and proposals), all computer software (including data and related documentation and object and source codes), whether in magnetic format or hard copy, and tangible embodiments thereof (in whatever form or medium) of Seller, in each case, utilized exclusively in the Business. 1.1.57 "Interim Statement of Net Assets" means the Citizens Water Resources Statement of Net Assets - Indiana, June 30, 1999, which is attached hereto as Schedule 3.4. 1.1.58 "Interim Statement of Net Assets Date" means June 30, 1999. 1.1.59 "IRS" has the meaning set forth in Section 3.16.2 hereof. 6 Indiana 1.1.60 "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). 1.1.61 "Material Adverse Effect" means a change or effect (or series of related changes or effects) which has or is reasonably likely to have a material adverse change in or effect upon the business, assets, condition (financial or otherwise), or results of operations of the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. For purpose of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect (a) if it arises from general business, economic or financial market conditions, from conditions generally effecting the industries in which Seller competes, or from the transactions contemplated by this Agreement, or (b) solely with respect to matters arising prior to Closing, to the extent that either (i) Seller realizes the benefit of insurance maintained by Citizens on or prior to the Closing Date and Buyer receives the cash proceeds of such insurance to the extent required by Section 1.1.1(k), or (ii) Seller arranges for Buyer to recover payments in respect of such occurrence or condition from any other source (whether in a lump sum or stream of payments), it being understood and agreed that a Material Adverse Effect may have occurred irrespective of such insurance recovery if the occurrence or condition giving rise to such recovery also causes a non-monetary material adverse change in or effect upon the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. 1.1.62 "Mortgage Indenture" means Indenture of Mortgage and Deed of Trust between BNY Western Trust Company (successor in interest to Wells Fargo Bank, N.A.) and First Interstate Bank of California (as successor trustee to Marine Midland, N.A., formerly the Marine Midland Trust Company of New York). 1.1.63 "OSHA" has the meaning set forth in Section 3.7.1 hereof. 1.1.64 "PCBs" has the meaning set forth in Section 3.8.6 hereof. 1.1.65 "Permits" has the meaning set forth in Section 1.1.1(h) hereof. 1.1.66 "Permitted Exceptions" has the meaning set forth in Section 3.10 hereof; provided, however, that from and after the Closing, Permitted Exceptions shall not include any Lien arising under or resulting from the Mortgage Indenture. 1.1.67 "Person" means an individual, a corporation, a partnership, an association, an Authority, a trustor other entity or organization. 1.1.68 "Pre-Existing Conditions" has the meaning set forth in Section 2.3.1(d). 7 Indiana 1.1.69 "Prime Rate" means the rate per annum announced from time to time during the reference period by Citibank N.A. as its United States prime, reference or base rate for commercial loans. 1.1.70 "PUC" has the meaning set forth in Section 5.5 hereof. 1.1.71 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.72 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof. 1.1.73 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof. 1.1.74 "Related Purchase Agreements" as the meaning set forth in Section 6.1.7 hereof. 1.1.75 "Release" or "Released" has the meaning set forth in Section 3.8 hereof. 1.1.76 "Remedial Action" has the meaning set forth in Section 3.8 hereof. 1.1.77 Intentionally Omitted. 1.1.78 "Retained Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.79 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.80 "SEC" means the U.S. Securities and Exchange Commission. 1.1.81 "Securities Filings" has the meaning set forth in Section 5.8.2 hereof. 1.1.82 "Seller" and "Seller Parties" have the respective meaning set forth in the introduction hereof. 1.1.83 "Seller's Accountants" means KPMG LLP or any other firm of independent public accountants hereafter designated by Seller for purposes of this Agreement. 1.1.84 "Seller's Adjusted Amount" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.85 "Seller's Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.86 "Seller's 401(k) Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.87 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f) hereof. 8 Indiana 1.1.88 "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall profits, social security (or similar unemployment), disability, transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise and other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 1.1.89 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.90 "Threshold Amount" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.91 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i) hereof. 1.1.92 "Transferred Accounts" has the meaning set forth in Section 5.11.2 hereof. 1.1.93 "Transaction Documents" has the meaning set forth in Section 3.2 hereof. 1.1.94 "Transferred Employees" has the meaning set forth in Section 5.9.2 hereof. 1.1.95 "Union Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.96 "VEBAs" has the meaning set forth in Section 5.12 hereof. 1.1.97 "WARN Act" means the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. section 2102- 2109, as amended. ARTICLE 2 THE TRANSACTION 2.1 Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 2.5 below, Citizens shall, and shall cause the other Seller Parties to, sell, assign, transfer, deliver and convey to Buyer, and Parent shall cause Buyer to purchase, the Acquired Assets for the Purchase Price specified in Section 2.6. 2.2 Excluded Assets. The following assets of Seller shall be excluded from the Acquired Assets (the "Excluded Assets"): 2.2.1 assets of the Seller used in both the Business and in Citizens' gas, electric or communications businesses, the material items of which are described on Schedule 2.2.12; 9 Indiana 2.2.2 cash and cash equivalents in transit, in hand or in bank accounts; 2.2.3 except as otherwise set forth herein, assets attributable or related to any Benefit Plan; 2.2.4 the stock record and minute books of Seller; 2.2.5 Acquired Assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; 2.2.6 except to the extent set forth in Sections 2.9, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member, and which are treated as Retained Liabilities under Section 2.3.3(b) below. 2.2.7 customer and other deposits held in Seller's accounts; 2.2.8 accounts owing by and among Seller and its Affiliates; 2.2.9 notes receivable and other receivables (other than note and accounts receivable attributable exclusively to the Business); 2.2.10 all deferred tax assets or collectibles; 2.2.11 duplicate copies of all books and records transferred to Buyer; and 2.2.12 those certain items listed on Schedule 2.2.12. 2.3 Assumption of Certain Liabilities. 2.3.1 Buyer shall not assume any liabilities of Citizens or Seller or any of their Affiliates, except that Buyer shall assume the following specific liabilities and obligations: (a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; (b) except as set forth in Section 2.3.3(b), all liabilities and obligations of Seller in respect of the Contracts and Permits assigned or transferred to Buyer pursuant to this Agreement in accordance with the respective terms thereof, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (c) intentionally omitted; 10 Indiana (d) any liability, obligation or responsibility of Seller for conditions at the Real Estate, whether based on statutory or common law, now or hereafter in effect, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment at the Real Estate or into or from any building, structure, pipeline or other facility at the Real Estate, or from violation of any law relating to the foregoing, including without limitation, any CERCLA or similar liability under any federal or state law or regulation, except to the extent Buyer has given written notice of a claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to the expiration of the claims period set forth in Section 7.3.2(a) or (b) (and if Buyer has given written notice prior to the expiration of such claims period, to the extent that such claim is not entitled to indemnification under Sections 7.3 and 7.4) (the foregoing, the "Pre-Existing Conditions"); (e) all liabilities and obligations of Seller related to unperformed service obligations, easement and right-of-way relocation obligations, and construction work in progress, and all engineering and construction required to complete scheduled construction and other capital projects for the Business, in each case relating to the Business and outstanding on or arising after the Closing Date except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (f) liability for accrued but unused vacation pay for the Transferred Employees to the extent provided in Section 5.9.2; (g) any liability, obligation or responsibility relating to customer deposits held by Seller on the Closing Date and relating to the Business; and (h) all liabilities and obligations imposed on Buyer by any PUC in connection with the operation of the Business or the ownership of the Acquired Assets, including with respect to any liability of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the financial statements of Seller. 2.3.2 Any liabilities or obligations which are assumed by Buyer pursuant to Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities." At the Closing, Parent shall cause Buyer to execute and deliver to Seller an assumption agreement, in substantially the form of the Assumption Agreement attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which Buyer shall assume the Assumed Liabilities. Each of Parent and Buyer hereby irrevocably and unconditionally waives and releases the Seller Parties from all Assumed Liabilities and all liabilities or obligations exclusively relating to the Business or the Acquired Assets to the extent arising from events or occurrences after the Closing or to the extent otherwise relating to the period after the Closing, including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). 11 Indiana 2.3.3 Buyer shall not assume any liabilities, commitments or obligations (contingent or absolute and whether or not determinable as of the Closing) of any of the Seller Parties or any of their Affiliates except for the Assumed Liabilities as specifically and expressly provided for above, whether such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Buyer hereunder as Assumed Liabilities are being retained by the Seller Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby irrevocably and unconditionally waives and releases Buyer from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Without limitation to the foregoing, all of the following shall be considered Retained Liabilities and not Assumed Liabilities (except as specified below) for the purposes of this Agreement: (a) any product liability, toxic tort or similar claim for injury to person or property, regardless of when made or asserted, to the extent that it arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any of the Seller Parties or any of their Affiliates prior to Closing, or alleged to have been made by any of such Persons, or to the extent that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product distributed or sold by or on behalf of any of the Seller Parties or any of their Affiliates prior to Closing, including any claim referred to above in this Section 2.3.3(a) relating to water quality standards, any claim relating to any product delivered in connection with the performance of services provided by Seller and any claim seeking recovery for consequential damages, lost revenue or income; (b) all refund obligations relating to the advances existing on the Closing Date for construction of facilities relating to the Business; (c) except to the extent set forth in Section 2.9, any federal, state, foreign or local income or other Tax payable with respect to the business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member; (d) any liability or obligation associated with or in connection with any common plant assets of Seller (other than the liabilities and obligations exclusively related to any common plant assets included among the Acquired Assets); (e) except as provided in Section 2.3.1 above, any liability or obligation with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any of the Seller Parties or any of their Affiliates, whether or not employed by Buyer after the Closing, that arises out of or relates to events or conditions to the extent occurring before the Closing Date; (f) except to the extent set forth in Section 2.3.1(d), any liability, obligation or responsibility of any of the Seller Parties, or any of their Affiliates or predecessors; 12 Indiana whether based on statutory or common law, but only as any such law is interpreted, amended and in effect on the Closing Date, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment or into or from any building, structure, pipeline or other facility or relating to or arising from the generation, use, storage, treatment, disposal, transport or other handling of Hazardous Substances or sale or product containing Hazardous Substances from violation of any law relating to the foregoing (but only as such law is interpreted, amended and in effect on the Closing Date) including without limitation, any (A) CERCLA or similar liability under any federal or state law or regulation as interpreted, amended and in effect on the Closing Date or (B) any such liability associated with businesses or assets of the Seller Parties other than the Business or the Acquired Assets; (g) liabilities and obligations relating to the Business to the extent arising prior to Closing (unless otherwise constituting Assumed Liabilities) arising by operation of law under any common law or statutory doctrine (including successor liability or de facto merger); (h) any obligation or liability arising under any contract, commitment, instrument or agreement (1) subject to the penultimate sentence of Section 2.4, that is not transferred to Buyer as part of the Acquired Assets, or (2) that relates to any breach or default (or to the extent that it relates to an event which would, with the passing of time or the giving of notice, or both, constitute a default) under any Contract, instrument or agreement or to any services to be provided by Seller under any such Contract, instrument or agreement to the extent that such services were performed or were required to have been performed on or prior to the Closing Date; (i) any liability or obligation in respect of the Excluded Assets; (j) any liability or obligation of any of the Seller Parties or any of their Affiliates existing as a result of any act, failure to act or other state of facts or occurrence which constitutes a breach or violation of any of Seller's representations, warranties, covenants or agreements contained in this Agreement, except to the extent set forth in Section 7.4; or (k) except for the Assumed Liabilities as specifically and expressly set forth herein, any liability to the extent arising out of or relating to the ownership or operation of the Acquired Assets or the Business prior to the Closing Date (including any predecessor operations), any claims, obligations or litigation to the extent arising out of or relating to events or conditions occurring before the Closing Date, and any liability associated with any business other than the Business. 2.4 Consent of Third Parties. On the Closing Date, Citizens shall cause Seller to assign to Buyer, and Parent shall cause Buyer to assume, the Contracts and the Permits which are to be transferred to Buyer as provided in this Agreement by means of the Assumption Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent (or result in a breach or violation thereof) of the other party thereto or any other third party, and such consent shall not be obtained prior to Closing, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets. In order, however, 13 Indiana to provide Buyer the full realization and value of every Contract of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Buyer, in the name of Seller or otherwise as Buyer shall specify, take all reasonable actions (including without limitation the appointment of Buyer as attorney-in-fact for Seller to proceed at Buyer's sole cost and expense) and do or cause to be done all such things as shall in the reasonable opinion of Buyer be necessary (a) to assure that the rights of Seller or its Affiliates under such Contracts shall be preserved for the benefit of Buyer and (b) to facilitate receipt of the consideration to be received by Seller or its Affiliates in and under every such Contract. To the extent that Buyer does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract "assigned or transferred to Buyer pursuant to this Agreement" within the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in any way diminish the obligations of Seller to obtain consents and approvals under this Agreement. 2.5 Closing. Subject to the terms and conditions of this Agreement, the closing of the sale and purchase of the Acquired Assets (the "Closing") shall take place at 10 a.m., East Coast time, on a date mutually satisfactory to Buyer and Seller which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in Sections 6.1 and 6.2 hereof (other than those conditions which require the delivery of any documents or the taking of other action, at the Closing) at the offices of Fleischman and Walsh, LLP, 1400 Sixteenth Street, N.W., Washington, D.C. 20036, or on such other date and at such other time or place as may be mutually agreed upon by the parties hereto (the "Closing Date"). Upon payment of the Initial Cash Payment by Buyer and confirmed receipt thereof by Seller or the Escrow Agent pursuant to Section 2.6.2 below, Seller shall operate the Business at the direction of and under the control of Buyer. Notwithstanding the foregoing, the Closing shall be deemed to be effective as of 11:59 p.m. on the Closing Date for all purposes. 2.6 Purchase Price. 2.6.1 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price be paid by Buyer for the purchase of the Acquired Assets (the "Purchase Price") shall be: (i) $1,780,000 in cash (the "Base Cash Purchase Price," the Base Cash Purchase Price as adjusted in accordance with Section 2.6.3 and Section 2.6.5 is referred to as the "Initial Cash Payment"), subject to adjustment pursuant to the provisions of this Agreement (including Section 2.6.3, Section 2.6.4, Section 2.6.5 and Section 2.9 of this Agreement) and (ii) the assumption by Buyer of the Assumed Liabilities. 2.6.2 Payment of Initial Cash Payment. Subject to the terms and conditions of this Agreement, the Initial Cash Payment shall be paid by Buyer on the Closing Date by federal other wire transfer of immediately available funds to the account designated by Seller in writing at least two (2) Business Days prior to the Closing Date. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Buyer shall deliver the Initial Cash Payment to Buyer's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. Upon receipt, the Escrow Agent shall invest the Initial Cash Payment in an interest-bearing account mutually agreed upon by Seller and Buyer. At Closing, Parent shall sign and deliver to Citizens a statement which confirms that the Closing has occurred and which instructs the Escrow 14 Indiana Agent to transfer to Citizens the funds representing the Initial Cash Payment, plus an amount representing the interest earned after the Closing Date until the date the funds are transferred, to an account that Citizens shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to Buyer. The fees and expenses of Escrow Agent shall be paid by Buyer. 2.6.3 Estimated Closing Statement. At least five (5) business days prior to the Closing Date, Citizens shall deliver to Parent and Buyer a statement of net assets (the "Estimated Statement of Net Assets") reflecting its good faith calculation of the Acquired Assets of the Business as of the last day of the latest calendar month for which financial statements of Seller are available (the "Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall be prepared in the same manner and utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999). The Base Cash Purchase Price shall be increased or decreased on a dollar for dollar basis by the amount, if any, by which the Estimated Adjusted Net Assets is greater than or less than $886,056 (such increase or decrease, as the case may be, is referred to herein as the "Estimated Net Asset Adjustment"). 2.6.4 Post-Closing Adjustment to Purchase Price. (a) Within 90 days after the Closing, Citizens shall prepare and deliver to Parent and Buyer a Statement of Net Assets (the "Closing Statement of Net Assets") which reflects the Acquired Assets, as of 11:59 p.m. on the Closing Date, based on actual financial performance and calculated in the same manner, utilizing the same accounting principles, policies and methods utilized in preparing the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999), together with (A) an audit report of Seller's Accountants stating that the Closing Statement of Net Assets has been prepared utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets and (B) a calculation of Citizens' determination of the amount of increase or decrease in the amount of the Acquired Assets of the Business from the Interim Statement of Net Assets Date to the Closing Date which is derived from the Closing Statement of Net Assets ("Seller's Adjustment Amount"). The Closing Statement of Net Assets shall not give effect to any purchase accounting treatment arising from Buyer's purchase of the Acquired Assets. Buyer shall pay the fees and expenses of Seller's Accountants incurred in connection with this Section 2.6.4. Buyer agrees to cooperate, and agrees to cause Buyer's Accountants to cooperate, with Citizens and Seller's Accountants in connection with the preparation of the Closing Statement of Net Assets, and related information, and shall provide to Citizens and Seller's Accountants such books, records and information as may be reasonably requested from time to time, including the work papers of Buyer's Accountants. Citizens will give Buyer and its representatives access during the normal business hours of Citizens to the personnel, books and records of Citizens and the work papers of Seller's Accountants to assist Buyer in the review of the Closing Statement of Net Assets and related matters. Buyer agrees that, following the Closing through the date on which the Closing Statement of Net Assets is delivered, it will not take any actions with respect to any accounting books, records, policies or procedures on which the Closing Statement of Net Assets is to be based that would make it impossible or impracticable to calculate the Acquired Assets in the manner and utilizing the methods required hereby. Without limiting the generality of the foregoing, no changes shall be made 15 Indiana in any reserve or other account existing as of the date of the Interim Statement of Net Assets except in the ordinary course or as a result of events occurring after the date of the Interim Statement of Net Assets and, in such event, only in a manner consistent with past practices of Seller. (b) Parent or Buyer may dispute any amounts reflected on the Closing Statement of Net Assets, in the Seller's Adjustment Amount or in the Statement of Certain Assumed Liabilities, provided, however, that Buyer shall notify Citizens in writing of each disputed amount, and specify the amount thereof in dispute and the basis of such dispute, within 30 days of the Buyer's receipt of the Closing Statement of Net Assets and the Seller's Adjustment Amount (such 30 day period hereinafter referred to as the "Review Period"). In the event of a dispute with respect to the Closing Statement of Net Assets, the Seller's Adjustment Amount or the Statement of Certain Assumed Liabilities, Buyer and Seller shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Buyer and Seller are unable to reach a resolution of such differences within 30 days of receipt of Buyer's written notice of dispute to Seller, Buyer and Seller shall submit the amounts remaining in dispute (together with any amounts remaining in dispute pursuant to Section 2.6.4(b) of each of the Related Purchase Agreements) for resolution to an independent accountant firm of national reputation mutually appointed by Seller and Buyer (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall be requested to determine and report to the parties, within 30 days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Buyer and the Seller Parties so that the Seller Parties' share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to the Third Accounting Firm that is unsuccessfully disputed by the Buyer (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed amounts so submitted by the Buyer to the Third Accounting Firm. Buyer shall pay the fees and expenses of Buyer's Accountants incurred in connection with this Section 2.6.4(b). Seller's Adjustment Amount, if there are no disputes with respect thereto, or Seller's Adjustment Amount as adjusted after the resolution of all disputes with respect thereto in accordance herewith, shall be referred to as the "Final Net Asset Adjustment." (c) If the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment exceeds the Initial Cash Payment, then within five (5) business days after final determination thereof Buyer shall pay Seller the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. If the Initial Cash Payment exceeds the sum of the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment, then within five (5) business days after final determination thereof Seller shall pay Buyer the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. 2.6.5 Adjustment for Certain Liabilities. Concurrent with the delivery of the Estimated Statement of Net Assets, Citizens also shall deliver to Parent and Buyer a statement reflecting (i) the customer and other deposits held by Seller on the Closing Date and relating to the 16 Indiana Business, (ii) the items specified in Section 2.9 to the extent set forth therein, and (iii) without duplications of any amount included in clause (i) above, any payments received by Seller under the Contracts and Permits for obligations not performed as of the Closing Date (the "Statement of Certain Assumed Liabilities"). The Statement of Certain Assumed Liabilities shall reflect Citizens' good faith calculation of such liabilities as of the Closing Date. The Base Cash Purchase Price shall be decreased by the net amount set forth in the Statement of Certain Assumed Liabilities. Concurrent with the delivery of the Closing Statement of Net Assets, Citizens also shall deliver to Parent a statement showing any adjustments to the Statement of Certain Assumed Liabilities and the Base Cash Purchase Price shall be further adjusted to give effect to any such adjustments to the Statement of Certain Assumed Liabilities. 2.7 Deliveries and Proceedings at Closing. Subject to the terms and conditions of this Agreement, at the Closing: 2.7.1 Deliveries to Buyer. Citizens shall, and shall cause Seller to deliver to Buyer: (a) bills of sale and instruments of assignment to the Acquired Assets, duly executed by Seller, substantially in the form of Exhibit B hereto and; (b) the consents to transfer, of all transferable or assignable Contracts, Intellectual Property, Permits (including Environmental Permits), to the extent specifically required hereunder; (c) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Seller (together with any other transfer forms necessary to transfer title to such vehicles); (d) special warranty deeds of conveyance with respect to the parcels of Real Estate owned in fee simple by Seller (or, with respect to any such parcel which was acquired by Seller (or its predecessor in interest, in cases involving mergers) by deed without covenant or warranty of title, a quit claim deed without covenant or warranty of title) to Buyer, duly executed and acknowledged by Seller and in recordable form; (e) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Real Estate, duly executed by the Seller Parties (the "FIRPTA Affidavit"); (f) the certificates, opinions and other documents required to be delivered by the Seller Parties pursuant to Section 6.1 hereof and certified resolutions evidencing the authority of the Seller Parties as set forth in Section 3.2 hereof; (g) all agreements and other documents required by this Agreement; (h) a receipt for the payment of the Initial Cash Payment duly executed by Citizens; and 17 Indiana (i) all such other instruments of conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer to Buyer the Acquired Assets in accordance with this Agreement and where necessary or desirable, in recordable form. 2.7.2 Deliveries By Buyer to the Seller Parties. Parent shall, and shall cause Buyer to deliver to the Seller Parties: (a) wire transfer of immediately available funds in an amount equal to the Initial Cash Payment; (b) the Assumption Agreement, duly executed by Buyer; (c) the certificates, opinions and other documents required to be delivered by Buyer pursuant to Section 6.2 hereof; (d) all of the instruments contemplated by Section 5.24(a) to the extent not previously executed and delivered by Parent; and (e) all such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Parent and Buyer to assume the Assumed Liabilities in accordance with this Agreement. 2.8 Allocation of Consideration. Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Authority or in any proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in any legal requirement. 2.9 Prorations. The parties hereto agree that the following expenses shall be calculated and pro rated as of the Closing Date, with Seller responsible for such expenses and to receive the benefit for the same for the period through and including the Closing Date, and Buyer to be responsible for and to receive the benefit of the same after the Closing Date: 2.9.1 personal and real property taxes (on the basis on which the same were assessed and paid) and sales, occupation and use taxes, in each case, to the extent relating to the Business and except as otherwise provided in Section 7.1; 18 Indiana 2.9.2 electric, fuel, gas, telephone, sewer and utility charges, in each case, to the extent relating to the Business; 2.9.3 rentals and other charges under Contracts to be assumed by Buyer pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h)); and 2.9.4 charges under maintenance and service contracts and other Contracts (except to the extent provided in Section 2.3.3(h)), and fees under Permits to be transferred to Buyer as part of the Acquired Assets; 2.9.5 water, sewer and other similar types of taxes, and installments on special benefit assessments; and 2.9.6 payroll expenses, payroll taxes, reimbursable employee business expenses and the financial cost of the accrued vacation of each Transferred Employee. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Each of the Seller Parties jointly and severally represent and warrant to Parent and Buyer as follows: 3.1 Qualification; No Interest in Other Entities. 3.1.1 Each of the Seller Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as presently being conducted. Each of the Seller Parties is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of the business conducted by it or such Seller Party's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of the Seller Parties do not have a Material Adverse Effect. 3.1.2 No shares of any corporation or any ownership or other investment interest, either of record, beneficially or equitably, in any Person are included in the Acquired Assets. 3.2 Authorization and Enforceability. Each of the Seller Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements and instruments to be executed by them in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents"). The execution, delivery and performance by each of the Seller Parties of this Agreement and the Transaction Documents to which such Seller Party is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by each of the Seller 19 Indiana Parties, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by the Seller Parties. This Agreement is a legal, valid and binding obligation of each Seller Party, enforceable against them in accordance with its terms except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which each of the Seller Parties is a party will be duly executed and delivered by each of the Seller Parties and will constitute the legal, valid and binding obligations of each of the Seller Parties, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 3.3 No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the Transaction Documents by each of the Seller Parties do not, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents by the Seller Parties, will not: (a) contravene any provision of the Restated Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of the other Seller Party; or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or give to others any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which any of the Seller Parties is a party, or by which the Business or any of the Acquired Assets may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, Liens, interests or rights which, individually and in the aggregate, do not have a Material Adverse Effect or will be cured, waived or terminated prior to the Closing Date, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, to which any of the Seller Parties is subject, other than those violations or conflicts which individually and in the aggregate would not have a Material Adverse Effect. 3.4 Financial Statements. Citizens has previously delivered to Buyer the statement of income of the Business (the "Income Statement") and the Interim Statement of Net Assets contained in Schedule 3.4 (collectively, the "Financial Statements"). The Income Statement (a) fairly presents in all material respects the results of operations of the Business in accordance with generally accepted accounting principles ("GAAP") consistently applied except for the omission of full footnotes to the Income Statement and (b) has in all material respects been derived from the books and records of Seller and reflects the separation of the operation associated with the Business from other operations of Citizens. The Interim Statement of Net Assets (a) has in all material respects been derived from the books and records of Seller and reflects the separation of the operations associated with the Business from other operations of Citizens; (b) fairly presents in all material respects the Acquired Assets as of the Interim Statement of Net Assets Date; and (c) has in all material respects been prepared in accordance with GAAP consistently applied except for the omission of full footnotes to such Interim Statement of Net Assets. The financial statements 20 Indiana included in the Annual Report to each PUC for the year ended December 31, 1998, were prepared in all material respects in accordance with the rules and regulations of such PUC. 3.5 No Changes. Since the Interim Statement of Net Assets Date to the date hereof, except as disclosed in Schedule 3.5, the Seller Parties have conducted the Business as presently operated only in the ordinary course of business consistent with past practice. Since the Interim Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has not been: 3.5.1 any Material Adverse Effect; 3.5.2 prior to the date of this Agreement, any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any Transferred Employee, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the Transferred Employees participate) to which any of the Transferred Employees may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan other than in any such case (i) in the ordinary course consistent with past practice, (ii) as required by law, or (iii) as required by any collective bargaining agreement, if any; 3.5.3 any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or the provision of discounts, rebates or allowances; 3.5.4 any disposition of or failure to keep in effect any rights in, to or for the use of any Permit of the Business which individually or in the aggregate would have a Material Adverse Effect; 3.5.5 any damage, destruction or loss affecting the Business which individually or in the aggregate would have a Material Adverse Effect whether or not covered by insurance; 3.5.6 prior to the date of this Agreement, any change by Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP and is set forth on Schedule 3.5; or 3.5.7 prior to the date of this Agreement, any sale, transfer or other disposition of any material assets, properties or rights of the Business, except in the ordinary course of business consistent with past practice. 3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a list of all Contracts (other than (i) with respect to which the Business' total annual liability or expense is less than (a) $250,000 per such Contract and (b) $6,123,000 per all such Contracts (when taken together with similar contracts omitted from Schedule 3.6 of the Related Purchase Agreements), and (ii) Contracts that may be terminated by Seller, without penalty, on notice of 90 days or less) except line extension agreements and similar agreements and construction and design contracts. Seller has furnished to Buyer a correct and complete copy of each written agreement listed in Schedule 3.6. 21 Indiana Except as disclosed on Schedule 3.6, with respect to each Contract, neither Seller nor, to the Seller Parties' knowledge, any other party thereto, is in breach or default, and to the Seller Parties' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the Contract, except in each case where such breaches, terminations, modifications, accelerations or defaults, individually or in the aggregate, do not have a Material Adverse Effect. Except as set forth in Schedule 3.6, there are no disputes pending or to the best of the Seller Parties' knowledge, threatened, under or in respect of any of the Contracts, other than those that individually and in the aggregate do not have a Material Adverse Effect. 3.7 Permits and Compliance With Laws Generally. 3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes, including Environmental Laws (as defined below), except to the extent that any failure to possess, or to comply with, any Permit, laws, rules, regulations or orders would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in Schedule 3.7, the Business is conducted by Seller in compliance with all applicable laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA"), zoning, building and similar laws and Environmental Laws), rules, regulations, ordinances, codes, judgments and orders, except for such failures to comply which do not individually or in the aggregate have a Material Adverse Effect. Except as disclosed on Schedule 3.7, all Permits of Seller relating to the operation of the Business are in full force and effect, other than those the failure of which to be in full force and effect would not individually or in the aggregate have a Material Adverse Effect. There are no proceedings pending or, to the Seller Parties' knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Permits presently possessed by Seller other than those revocations, cancellations, suspensions or modifications which do not individually or in the aggregate have a Material Adverse Effect. 3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the knowledge of the Seller Parties, threatened, by any Authority or other Person with respect to any alleged (i) violation by Seller or any Affiliate of Seller relating to the Business of any law, ordinance, rule, regulation, code or order of any Authority; or (ii) failure by Seller or any Affiliate to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets), except, in each case, where such violations or failures, individually or in the aggregate, would not have a Material Adverse Effect. 3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and with such exceptions as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect: 3.8.1 Seller has not disposed of or arranged for the disposal of or Released any Hazardous Substances, other than in conformity with Environmental Laws, at any Real Estate, 22 Indiana or, in connection with the Business or Acquired Assets, at any other facility, location, or other site. 3.8.2 Seller has not received any written notice or request for information with respect to, and to the best of the Seller Parties' knowledge, Seller has not been designated a potentially liable party for Remedial Action, in connection with any Real Estate, or, as of the date hereof, with respect to the Business or Acquired Assets, at any other facility, location, or other site under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or comparable state statutes. 3.8.3 To the best of the Seller Parties' knowledge, except for such use or storage of Hazardous Substances as is incidental to the conduct of the Business, which use and storage is or has been in compliance with Environmental Laws, and which use and storage has not caused any condition that requires Remedial Action, no Real Estate has been used for the storage, treatment, generation, processing, production or disposal of any Hazardous Substances or as a landfill or other waste disposal site in violation of any Environmental Law. 3.8.4 To the best of the Seller Parties' knowledge, underground storage tanks are not, and have not in the past been, located on or under any Real Estate. 3.8.5 There are no pending or unresolved claims against Seller or the Business for investigatory costs, cleanup, removal, remedial or response costs, or natural resource damages arising out of any Releases or threat of Release of any Hazardous Substances at any Real Estate or, as of the date hereof, with respect to the Business or the Acquired Assets or at any other facility, location, or other site. 3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing materials are located at or in any Real Estate in violation of Environmental Laws or which require Remedial Action. 3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance managed or generated by or on behalf of Seller at the Real Estate or in connection with the Business or Acquired Assets has come to be located at any site that is listed or formally proposed for listing under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), or any similar state list or that is the subject of federal, state, or local enforcement actions or investigations. 3.8.8 The Seller Parties know of no facts or circumstances related to environmental matters (i) in connection with the operation of the Business or (ii) concerning the Real Estate, that are reasonably likely to result in any material reduction in the quality or quantity of water available for supply to the Seller Parties' customers. 3.8.9 The Seller Parties will within thirty (30) days of the date hereof provide Buyer with copies of all written environmental audits or investigations of which they are aware (after due inquiry) prepared for the Real Estate or operations of the Business. 23 Indiana 3.8.10 Except as set forth in Schedule 3.8.10 or Citizens' Annual Report on Form 10-K for the year ended December 31, 1998: (a) The Seller Parties (including for purposes of Section 3.8.10(a) and (b), Affiliates and predecessors of the Seller Parties) are and have been for the past three years in full compliance with all federal and state primary drinking water standards; (b) The Seller Parties are and have been for the past three years in full compliance with all federal and state secondary drinking water standards; and (c) As to all outstanding violations of state or federal drinking water standards, as of the date hereof, the Seller Parties have completed or are in the process of completion in accordance with all applicable deadlines, all actions required by Environmental Law or Authorities to correct or otherwise respond to such violations. 3.8.11 Except as set forth in Schedule 3.8.11, none of the Seller Parties will be required to place any notice or restriction relating to the presence of Hazardous Substances in the deed to any Real Estate, or in any written instrument accompanying this Agreement, and no Real Estate has such a notice or restriction in its deed or any other written instrument relating to the purchase, lease or rental of such property. For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way respond to any presence, Release or threat of Release of Hazardous Substances; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substances so it does not endanger or threaten to endanger public or employee health or welfare or the environment; or (z) perform studies, investigations or monitoring necessary or required to investigate the foregoing; (B) "Environmental Laws" means any common law or federal, state or local law, statutes, rule, regulation, ordinance, code, judgment or order relating to the protection of the environment or human health and safety and includes, but is not limited to, CERCLA (42 U.S.C. section 9601, et seq.), the Clean Water Act (33 U.S.C. section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. section 2701 et seq.), each as has been or may be interpreted or amended as of the Closing Date and the regulations promulgated pursuant thereto and in effect as of the Closing Date; (C) "Released" means released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or polluting substance or waste or contaminant under or pursuant to any Environmental Law, including petroleum products, PCBs and radioactive materials. 3.9 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by the Selling Parties of this Agreement, the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by the Seller Parties, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except (i) as required by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the 24 Indiana "HSR Act"), (ii) as specified on Schedule 3.9, and (iii) for such other consents, approvals, authorizations, registrations or filings the failure of which to obtain or make would not individually or in the aggregate have a Material Adverse Effect or which are obtained by the Closing Date. 3.10 Title. Seller has good and valid title to all of the Acquired Assets constituting personal property, good and marketable title in fee simple to all of the owned Acquired Assets constituting Real Estate and good and valid leasehold title to all of the leased Acquired Assets constituting Real Estate, in each case, free and clear of Liens subject only to the Permitted Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set forth in Schedule 3.10 hereto, (b) Liens securing Taxes, assessments, governmental charges or levies, or the claims of materialmen, mechanics, carriers and like persons, all of which are not yet due and payable or which are being contested in good faith or (c) such other Liens which, individually or in the aggregate, do not have a Material Adverse Effect (it being understood that to the extent a Permitted Exception relates to or arises from a Retained Liability, Seller shall still be liable for such Retained Liability to the extent set forth herein). 3.11 Real Estate. 3.11.1 As of the date hereof, Seller has not received any written or oral notice for assessments for public improvements against the Real Estate which remains unpaid, and to the best knowledge of the Seller Parties, no such assessment has been proposed. Except as set forth on Schedule 3.11, as of the date hereof, there is no pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate and to the best knowledge of the Seller Parties no such proceeding is threatened. 3.11.2 Except as disclosed on Schedule 3.6, as of the date hereof, Seller is not a lessee under any Contract relating to the use or occupancy of the Real Estate involving annual payments in excess of $100,000. 3.11.3 Each parcel of the Real Estate has physical and, to Seller's knowledge, legal vehicular and pedestrian access to and from public roadways as may be reasonably necessary to the operation of the Business except where the failure to have such access does not have a Material Adverse Effect. To Seller's knowledge, no fact or condition exists which would result in the termination of (a) the current access from each parcel of the Real Estate, and (b) continued use, operation, maintenance, repair and replacement of all existing and currently committed water lines used by Seller in connection with the Business, except where such termination would not have a Material Adverse Effect. 3.12 Taxes. The Seller Parties have (a) timely filed all material returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (b) paid all Taxes that are shown to have come due pursuant to such returns or reports and (c) paid all other material Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due. To the best of the Seller Parties' knowledge, all such returns or reports have been prepared in accordance with all applicable laws and requirements in all material respects. 25 Indiana Except to the extent disclosed on Schedule 3.12, none of the assets of the Business or constituting any of the Acquired Assets (a) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (b) is "tax-exempt use property" within the meaning of Section 168(h) of the Code or (c) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. 3.13 Patents and Intellectual Property Rights. To the best of the Seller Parties' knowledge, the operations of Seller do not make any unauthorized use of any Intellectual Property except for any such unauthorized uses which do not have a Material Adverse Effect. Assuming the consents listed as item XII on Schedule 3.9 are obtained, Buyer will not lose any of Seller's rights to, or be required to pay increased royalties for, any Intellectual Property included in the Acquired Assets as a result of the Closing and the consummation of the transactions contemplated by this Agreement, except for any such rights or such increased royalties the loss or payment of which would, individually or in the aggregate, not have a Material Adverse Effect. 3.14 Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Interim Statement of Net Assets or arising since the date thereof have arisen out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; the allowance for collection losses on the Interim Statement of Net Assets has been determined in accordance with GAAP consistent with past practice. 3.15 Labor Relations. As of the date hereof, except as set forth in Schedule 3.15, to best of the knowledge of the Seller Parties, there has been no union organizing efforts with respect to the Business conducted within the last three (3) years and there are none now being conducted with respect to the Business. Except as set forth in Schedule 3.15, Seller has not at any time during the three (3) years prior to the date of this Agreement had, nor, to the best of the Seller Parties' knowledge, is there now threatened, a strike, work stoppage or work slow down with respect to or affecting the Business which had or could reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as set forth in Schedule 3.15, (i) no Employee is represented by any union or other labor organization and (ii) there is no unfair labor practice charge pending or, to the best knowledge of the Seller Parties, threatened against Seller relating to any of the Employees as related to the Business which could reasonably be expected to have a Material Adverse Effect. 3.16 Employee Benefit Plans. 3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive, deferred compensation, excess benefit, employment contract, stock purchase, stock ownership, stock option, supplemental unemployment, vacation, sabbatical, sick-day, severance or other material employee benefit plan, program or arrangement (other than those required to be maintained by law), whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic, (i) maintained by, or contributed to by Citizens or any of its Affiliates, in respect of any Employee or Former Employee, or (ii) with respect to which Citizens or any of its Affiliates has any liability in respect of any Employee or Former Employee (the"Benefit Plans"). Except as disclosed on Schedule 3.16.1, neither Citizens nor any 26 Indiana of its Affiliates maintains any bonus, pension or welfare benefit plan, program or arrangement, including any deferred compensation arrangement, for directors, consultants or independent contractors of the Business. 3.16.2 A true and complete copy of each Benefit Plan and related trust agreements and (to the extent applicable) a copy of each Benefit Plan's current summary plan description and in the case of an unwritten Benefit Plan, a written description thereof, has been furnished to Buyer. In addition, to the extent applicable, Buyer has been provided a copy of the most recent Internal Revenue Service ("IRS") determination letter issued to each Benefit Plan and a copy of the most recent IRS Form 5500 together with all schedules and accountants' statement filed, and actuarial reports prepared, on behalf of each Benefit Plan. 3.16.3 Each Benefit Plan which is intended to be qualified under Section 401(a) of the Code (as designated on Schedule 3.16.1) is so qualified, and will remain so qualified upon the timely making of certain amendments required by law during the applicable remedial amendment period, and any trust forming a part of such a Benefit Plan is tax exempt under Section 501(a) of the Code. Each such Benefit Plan has been amended, as and when necessary, to comply with the Tax Reform Act of 1986 and upon timely filing of an Application for Determination with the Internal Revenue Service, will be eligible to make further such amendments under the"remedial amendment period." 3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code. 3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the Code or ERISA. 3.16.6 Neither Citizens nor any ERISA Affiliate and, to the knowledge of the Seller Parties, no other Person, has taken any action or failed to take any action with respect to any Benefit Plan that may subject Buyer or any Benefit Plan under which liabilities may be assumed by Buyer under Sections 5.10, 5.11 or 5.12 ("Assumed Benefit Liabilities") to any material liability or Tax under the Code or ERISA. 3.16.7 Neither Citizens nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Benefit Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, including any contingent liability under Section 4204 of ERISA or withdrawal liability arising from the actions of Citizens or any ERISA Affiliate contemplated by this Agreement. All contributions that Citizens or any ERISA Affiliate have been obliged to make to any Benefit Plan, including any multiemployer plan, have been duly and timely made. 3.16.8 There are no pending or, to the knowledge of the Seller Parties, threatened claims (other than routine claims for benefits), assessments, complaints, proceedings or investigations of any kind in any court or governmental agency with respect to any Benefit Plan which could reasonably be expected to give rise to a material liability to Buyer. 27 Indiana 3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides benefits, including without limitation, death or medical benefits, beyond termination of service or retirement other than (i) coverage mandated by law, or (ii) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code. Seller's Retiree Medical Plan contains provisions permitting Seller to modify or terminate retiree medical benefits at any time, without prior notice to any covered individual. Except with respect to retirees, "grandfathered" employees and collectively bargained employees, Seller knows of no reason why its ability to effect those provisions would be limited. 3.16.10 With respect to each Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, Citizens and each ERISA Affiliate have complied in all material respects with the continuation coverage requirements of the Code and ERISA. 3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.17, Seller has no liabilities with respect to the Business which would constitute Assumed Liabilities, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, except: 3.17.1 the liabilities which would decrease the Base Cash Purchase Price pursuant to Section 2.6.5 to the extent assumed by Buyer at Closing; 3.17.2 liabilities arising in the ordinary course of business under any Contract or Permit or with respect to any agreement or instrument included within the definition of Real Estate; and 3.17.3 those liabilities incurred, consistent with past business practice, in or as a result of the normal and ordinary course of business and reflected in the books and records related to the Business; 3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; and 3.17.5 those other liabilities, which individually and in the aggregate, would not have a Material Adverse Effect. 3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule 3.18, there are no actions, suits, investigations or proceedings pending against or, to the best of the Seller Parties' knowledge, threatened, against or affecting, Seller, the Business or any of the Acquired Assets before any court or arbitrator or Authority which individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there are currently no outstanding judgments, decrees or orders of any court or Authority against any of the Seller Parties, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets (other than any PUC order relating to rates, tariffs and similar matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. 28 Indiana 3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real Estate has adequate arrangements for supplies of electricity, gas, oil, coal and/or sewer for all operations at the 1998 or current operating levels, whichever is greater. Except as set forth on Schedule 3.19, there are no actions or proceedings pending or, to the best of the Seller Parties' knowledge, threatened, that would adversely affect the supply of electricity, gas, coal or sewer to the Real Estate except for those which individually and in the aggregate would not have a Material Adverse Effect. 3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by Seller, together with the risks insured against, coverage limits and deductible amounts. 3.21 Relationship with Customers. As of the date hereof, Seller does not have any current customer which accounted for more than 5% of the net sales of the Business (taken together with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) for the immediately preceding 12-month period. 3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth in Schedule 3.22 hereto, within six months prior to the date hereof, (i) Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; or (b) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; (ii) Seller has not been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar state or local law; and (iii) none of Seller's employees who are employed in connection with the Business has suffered an "employment loss" (as defined in the WARN Act) . 3.23 Condition of Assets. Except as set forth on Schedule 3.23, the buildings, machinery, equipment, tools, furniture, improvements and other fixed tangible assets of the Business included in the Acquired Assets, taken as a whole and taken together with the similar assets included among the assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements, are in good operating condition and repair, reasonable wear and tear excepted. 3.24 Brokerage. None of the Seller Parties or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to Buyer or its Affiliates. 3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded Assets, the Acquired Assets include all assets, rights, properties and contracts the use of which is necessary to the continued conduct of the Business by Buyer substantially in the manner as it was conducted prior to the Closing Date, including the service of all utility customers in substantially the same manner and at substantially the same service levels as provided by Seller on the date hereof. 29 Indiana 3.26 Year 2000 Matters. Citizens has (1) initiated a review and assessment of all mission critical areas within the Business and related operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by any Seller Party (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in Citizens' Annual report on Form 10-K for the fiscal year ended December 31, 1998 and Citizens' Quarterly reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in accordance with that timetable. Seller has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to Seller after making reasonable inquiries of such suppliers and vendors. Seller makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. 3.27 Product Liability. Except as disclosed in Schedule 3.27 and except for those liabilities which individually or in the aggregate would not have a Material Adverse Effect, there are no (a) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties, unasserted, with respect to any product liability or similar claim that relates to any product or service sold by Seller or the Business to others or (b) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties unasserted, with respect to any claim for the breach of any express or implied product warranty or a similar claim with respect to any product or service sold by Seller or the Business to others. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER Parent and Buyer jointly and severally represent and warrant to Seller as follows: 4.1 Organization and Good Standing. 4.1.1 Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.1.2 Buyer is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business. Buyer is qualified to do business and is in good standing in all jurisdictions wherein the nature of the business conducted by it or Buyer's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such failures of Buyer do not have a material adverse effect on its ability to perform its obligations under this Agreement and the Transaction Documents. 30 Indiana 4.2 Authorization and Enforceability. Each of Buyer and Parent has full corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which either of them is a party. The execution, delivery and performance by Buyer and Parent of this Agreement and the Transaction Documents to which Buyer and/or Parent is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by Buyer and Parent, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by Buyer and Parent. This Agreement is a legal, valid and binding obligation of Buyer and Parent, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which Buyer and Parent is a party will be duly executed and delivered by Buyer and Parent and will constitute the legal, valid and binding obligations of Buyer and Parent, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 4.3 No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Transaction Documents by Buyer and/or Parent do not, and the consummation of the transactions contemplated hereby and thereby will not, (a) contravene any provision of the Articles of Incorporation or Bylaws of Buyer or the Certificate of Incorporation or Bylaws of Parent; or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, authorization, proof of dedication or other agreement or commitment, oral or written, to which Parent or Buyer is a party, or by which any of their assets or properties may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, interests or rights which, individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation to which Buyer or Parent is subject other than those violations and conflicts which individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.4 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by Buyer and Parent of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by Buyer or Parent except (i) as required by the HSR Act, (ii) as specified on Schedule 3.9 and (iii) for such consents, approvals, authorizations, registrations or filings, the failure to obtain or make would not individually or in the aggregate have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 31 Indiana 4.5 Financing. Buyer and Parent have, and at the Closing Date, will have sufficient resources to pay the Purchase Price, and Parent, Buyer or the other Affiliates of Parent that are buyers of the assets and businesses being acquired pursuant to the Related Purchase Agreements have, and at the Closing Date, will have sufficient resources to pay the purchase prices set forth in the Related Purchase Agreements. 4.6 Brokerage. None of Parent, Buyer or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to the Seller Parties. 4.7 Insurance. Schedule 4.7 lists the policies and contracts in effect as of the date hereof for casualty and property insurance covering Buyer's assets and properties and the operation of Buyer's business, together with the risks insured against, coverage limits and deductible amounts. ARTICLE 5 ADDITIONAL COVENANTS 5.1 Conduct of Business. Except (i) as otherwise specifically permitted by this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the prior written consent of Buyer, from and after the date of this Agreement and up to and including the Closing Date, each of the Seller Parties agree that: 5.1.1 Seller shall conduct the Business as presently operated and only in the ordinary course of business consistent with past practice. 5.1.2 They shall promptly inform Buyer in writing of any specific event or circumstance of which they are aware, or of which they receive notice, that has or is likely to have, individually or in the aggregate, taken together with the other events or circumstances, a Material Adverse Effect on the Acquired Assets or the Assumed Liabilities. 5.1.3 Seller shall not: (a) change or modify in any material respect existing credit and collection policies, procedures and practices with respect to accounts receivable; (b) enter into any contract or commitment, waive any right or enter into any other transaction (except in the ordinary course of business) which would have a Material Adverse Effect; (c) except in the event of service interruption, emergency or casualty loss, commit to acquire subsequent to the Closing Date on behalf of the Business any capital asset or group of capital assets costing in excess of $1,000,000 that is not included in the capital budget of Seller for fiscal year 2000 and which, if so acquired, would be included in the Acquired 32 Indiana Assets; commencing December 1, 1999, accept or receive customer advances for construction in excess of $9,000,000 (when combined with customer advances relating to the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) per each of the next four consecutive three-month periods unless pursuant to an existing tariff, Contract or Permit of Seller; or sell or lease or agree to sell or lease or otherwise dispose of any assets included in the Acquired Assets except in the ordinary course of the conduct of the Business, consistent with past practice; (d) except in the ordinary course of business, consistent with past practice or as required under any of Seller's debt instruments or indentures, mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets; (e) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any Transferred Employee except (i) as required by law, and (ii) in the ordinary course, consistent with past practice; provided, however, no individual Employee shall in any event receive a compensation increase in excess of seven percent (7%); (f) other than in the ordinary course of business consistent with past practice, sell or otherwise transfer any assets necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; (g) change the Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP or any Authority; (h) intentionally and wilfully take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 3.25 hereof (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful omission to take action); or (i) prepay, redeem, retire, refund or otherwise extinguish any of the Assumed Indebtedness. 5.2 Negotiations. Neither Citizens nor any Person controlled by Citizens or under common control with Citizens (each such person being a "Section 5.2 Affiliate"), nor any officer, director, employee, representative or agent of Citizens or any of their Section 5.2 Affiliates, shall, directly or indirectly, solicit or initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into an agreement with any Person or group of Persons (other than Parent, Buyer or any Person controlled by Parent or Buyer or under common control with Parent, Buyer or any Persons providing financing to the parties hereto in connection with facilitating the consummation of the transactions contemplated by this Agreement) concerning any acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) that would result in the transfer to any such Person or 33 Indiana group of Persons of ten percent (10%) of the Acquired Assets (as measured by net book value of such assets on the date of each such transaction) or the acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) involving the Seller Parties, if such acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) would be inconsistent, in any respect, with the obligations of the Seller Parties hereunder (any of the foregoing transactions, a "Competing Transaction"). 5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties will provide Buyer with a supplement or amendment to the Disclosure Schedules with respect to any matter, condition or occurrence which is required to be set forth or described in the Disclosure Schedules. For the avoidance of doubt, a matter, condition or occurrence shall only be "required" to be set forth or described in the Disclosure Schedules if the failure to be so disclosed would result in a breach of the applicable representation or warranty (qualified by Material Adverse Effect where applicable) on the date hereof or on the Closing Date. In addition, Seller shall have the right at any time and from time to time prior to the Closing to supplement or amend the Disclosure Schedules. Seller may provide Disclosure Schedules with respect to any representation or warranty of this Agreement whether or not a specific schedule is referred to therein. In the event that any supplement or amendment of such Disclosure Schedules shall be provided later than five (5) business days prior to the Closing Date, the Buyer shall have the right to delay the Closing for a period of five (5) business days in order for Buyer to review such supplement or amendment. No such supplement or amendment shall be deemed to cure any breach of or alter any representation or warranty made in this Agreement so as to permit the Closing to occur unless Buyer specifically agrees thereto in writing. The Seller Parties shall promptly inform Buyer, and Buyer will promptly inform the Seller Parties of any fact or event which comes to their attention, the existence of which constitutes or likely will constitute a breach in any material respects of any representation or warranty in this Agreement. In addition, Parent will, within five (5) days of receipt thereof, forward to Seller (i) any title report Buyer receives from a title company with respect to the Real Estate and (ii) any written communication regarding a specific Lien or title defect affecting a specifically identified parcel of the Real Estate sent to the President, Treasurer or General Counsel of Parent or the President or Corporate Counsel of any other Buyer Party, and sent by a party other than the Seller Parties, their legal counsel, financial advisors or representatives. 5.4 Mutual Covenants. The parties mutually covenant from the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement, including Section 5.8 hereof): 5.4.1 to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents; 5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but not waiver) of the conditions to the Closing of the transactions contemplated herein (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and 34 Indiana 5.4.3 to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 5.5 Filings and Authorizations. The parties hereto will as promptly as practicable, make or cause to be made all such filings and submissions under laws, rules and regulations applicable to it or its Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act and with the applicable public utility commission (each, a "PUC"). Any such filings and supplemental information will be in substantial compliance with the requirements of the applicable law, rule or regulation. Each of Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission to the PUC or which is necessary under the HSR Act. The Seller Parties, on the one hand and Buyer and Parent, on the other, shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Authority, including the PUC, the United States Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division"), and shall comply promptly with any such inquiry or request. Each of Citizens, Seller, Parent and Buyer will use its reasonable efforts to obtain any clearance required under the HSR Act and from the PUC for the purchase and sale of the Acquired Assets in accordance with the terms and conditions hereof. Notwithstanding the foregoing, nothing contained in this Agreement will require or obligate any party or their respective Affiliates: (i) to initiate, pursue or defend any litigation (or threatened litigation) to which any Authority (including the PUC, the Antitrust Division and the FTC) is a party; (ii) to agree or otherwise become subject to any material limitations on (A) the right of Buyer or its Affiliates effectively to control or operate the Business or the right of Seller or its Affiliates effectively to control or operate Citizens' other businesses, (B) the right of Buyer or its Affiliates to acquire or hold the Business or the right of Seller or its Affiliates to hold the Excluded Assets or Citizens' other businesses, or (C) the right of Buyer to exercise full rights of ownership of the Business or all or any material portion of the Acquired Assets or the right of Citizens to exercise full rights of ownership of Citizens' other businesses or all or any material portion of the Excluded Assets; or (iii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, assets or operations of Citizens, Seller, Parent, Buyer, any Affiliate of Buyer or the Business. The parties agree that no representation, warranty or covenant of Buyer, Parent, or Citizens contained in this Agreement shall be breached or deemed breached as a result of the failure by Parent and Buyer on the one hand or the Seller Parties, on the other, to take any of the actions specified in the preceding sentence. 5.6 Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law (in which case the parties shall make reasonable efforts to consult with each other prior to such required announcement). 35 Indiana 5.7 Further Assurances. Each of Citizens, Parent, Buyer and Seller, from time to time after the Closing, at Buyer's or Seller's request, will execute, acknowledge and deliver to the applicable person such other instruments of conveyance and transfer and will take such other actions and execute such other documents, certifications, and further assurances as Buyer or Seller, as the case may be, may reasonably require in order to transfer, in accordance with the terms and conditions of this Agreement, more effectively in Buyer or to put Buyer more fully in possession of any of the Acquired Assets or better to enable Buyer to complete, perform and discharge any of the Assumed Liabilities. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.8 Cooperation. 5.8.1 Parent, Buyer, Citizens and Seller shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 5.8.2 Without limiting the foregoing, neither Parent and Buyer, nor Citizens and Seller (nor any of their respective Affiliates) shall make any filings pursuant to federal or state securities laws ("Securities Filings") or make any consent solicitations to holders of Assumed Indebtedness which include any information about Seller, Buyer (or their respective Affiliates) or the transactions contemplated hereby without consulting with the other party and providing the other party a reasonable opportunity to review and comment on such information, it being understood and agreed that any party may so disclose such information in its reasonable judgment to the extent such party's counsel advises it that such disclosure is advisable under applicable law. Each of Parent, Buyer, Citizens and Seller shall, and shall cause their respective Affiliates to, comply with all applicable federal and state securities laws in connection with this Agreement and the transactions contemplated hereby (including any solicitation of consents of holders of Assumed Indebtedness), and all information supplied by any party for inclusion in any Securities Filing or consent solicitation, including, without limitation, any proxy or information statement, or any registration statement on Form S-4 shall be true and correct in all material respect and shall not contain any untrue statement of a material fact or omit to state any material fact which is required to be stated therein or which is necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. 5.8.3 During the first 90 days after the Closing Date (180 days for Trademarks on tanks), Buyer shall have the right to use all of the logos, trademarks and trade identification of Seller as are located at the Real Estate or on the Acquired Assets (collectively, the "Trademarks"). Buyer's use of the Trademarks shall be in accordance with such reasonable quality control standards as may be promulgated by Seller and provided to Buyer. If Seller shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Seller shall have the right to terminate Buyer's right under this Section 5.8.3 to use the Trademarks. 36 Indiana 5.8.4 Seller shall give Buyer and its representatives (including Buyer's Accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, full access to the properties, contracts, employees, books, records and affairs of Seller to the extent relating to the Business and the Acquired Assets, and shall cause its officers, employees, agents and representatives to furnish to Buyer all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as Buyer may reasonably request. Except to the extent disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4, no investigation or receipt of information by Buyer pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller Parties under this Agreement or the conditions to the obligations of Parent or Buyer under this Agreement. All information provided to Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement dated August 2, 1999 between Citizens and Parent. 5.9 Employees; Employee Benefits. 5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and hourly employees actively employed (as of the date of this Agreement) in each division by Seller or any of its Affiliates whose primary responsibilities relate to the Business. None of the employees listed on Schedule 5.9.1 is subject to a collective bargaining agreement. All individuals referred to on Schedule 5.9.1 are herein referred to as the "Employees." No later than March 1, 2000, Buyer and Seller shall determine the number of Employees to whom Buyer will offer employment, which number shall be at least equal to 250 (when combined with offers made by Buyer or Affiliates of Buyer to employees of Affiliates of Seller in connection with the Related Purchase Agreements) (the "Base Number"), and such additional number of Employees, if any, whom Buyer also wishes to employ. Upon determination of such Employees, Seller will supplement Schedule 5.9.1 with the name, job title, unused vacation, current base salary or hourly wage, date of hire and assigned location of each Transferred Employee (as that term is defined below). At the Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose all the information required under the preceding sentence as of the most recent practicable date prior to Closing. 5.9.2 Effective as of the Closing, Buyer shall offer employment to at least the Base Number of those employees included on Schedule 5.9.1. All Employees to whom Buyer offers employment and who accept such employment are herein referred to as the "Transferred Employees." In the event any Employees do not accept Buyer's offer of employment, Buyer shall offer employment to such additional employees (the identity of whom shall be determined by Buyer and Seller) as are necessary to bring the total number of Transferred Employees to the Base Number. Subject to the provisions of this Section 5.9 and Section 5.12, Buyer shall provide each Transferred Employee with base compensation at least equal to that provided by Seller on the Closing Date, and employee benefits which are substantially comparable to those provided by Buyer to its other similarly situated employees. Buyer agrees (i) to credit the service of each Transferred Employee with Seller and its Affiliates before the Closing, for all purposes under all employee benefit plans and arrangements maintained by Buyer (and/or any of its Affiliates) for the benefit of any Transferred Employee (including without limitation for purposes of attainment of retirement dates and payment of optional forms of benefits), other than for purposes of benefit accrual under any 37 Indiana "defined benefit plan", within the meaning of Section 3(35) of ERISA, (ii) to provide accrued vacation to Transferred Employees in the year in which the Closing occurs, equal to the excess, if any, of the accrued vacation to which the Transferred Employee would otherwise be entitled under Seller's vacation plan during that year over the amount of accrued vacation the Transferred Employee had taken during that year, and, thereafter, to provide vacation to Transferred Employees on the same basis as provided to similarly situated employees of Buyer, with service credit as provided in (i) hereof, and (iii) to provide severance benefits to Transferred Employees terminated by Buyer that are substantially comparable to those benefits provided by Buyer. Buyer shall be responsible for providing to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of Closing reduced by the number of vacation days such Transferred Employee has taken on or before Closing. Nothing in this Section 5.9 shall limit Buyer's authority to terminate the employment of any Transferred Employee at any time and for whatever reason. Until the second anniversary of the Closing Date, neither Seller nor any of its Affiliates shall directly or indirectly solicit or offer employment to any Transferred Employee then employed by Buyer or its Affiliates. 5.9.3 Except as specifically provided in Sections 5.9 and 5.12, Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by Buyer as the result of any claims against Buyer or its Affiliates that are made by any Employees or Former Employees (or the Beneficiary of any Employee or Former Employee) who are not made offers to become employees of Buyer or its Affiliates including, without limitation, claims asserted against Buyer as a result of their termination by Seller or its Affiliates. 5.9.4 Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation claims or the benefits provided under the Benefit Plans, whether paid before or after the Closing) owed to any Transferred Employee or the Beneficiary of any Transferred Employee or any Water Sector Retiree or the Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Seller or any of its Affiliates and such Transferred Employee or Beneficiary or (ii) any benefit claim or expense (including medical expenses) incurred before Closing under any Benefit Plan. For purposes of this Agreement, a medical expense shall be deemed to be incurred when the services giving rise to a claim are rendered, regardless of when billed or paid. Without limiting the foregoing, Seller shall be responsible for the payment of any employee benefits that become due to any Transferred Employees as a result of their termination by Seller. 5.9.5 Except as otherwise specifically provided in Section 5.9, 5.11 or 5.12, Buyer shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation, claims or the benefits provided under any employee benefit plan or arrangement of Buyer incurred after Closing) owed to any Transferred Employee or Beneficiary of any Transferred Employee or any Water Sector Retiree or Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Buyer or any of its Affiliates and any Transferred Employee or (ii) any benefit claim or expense (including medical expense) incurred after Closing under any 38 Indiana employee benefit plan sponsored or contributed to by Buyer or an ERISA Affiliate after Closing. Notwithstanding the foregoing, Buyer shall not be responsible for the payment of any employee benefits that become due to any Transferred Employees under any Benefit Plan (other than the Assumed Benefit Liabilities). 5.9.6 Buyer agrees to reimburse Seller for its proportionate share (as defined below) of any amount in excess of $1,000,000 paid by Seller as severance under Citizens' severance plan as in effect on the date hereof to any Employees (when such amount paid by Seller is aggregated with amounts paid by Citizens to other employees as referenced in Section 5.9.6 of the Related Purchase Agreements) provided (i) Buyer does not hire such Employees in accordance with the provisions of Sections 5.9, 5.11 and 5.12 and (ii) Seller provides notice to those Employees on or before the Closing Date to the effect that their employment will be terminated on or shortly after the Closing Date. Buyer will pay such reimbursement to Citizens within 5 days after receipt of a list of the Employees showing which are entitled to severance pay, the amounts of that severance pay and certifying that those amounts have been paid. The Buyer's "proportionate share" means the amount obtained by multiplying the amount in excess of $1,000,000 by a fraction, the numerator of which is the amount of severance paid by Seller to Employees under Section 5.9.6 of this Agreement and the denominator of which is the sum of (i) the amount paid by Seller to Employees under Section 5.9.6 of this Agreement and (ii) the aggregate amount paid by Citizens under Section 5.9.6 of each of the Related Purchase Agreements. 5.9.7 Until the second anniversary of the Closing Date, Buyer shall not directly or indirectly solicit or offer employment to any active employee of Seller, other than the Transferred Employees. 5.10 Employee Pension Plan. 5.10.1 At least fifteen days prior to the Closing Date, Seller shall take any and all actions necessary to cease benefit accruals and fully vest all Transferred Employees in their accrued benefits under the Citizens Pension Plan ("Seller's Pension Plan" or "Citizens Pension Plan"). Seller shall retain liability and related assets for benefits accrued through the Closing Date by Transferred Employees under Seller's Pension Plan. 5.10.2 As of the Closing Date, Transferred Employees shall be covered under the American Pension Plan, and shall be given credit for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, subsidized benefits, and entitlement to optional forms of payment, but not for accrual of benefits. 5.11 Employee Savings Plan. 5.11.1 Effective upon the date of the transfer described in Section 5.11.2, subject to the terms and conditions of this Agreement, Parent shall cause the Savings Plan for Employees of American Water Works Company, Inc. (the "American Savings Plan") to assume the liability of the Seller's 401(k) Plan for the account balances of those Transferred Employees participating in the Seller's 401(k) Plan on the Closing Date (the "Affected Participants") that are 39 Indiana transferred to the American Savings Plan. As of the Closing Date, Affected Participants shall be 100% vested in their account balances under the Seller's 401(k) Plan. Transferred Employees shall be given credit under the American Savings Plan for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, contribution levels and optional forms of benefit payment, to the same extent that credit for such service has been given by Seller and its Affiliates. 5.11.2 Buyer shall deliver to Seller as soon as practicable, but in no event later than ninety (90) days after Closing (i) a certified copy of the American Savings Plan and any amendment necessary to effectuate the transfer of assets and the assumption of account balances in accordance with this Section 5.11, (ii) a certified copy of the trust agreement for the American Savings Plan; (iii) the most recent favorable determination letter from the IRS with respect to the American Savings Plan; and (iv) an opinion from Buyer's legal counsel acceptable to Seller that the American Savings Plan, as so amended, complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of, and the transfer of assets and assumption of benefit liabilities by, the American Savings Plan. Seller shall deliver to Buyer as soon as practicable, but in no event later than ninety (90) days after Closing, an opinion from Seller's legal counsel acceptable to Buyer that the Seller's 401(k) Plan complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of the Seller's 401(k) Plan, and the transfer of assets to, and assumptions of benefit limitations by, the American Savings Plan. As soon as practicable, but in any event within 120 days after Closing, Seller shall cause the trustee of the Seller's 401(k) Plan to transfer in cash and promissory notes representing outstanding loans to Affected Participants to the trustee of the American Savings Plan an amount equal to the sum of the account balances of the Transferred Employees (the "Transferred Accounts") calculated as of the most recent valuation date under the Seller's 401(k) Plan (which shall, in any event, be within thirty (30) days of the transfer). Both the Seller Parties and Buyer will file any IRS Form 5310A that is required with respect to the transfer contemplated by this Section 5.11 date at least 30 days prior to the transfer. Upon the transfer described in this Section 5.11, Buyer and the American Savings Plan shall be responsible for all benefits attributable to the Transferred Accounts to which Transferred Employees were entitled under the Seller's 401(k) Plan as of such date, and Seller and the Seller's 401(k) Plan shall cease to have any liability, contingent or otherwise, for such benefits. 5.12 Welfare Benefits. 5.12.1 Within sixty (60) days after the Closing, Seller agrees to transfer to trusts established by Buyer under Section 501(c)(9) of the Code ("Buyer's VEBAs") the amount held under any trust established by Seller under Section 501(c)(9) of the Code ("Seller's VEBAs") to fund post-retirement health care and life insurance benefits attributable to the Business, including Former Employees identified on Schedule 5.12 (the "Water Sector Retirees") and any "grandfathered" Transferred Employees as set forth on Schedule 5.12. Buyer agrees to provide post-retirement health care and life insurance benefits to the Water Sector Retirees and, as applicable, Transferred Employees who become eligible for such benefits after Closing and further agrees that Buyer's VEBAs will apply an amount at least equal to the sum of the assets (and earnings thereon calculated at the rate of return generated by Buyer's VEBAs) transferred from Seller's VEBAs to provide post-retirement health care and life insurance benefits for such employees. Upon Closing, Buyer shall be responsible for all obligations of the Seller Parties to provide post-retirement health care and 40 Indiana life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing and the Seller Parties shall cease to have any liability, contingent or otherwise, for such benefits. In consideration of such transfer, Buyer agrees not to terminate or materially modify those post-retirement health and life benefit provisions applicable to such grandfathered Transferred Employees and Water Sector Retirees as such provisions are in effect immediately prior to the Closing Date. 5.12.2 Buyer shall take all action necessary and appropriate to ensure that, as of the Closing Date, Buyer provides medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefits (including retiree medical benefits) to Transferred Employees that, in the case of Non-Union Transferred Employees and Union Transferred Employees are substantially similar to those benefits provided by Buyer under its corresponding welfare benefit plans (the "Buyer's Welfare Plans"). For purposes of determining eligibility to participate, and entitlement to benefits, in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, waiting periods, and requirements for evidence of insurability under the Buyer Welfare Plans shall be waived in Buyer's Welfare Plans for Transferred Employees and retirees of the Water Sector and their respective Beneficiaries, and Transferred Employees and retirees of the Water Sector and their respective Beneficiaries shall receive credit under the Buyer Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees and retirees of the Water Sector and their respective Beneficiaries who had credited service under a Seller Welfare Plan, together with each such individual's service, copayment, deductible and out-of-pocket payment amounts under such plan. 5.12.3 Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the Closing Date. Seller shall provide to Buyer prior to the Closing Date a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such Account, and balances standing to their credit as of the Closing Date. 5.13 Taxes. The Seller Parties, on the one hand, and Parent and Buyer, on the other, shall (a) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (b) each retain and provide the other with any records or other information which may be relevant to such return, audit, examination or proceeding, and (c) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or 41 Indiana information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 5.14 Intentionally Omitted. 5.15 Citizens' Guarantees and Surety Instruments. Each of Parent and Buyer shall use its reasonable efforts to assist Citizens in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed on Schedule 5.15. For purposes of this Section 5.15 and Section 5.16, reasonable efforts: (a) shall include Parent's or Buyer's assumption of the Contracts and the Permits on the terms set forth in this Agreement; and (b) shall include an obligation on the part of Parent or Buyer to provide a guarantee, letter of credit, bond or other required surety instrument at Closing to the extent required by any Contract or Permit and in general to provide an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business. 5.16 Intentionally Omitted. 5.17 Schedule of Permits. No later than March 13, 2000, Citizens shall deliver to Buyer a schedule, to be identified as Schedule 5.17, which sets forth all material Permits required for the use of the Acquired Assets and the operation of the Business by Buyer substantially in the manner as it was conducted prior to the date hereof. For purposes of this Section 5.17, material Permits shall include those required for the service of all utility customers at substantially the same service levels as provided by Seller on the date of this Agreement. All Permits listed on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule 3.9 shall be so designated. Seller has made or will make prior to the Closing Date timely applications for renewals of all such Permits listed on Schedule 5.17, which under applicable law must be filed prior to the Closing Date to maintain the Permits listed on Schedule 5.17 in full force and effect. 5.18 Title Information. No later than March 13, 2000, Seller shall use its reasonable efforts to deliver to Buyer true, correct and complete copies of all existing title policies, surveys, leases, deeds, instruments and agreements relating to title to the Real Estate in Seller's possession. 5.19 Transaction with Related Parties. Effective as of the Closing Date, except as otherwise provided in Sections 5.9 through 5.12, 5.15, 5.26, 5.27 and 2.7.1(j) of this Agreement, Seller shall have terminated and canceled all contracts, commitments and agreements (including employment relationships) relating to the Acquired Assets or the Business, between Seller, any Affiliate of Seller (including Citizens), any officer or director of any Seller Party, or any Affiliate of the foregoing. Seller shall be solely liable for any contractual or other claims, express or implied arising out of the termination and cancellation of any of the foregoing raised by any party thereto. 5.20 Approval by Citizens. Citizens shall, as the sole owner of common stock of each other Seller Party, vote all of such shares of common stock to approve this Agreement and the transactions contemplated hereby. 42 Indiana 5.21 Supplemental Information. 5.21.1 Citizens shall provide Buyer, within fifteen (15) days after the execution or the date of receipt thereof, a copy of (a) each Contract (other than with respect to which the Business' total annual liability or expense is less than $100,000 per such Contract) entered into by Seller after the date hereof and prior to the Closing Date; (b) a copy of any written notice for assessments for public improvements against the Real Estate received after the date hereof and prior to the Closing Date; (c) a copy of the filing of any condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate received after the date hereof but prior to the Closing Date; and (d) a copy of any Contract where Seller is a lessee relating to the use or occupancy of the Real Estate and where such Contract involves annual payments in excess of $100,000 entered into by Seller after the date hereof and prior to the Closing Date. 5.21.2 Within fifteen (15) days after the receipt of notice of violation, Citizens shall notify Buyer of any violations of state or federal drinking water standards which, if such violations existed on the date hereof, would be required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly notify Buyer of the actions proposed to be taken by Seller to correct or otherwise respond to such violations. 5.22 Non-Competition. The Seller Parties agree that for a period of fifteen (15) years after the Closing Date no Seller Party nor any Affiliate of a Seller Party shall directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of or be otherwise connected in any substantial manner with any entity (other than Buyer and its successors and assigns) engaged in the business of storing, supplying and distributing water in the States in which Buyer acquires any Acquired Assets, whether or not such business is subject to regulation by a PUC (it being understood that the individual directors of Seller and Citizens are not Affiliates of a Seller Party). 5.23 Intentionally Omitted. 5.24 Intentionally Omitted. 5.25 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller may, at Seller's written election delivered to Buyer no later than five (5) days prior to the Closing Date, direct that all or a portion of the Initial Cash Payment be delivered to a "qualified intermediary" as defined in Treasury Regulation ss.1.1031(k) - (g)(4) as to enable Seller's relinquishment of the Acquired Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall reasonably cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller reasonably requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions reasonably required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person 43 Indiana or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. Seller shall indemnify and hold Buyer harmless from any cost, expense or liability arising from its cooperating under this Section 5.25. 5.26 Transition Plan. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a transitional services team, which shall include expertise from various functional specialties associated with or involved in providing billing, payroll and other support services provided to Seller by any automated or manual process using facilities or employees that are not included among the Acquired Assets or Transferred Employees. Such team will be responsible for preparing, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. The transition plan will set forth reasonable arrangements providing Buyer, at Buyer's sole expense, with appropriate access to Seller's relevant computer systems to allow for a full conversion of the relevant data and functionality to Buyer's systems on the Closing Date. Buyer and Seller shall use their commercially reasonable efforts to cause their representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan no later than 60 days prior to the Closing Date. 5.27 Procedures regarding Refunds of Advances. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a working group of appropriate subject matter experts to determine the appropriate obligations of Parent and Buyer regarding notification and the provision of other accurate and timely data to Citizens to enable Citizens timely and accurately to satisfy the refund obligations described in Section 2.3.3(b). Such working group will be responsible for preparing a comprehensive agreement no later than March 13, 2000, which agreement shall be executed by the parties at Closing. Among other arrangements, the parties would require that the customers and developers owed refunds provide joint notices to Buyer and Citizens. 5.28 Title Insurance. Prior to Closing, Seller shall cooperate with Buyer and use commercially reasonable efforts to assist Buyer if Buyer desires to obtain ALTA title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issuing ALTA (or its local equivalent) form of title insurance policies insuring good, valid, indefeasible fee simple title to the Real Estate in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Liens or other exceptions to title other than Permitted Exceptions (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities and similar documents reasonably requested by the Title Company in connection with the issuance of 44 Indiana the Title Commitments or the Title Policies; provided that such efforts and Buyers' request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION 6.1 Conditions Precedent to Obligations of Buyer and Parent. The obligations of Buyer and Parent to cause the purchase of the Acquired Assets and the assumption of the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer and Parent in their sole discretion): 6.1.1 Performance of Agreements; Representations and Warranties. Seller shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Seller shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 3.25), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a Material Adverse Effect; provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso); and provided further, that the representation and warranty set forth in Section 3.5.1 shall be deemed to be true and correct on and as of the Closing Date if any Material Adverse Effect that may have arisen or occurred between the execution date of this Agreement and the Closing Date shall have been cured or remedied such that such Material Adverse Effect is not continuing as of the Closing Date. Buyer shall have been furnished with a certificate of the Chief Financial Officer or other Vice President of Citizens dated the Closing Date, certifying to the foregoing. 6.1.2 Opinion of Counsel. Buyer shall have received from L. Russell Mitten II, Vice President and General Counsel of Seller, an opinion dated the Closing Date, in form and substance satisfactory to Buyer, to the effect set forth in Exhibit E hereto. 6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.1.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby, and such order shall not contain any 45 Indiana restrictions or conditions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the Business in existence as of the date of this Agreement applicable to Seller be continued following the transactions contemplated hereby) which would have a Material Adverse Effect or a material adverse effect on any other regulated business of Buyer in the state in which the PUC has jurisdiction, and such order shall be final and unappealable; Seller shall have obtained all statutory, regulatory and other consents and approvals which are required in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business in the manner contemplated by Section 3.25 hereof other than those the failure of which to obtain would not have a Material Adverse Effect. Seller shall have also obtained (i) all consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing, free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture) and (ii) all consents required under Contracts and Permits relating to Seller's water appropriation and flowage rights to the extent reasonably sufficient to enable Buyer to service the customers of the Business and to service future commitments under such Contracts. 6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Buyer's ownership of all or any material portion of the Acquired Assets, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which would reasonably be expected to materially limit or materially adversely affect Buyer's ownership of the Acquired Assets. 6.1.6 Documents. Seller and Citizens shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 2.7 hereof and shall have made arrangements reasonably satisfactory to Buyer to deliver to Buyer as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the Business. 6.1.7 Related Closings. Buyer shall be reasonably satisfied that the consummation of each of the asset purchase and sale transactions contemplated by those certain purchase agreements described on Schedule 6.1.7 (the "Related Purchase Agreements") will occur concurrently with the Closing. 6.2 Conditions Precedent to Obligations of Seller Parties. The obligations of the Seller Parties to cause the sale of the Acquired Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by the Seller Parties in their sole discretion): 6.2.1 Performance of Agreements; Representations and Warranties. Parent and Buyer shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Buyer and Parent shall be true and correct on and as of the Closing Date, with the same force and effect as 46 Indiana though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 4.2), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a material adverse effect on the respective ability of Buyer and Parent to perform their obligations under this Agreement and the Transaction Documents, provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso). Seller shall have been furnished with a certificate of the President or Vice President of Parent and Buyer, dated the Closing Date, certifying to the foregoing. 6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price & Rhoads, counsel to Parent and Buyer, an opinion dated the Closing Date, in form and substance satisfactory to Seller, to the effect set forth in Exhibit F hereto. 6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.2.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby and such order shall not contain any restrictions or conditions which would have a material adverse effect on Seller's business activities in the State in which the PUC has jurisdiction or any significant adverse effect on Citizens' acquisition and divestiture activities in that State (including divestiture of the Acquired Assets), and such order shall be final and unappealable; Seller shall have obtained all statutory and regulatory consents and approvals which are required in order to consummate the transactions contemplated hereby, other than those the failure of which to obtain would not have a material adverse effect on the Seller after the Closing. Seller shall have obtained (i) all consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing, free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture), and (ii) all other consents required or advisable in order for Seller to transfer Acquired Assets without incurring material liability under any Contract, Permit or Real Estate instrument. 6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Seller's ownership of all or any material portion of its properties, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which could reasonably be expected to materially limit or materially adversely affect Seller's ownership of any of its properties. 6.2.6 Documents. Parent and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including 47 Indiana pursuant to Sections 2.7 and 5.27, and shall have taken such actions as Seller may have requested pursuant to Section 5.25 hereof. 6.2.7 Related Closings. Seller shall be reasonably satisfied that the consummation of each of the Related Purchase Agreements will occur concurrently with Closing. 6.3 Termination. This Agreement may be terminated at anytime prior to the Closing Date: 6.3.1 by mutual written consent of the Seller Parties, Buyer and Parent; 6.3.2 by any of the Seller Parties, Parent or Buyer if: (i) any governmental or regulatory body the consent of which is a condition to the obligations of the Seller Parties, Parent and Buyer to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful; (ii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, judgment or decree shall have become final and nonappealable; or (iii) the Closing shall not have occurred on or before March 31, 2001; provided, however, that the right to terminate this Agreement under this Section 6.3.2(iii) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; and provided, further, that if Closing has not occurred by such date because the conditions precedent to Closing set forth in the first sentence of Section 6.1.4 and the first sentence of Section 6.2.4 have not been fulfilled, then such date shall be automatically extended to September 30, 2001; or 6.3.3 If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Section 6.3, this Agreement shall become void and of no further force and effect, except for the provisions of Section 5.6 relating to publicity, Sections 3.24 and 4.6 relating to brokerage and Section 7.1 relating to expenses. Nothing in this Section 6.3 shall be deemed to release either party from any liability for any willful breach by such party of the terms and provisions of this Agreement. ARTICLE 7 CERTAIN ADDITIONAL COVENANTS 7.1 Certain Taxes and Expenses. Citizens shall be solely responsible for all state and local sales, use, transfer, real property transfer and other similar taxes, fees and charges that are calculated based on the value of the Acquired Assets being transferred arising from and with respect to the sale and purchase of the Acquired Assets and Buyer shall be solely responsible for all transfer, registration, documentary stamp, recording and other similar fees and charges arising from and with respect to the transfer and recording of title documentation relating to the Acquired Assets. Parent shall be responsible for all costs and expenses relating to the assumption by or assignment to Parent or Buyer of the Assumed Indebtedness. Except as otherwise provided in this Agreement, each of 48 Indiana the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 7.2 Maintenance of Books and Records. The Seller Parties, on the one hand, and Buyer and Parent, on the other hand, shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets or the Assumed Liabilities or the conduct of the Business (whether in the possession of the Seller Parties or Buyer or Parent). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least 30 days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 7.2 shall be during normal business hours and upon not less than two (2) business days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 7.3 Survival. 7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j), all representations, warranties, covenants and agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing: (a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (b) the covenants contained in Section 5.2 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; (c) the representations and warranties contained in Sections 3.12 and 3.16 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought following the expiration of the applicable statute of limitations (or extensions or waivers thereof); (d) the representations and warranties contained in Section 3.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; 49 Indiana (e) the representations and warranties contained in Section 3.10 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (f) the representations and warranties contained in Section 3.7 and 3.17 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (g) the representations and warranties contained in Sections 3.3, 3.5, 3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (h) the representations and warranties contained in Section 3.11 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (i) the representations and warranties contained in Section 4.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (j) the representations and warranties contained in Sections 4.3 and 4.4 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (k) the representations and warranties contained in Section 4.5 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; and (l) all other representations and warranties contained in this Agreement and the related indemnity obligations contained in Section 7.4 shall terminate on and no further action or claim with respect thereto may be brought after, the second anniversary of the Closing Date; (m) such representations and warranties specified in the foregoing clauses (c) through (k), and the covenants contained in Section 5.1, 5.2, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such party has been given written notice setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims prior to the relevant anniversary of the Closing Date or the 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. If any claim for indemnification is asserted or could be asserted with respect to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and the Buyer or Parent is also entitled to indemnification in respect of that claim for breach or asserted breach of any other representation or warranty in this Agreement for 50 Indiana which there is a shorter survival period, such shorter period will apply to such claim except to the extent that such claim is a product liability, toxic tort or similar claim (as described in Section 2.3.3(a)) brought by a private party litigant. 7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by Buyer or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C): (a) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), for any action or claim with respect to the Pre-Existing Conditions; (b) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), with respect to the presence of Hazardous Substances at any locations other than the Real Estate; and (c) after the third anniversary of the Closing Date, for any action or claim with respect to any other Retained Liability; Provided, however, that the foregoing time limitations shall not apply to any such claims which have been the subject of a written notice from Parent and/or Buyer to the Seller Parties prior to such period setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims; and, provided, further, that the foregoing time limitations shall also not apply to any such claims: (u) with respect to Taxes; (v) with respect to any liability of the types that appear as "Trade Payables" or "Other Current and Accrued Liabilities" on the financial statements of Seller; (w) not exclusively related to the Acquired Assets or not exclusively related to the Business; and (x) with respect to any of the matters discussed in Section 3.16 hereof. For purposes of Sections 7.3.2(a) and (b), a "Change of Control of Citizens" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), other than an underwriter engaged in a firm commitment underwriting on behalf of Citizens, is or becomes the beneficial owner (as such term is used in Rule 13D-3 and 13D-5 under the Exchange Act, except that for purposes of this clause (i) a person shall be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding shares of common stock of the Company; (ii) all or substantially all of Citizens' and its Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any person or group of persons acting in concert; (iii) Citizens is merged or consolidated with any other person, whether or not Citizens is the surviving corporation in such merger or consolidation; or (iv) Citizens is liquidated or dissolved or adopts a plan of liquidation. 51 Indiana 7.4 Indemnification. Seller, Parent and Buyer agree as follows: 7.4.1 General Indemnification Obligations. (a) Seller shall indemnify Buyer and its directors, officers and other Affiliates (including Parent) and hold Buyer and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by the Seller Parties in this Agreement or in any document or certificate required to be furnished to Buyer by any of the Seller Parties pursuant to this Agreement (including the Transaction Documents); (B) subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; and (C) subject to Section 7.3.2, the ownership, operation or use of any of the businesses or assets of the Seller Parties or their Affiliates (other than the Business and the Acquired Assets) whether before, on or after the Closing Date. (b) Buyer and Parent shall indemnify Seller, and their directors, officers and other Affiliates (including Citizens) and hold Seller and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by Parent or Buyer in this Agreement or in any document or certificate required to be furnished to Seller by Parent or Buyer pursuant to this Agreement (including the Transaction Documents), (B) any Assumed Liabilities after the Closing Date, (C) the ownership, operation or use of the Business or the Acquired Assets after the Closing Date (except to the extent resulting from Retained Liabilities or to the extent resulting from breaches by the Seller Parties of representations, warranties, covenants or agreements hereunder or in the other Transaction Documents); and (D) any claim by a Transferred Employee or a Former Employee referred to on Schedule 5.12 or the Beneficiary of any such employee or former employee for post-retirement health care or life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing. (c) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including any governmental penalty or punitive damages assessed or asserted against the party seeking indemnification and including costs of investigation, clean-up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and reasonable expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened, incident to the successful enforcement of this Agreement). For purposes of this Section 7.4, the determination of whether any breach of any representation, covenant or agreement has occurred, and the calculation of the amount of Damages incurred by the Indemnified Party arising out of or resulting from any breach of a representation, covenant or agreement by any party hereto, the references to a "Material Adverse Effect" or materiality (or other correlative terms) shall be disregarded, provided that no such breach shall be found to have occurred due to facts or circumstances arising from an occurrence or condition described in Section 1.1.61(a). Notwithstanding the foregoing, Damages shall not include the loss of profits of the party seeking indemnification, or punitive damages unless the party seeking indemnification has had punitive damages assessed or asserted against it. 52 Indiana (d) Notwithstanding any language contained in any Transaction Document (including deeds to Real Estate and instruments delivered by Seller to the Title Company), representations and warranties as to Real Estate set forth in Section 3.10 and 3.11 will not be merged into any Transaction Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement, shall control. No provision set forth in any Transaction Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. 7.4.2 General Indemnification Procedures. (a) A party seeking indemnification pursuant to this Section 7.4 (an "Indemnified Party") shall give prompt written notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party after receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided, that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, solely the Indemnifying Party shall be obligated to satisfy and discharge the Third Party Claim, (B) such Third Party Claim does not include a request or demand for injunctive or other equitable relief by an Authority and (C) the Indemnifying Party makes reasonably adequate provision to assure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that is reasonably likely to result. The Indemnifying Party shall be deemed to have satisfied the condition set forth in clause (C) of the proceeding sentence if it is a regulated utility. (b) Neither the Indemnified Party nor the Indemnifying Party shall settle any Third Party Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (d) Amounts paid in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price. (e) Subject to Section 7.4.2(f) and Section 7.4.2(i), neither Parent nor Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages incurred unless the aggregate amount of Damages incurred by 53 Indiana Parent or Buyer (or the other Persons for which they can claim indemnification), together with all other claims for Damages under Section 7.4.2(e) of each of the Related Purchase Agreements, exceeds $6,123,000 in the aggregate (the "Threshold Amount"), in which case Seller shall then be liable for Damages in excess of the Threshold Amount. Subject to Section 7.4.2(f) and Section 7.4.2(i), the cumulative aggregate indemnity obligation of Citizens and its Affiliates under Section 7.4 of this Agreement and the Related Purchase Agreements shall not exceed $60,000,000 (the "Ceiling"). (f) Notwithstanding the foregoing, the parties acknowledge that Parent or Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages in respect of intentional and wilful breaches of covenants or agreements in this Agreement or any of the Retained Liabilities other than the Specified Liabilities irrespective of the Threshold Amount or the Ceiling (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful breach). As used herein, the "Specified Liabilities" shall mean the Retained Liabilities arising from claims made after the Closing Date which (i) do not relate to matters within the scope of clauses (u), (v), (w) and (x) of Section 7.3.2; (ii) were not known to the Seller Parties on or prior to Closing; and (iii) relate exclusively to the Acquired Assets or the Business prior to the Closing Date. Notwithstanding anything to the contrary in this Section 7.4, Parent or Buyer (or the other Persons for which they can claim indemnification) shall be entitled to indemnification for Damages in respect of a breach of Section 3.2, 3.12 or 3.16 irrespective of the Threshold Amount or the Ceiling. (g) The rights and remedies of Seller, Parent and Buyer under this Section 7.4 are exclusive and in lieu of any and all other rights and remedies which Seller, Parent and Buyer may have under this Agreement or otherwise for monetary relief with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by Seller, Parent or Buyer in or pursuant to this Agreement or any of the Transaction Documents or (y) any breach or failure to perform any covenant or agreements set forth in this Agreement or any of the Transaction Documents. (h) Except to the extent provided in Section 7.4.2(j) below, no right to indemnification under this Section 7.4 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto including, without limitation, the knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. (i) No party shall have any liability to another party under this Section 7.4 for Damages (and no cost or expense relating to such Damages shall be included in determining the extent of Damages incurred by such party for purposes of Section 7.4.2(e)) to the extent that: (A) the Indemnified Party recovers insurance proceeds covering the Damages or otherwise recovers payments in respect of such Damages from any other source (whether in a lump sum or stream of payments); or 54 Indiana (B) the Indemnified Party's Tax liability is actually reduced as a result of a tax benefit to which the Indemnified Party becomes entitled in respect of the Damages. (j) Seller shall have no liability or obligation under this Section 7.4 for any Damages resulting from the inaccuracy or breach of any representation or warranty if such inaccuracy or breach is disclosed by Seller pursuant to and in accordance with Sections 5.3 and 8.4 hereof; (k) Buyer agrees to use its commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Buyer consistent with its customary risk management practices, appear likely to give rise to a claim against Buyer that is likely to involve one or more insurance policies of Buyer. Any such notice shall be given in good faith by Buyer without regard to the possibility of indemnification payments by Seller under this Section 7.4, and shall be processed by Buyer in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Buyer agrees that (i) if it is entitled to receive payment from Seller for Damages arising under or pursuant to a breach of the representation and warranty set forth in Section 3.10, and (ii) if Buyer has obtained title insurance which may cover the claim or matter giving rise to such Damages, then (iii) such title insurance shall be primary coverage and Buyer will make a claim under the title insurance if such claim can be made in good faith before enforcing its right to receive payment from Seller. Buyer shall be under no obligation to obtain title insurance or prosecute such claim (other than the initial filing of such claim); (l) If at any time subsequent to the receipt by an Indemnified Party of an indemnity payment hereunder, such Indemnified Party (or any Affiliate thereof) receives any recovery, settlement or other similar payment with respect to the Damages for which it received such indemnity payment (including insurance proceeds and other payments pursuant to Section 7.4.2(i)(A) and a tax benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified Party shall promptly pay to the Indemnifying Party an amount equal to the amount of such Recovery, less any expense incurred by such Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment; (m) In the event of any indemnification claim under this Section 7.4 involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Indemnifying Party in the defense of any such claim under this Section 7.4. Without limiting the generality of the foregoing, the Indemnified Party shall furnish the Indemnifying Party with such documentary or other evidence as is then in its or any of its Affiliates' possession as may reasonably be requested by the Indemnifying Party for the purpose of defending against any such claim. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 55 Indiana 7.4.3 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer all inquiries with respect to ownership of the Acquired Assets or the Business to Buyer. In addition, Seller will execute such documents and financing statements as Buyer may reasonably request from time to time to evidence transfer of the Acquired Assets to Buyer in accordance with this Agreement, including any necessary assignment of financing statements. 7.6 Financial Statements. In connection with the preparation and filing of any registration statement or periodic report of Buyer or its Affiliates pursuant to Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, Seller, at Buyer's expense, shall provide Buyer (a) by April 30, 2000 or within 120 days after Buyer's written request therefor if made after January 1, 2000, with the following audited financial statements: (i) a statement of net assets of the Business as of the end of the last fiscal year prior to Closing; and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business for the last fiscal year prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements), including opinions thereon of Seller's Accountants, and (b) within 90 days after Buyer's written request made therefor (provided such request is made after the end of the fiscal quarter described below), the following unaudited statements: (i) a statement of net assets of the Business as of the end of the last fiscal quarter prior to Closing (but only if such quarter is subsequent to the last fiscal year prior to Closing); and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business, for the period from the end of the last fiscal year through the end of the last fiscal quarter prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements). 7.7 Collection of Receivables. Seller agrees that it shall promptly (and in any event no later than five (5) Business Days following receipt) deliver all such payments with respect to accounts receivable from customers of the Business received on and after the Closing Date (including but not limited to negotiable instruments tendered in payment of accounts receivable assigned to Buyer hereunder which shall be duly endorsed by Seller to the order of Buyer) to Buyer. Seller shall cooperate with Buyer in coordinating the transfer of collection agents and customers of the Business who pay their bills through the Automated Clearinghouse (ACH) process to Buyer. 56 Indiana ARTICLE 8 MISCELLANEOUS 8.1 Construction. Parent, Buyer and the Seller Parties have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Parent, Buyer and the Seller Parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean including without limitation. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified. The word "or" shall not be exclusive. Provisions of this Agreement shall apply, when appropriate, to successive events and transactions. Section references refer to this Agreement unless otherwise specified. 8.2 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier addressed to the party at its address set forth below: If to Parent: American Water Works Company 1025 Laurel Oak Road P.O. Box 1770 Voorhees, New Jersey 08043 Fax: (609) 346-8299 Attention: General Counsel 57 Indiana with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Buyer: Indiana-American Water Company, Inc. 491 Camby Court P. O. Box 570 Greenwood, IN 46142-0570 Fax: (740) 383-0983 Attention: Corporate Counsel with a copy to Parent and a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Seller: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: Robert J. DeSantis Telecopier: (203) 614-4625 with copies to: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten, II Telecopier: (203) 614-4651 58 Indiana and Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: J. Michael Love Telecopier: (203) 614-5201 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 8.3 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto; provided that Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the Code. 8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be clearly related to any other paragraph or section, be deemed to be disclosed with respect to that other paragraph or section. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. 8.6 Dispute Resolution. Except as otherwise provided herein, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any 59 Indiana Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"); provided, however, that at the election of either party, the arbitration shall take place before three (3) arbitrators, one arbitrator being selected by Parent, one arbitrator being selected by Citizen, and the third arbitrator, knowledgeable in the general subject matter of the dispute, controversy or claim, being selected by the other two arbitrators. Either party may demand such arbitration in accordance with the procedures set out in the Rules. The parties hereto shall use reasonable efforts to coordinate any arbitration commenced under any of the Related Purchase Agreements so that the resolution of the arbitration under this Agreement and the similar issues under the Related Purchase Agreements can be resolved as expeditiously and efficiently as reasonably practicable. Reasonable efforts shall include use of a common arbitrator or panel of arbitrators where practicable. The arbitration shall take place in Newark, New Jersey. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator(s) shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator(s) shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator(s), present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator(s) shall not have the authority to award, exemplary or punitive damages. The arbitrator(s) shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrators' majority decision shall be binding and final. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator(s); provided, however, that if the arbitrator(s) determines that the position taken in the Dispute by the non-prevailing party taken as a whole is unreasonable, the arbitrator(s) may order the non-prevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator(s) shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator(s) and the American Arbitration Association. 60 Indiana (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 8.6 and (ii) if any party, as party of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 8.6. 8.7 Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto and their successors and permitted assigns any rights or remedies under or by reason of this Agreement. 8.9 Entire Agreement. This Agreement, the Schedules and Exhibits hereto and the other Transaction Documents, and the Confidentiality Agreement dated August 2, 1999, between Citizens and Parent, (i) together constitute the entire understanding of the parties (and their affiliates) with respect to the subject matter hereof, and any related matter, (ii) supercede all prior agreements or understandings, written or oral, entered into by any of the parties that concern the subject matter hereof and (iii) are not intended to confer upon any Person other than the parties hereto any benefit, right or remedy. 8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (i) extend the time for the performance of any of the obligations of the other party; (ii) waive any inaccuracies in representations and warranties by the other party; (iii) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (iv) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or extension, as the case may be. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.12 Headings. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 61 Indiana 8.13 Definitions. For purposes of this Agreement, references to the knowledge of the Seller Parties (including a reference to "the best of the knowledge of the Seller Parties" and similar references) shall mean the actual knowledge possessed by any of the following officers or employees of Citizens: Chief Financial Officer, Vice President and Treasurer; President, Citizens Public Services; Vice President, Corporate Human Resources; Secretary; Vice President, Water; and the general manager of the Business. 8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE, INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES, PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT, BUYER OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER PARTIES. 8.15 Construction of Certain Provisions. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. 8.16 Bulk Sales. Buyer agrees that it shall not make any filings under any tax bulk sales provisions with respect to the transactions contemplated by this Agreement. [Signatures appear on following page.] 62 Indiana IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. CITIZENS UTILITIES COMPANY By:___________________________________________________________ Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer FLOWING WELLS, INC. By:___________________________________________________________ Robert J. DeSantis, Vice President AMERICAN WATER WORKS COMPANY, INC. By:___________________________________________________________ Joseph F. Hartnett, Jr., Treasurer INDIANA-AMERICAN WATER COMPANY, INC. By:___________________________________________________________ John E. Eckart, President Ohio EXECUTION COPY ASSET PURCHASE AGREEMENT among CITIZENS UTILITIES COMPANY AND CERTAIN OF ITS AFFILIATES AND AMERICAN WATER WORKS COMPANY, INC. AND OHIO-AMERICAN WATER COMPANY Dated as of October 15, 1999 Ohio TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Certain Definitions..............................................1 ARTICLE 2 THE TRANSACTION.................................................10 2.1 Sale and Purchase of Assets.....................................10 2.2 Excluded Assets.................................................10 2.3 Assumption of Certain Liabilities...............................11 2.4 Consent of Third Parties........................................14 2.5 Closing.........................................................15 2.6 Purchase Price..................................................15 2.6.1 Purchase Price............................................15 2.6.2 Payment of Initial Cash Payment...........................15 2.6.3 Estimated Closing Statement...............................16 2.6.4 Post-Closing Adjustment to Purchase Price.................16 2.6.5 Adjustment for Certain Liabilities........................18 2.6.6 Additional Adjustment to the Purchase Price...............18 2.7 Deliveries and Proceedings at Closing...........................18 2.7.1 Deliveries to Buyer.......................................18 2.7.2 Deliveries By Buyer to the Seller Parties.................19 2.8 Allocation of Consideration.....................................19 2.9 Prorations......................................................20 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.......................20 3.1 Qualification; No Interest in Other Entities....................21 3.2 Authorization and Enforceability................................21 3.3 No Violation of Laws or Agreements..............................21 3.4 Financial Statements............................................22 3.5 No Changes......................................................22 3.6 Contracts.......................................................23 3.7 Permits and Compliance With Laws Generally......................23 3.8 Environmental Matters...........................................24 3.9 Consents........................................................26 3.10 Title...........................................................26 3.11 Real Estate.....................................................27 3.12 Taxes...........................................................27 3.13 Patents and Intellectual Property Rights........................28 3.14 Accounts Receivable.............................................28 3.15 Labor Relations.................................................28 3.16 Employee Benefit Plans..........................................28 3.17 Absence of Undisclosed Liabilities..............................30 3.18 No Pending Litigation or Proceedings............................30 3.19 Supply of Utilities.............................................31 Ohio 3.20 Insurance.......................................................31 3.21 Relationship with Customers.....................................31 3.22 WARN Act........................................................31 3.23 Condition of Assets.............................................31 3.24 Brokerage.......................................................32 3.25 All Assets......................................................32 3.26 Year 2000 Matters...............................................32 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER..............32 4.1 Organization and Good Standing..................................33 4.2 Authorization and Enforceability................................33 4.3 No Violation of Laws or Agreements..............................33 4.4 Consents........................................................34 4.5 Financing.......................................................34 4.6 Brokerage.......................................................34 4.7 Insurance.......................................................34 ARTICLE 5 ADDITIONAL COVENANTS............................................34 5.1 Conduct of Business.............................................34 5.2 Negotiations....................................................37 5.3 Disclosure Schedules............................................37 5.4 Mutual Covenants................................................38 5.5 Filings and Authorizations......................................38 5.6 Public Announcement.............................................39 5.7 Further Assurances..............................................39 5.8 Cooperation.....................................................39 5.9 Employees; Employee Benefits....................................40 5.10 Employee Pension Plan...........................................43 5.11 Employee Savings Plan...........................................44 5.12 Welfare Benefits................................................45 5.13 Taxes...........................................................46 5.14 Intentionally Omitted...........................................46 5.15 Citizens' Guarantees and Surety Instruments.....................46 5.16 Intentionally Omitted...........................................46 5.17 Schedule of Permits.............................................46 5.18 Title Information...............................................47 5.19 Transaction with Related Parties................................47 5.20 Approval by Citizens............................................47 5.21 Supplemental Information........................................47 5.22 Non-Competition.................................................47 5.23 Intentionally Omitted...........................................48 5.24 IDRB Obligations................................................48 5.25 Cooperation with Respect to Like-Kind Exchange..................48 5.26 Transition Plan.................................................49 5.27 Procedures regarding Refunds of Advances........................49 5.28 Title Insurance.................................................50 Ohio ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION...............................50 6.1 Conditions Precedent to Obligations of Buyer and Parent.........50 6.1.1 Performance of Agreements; Representations and Warranties.50 6.1.2 Opinion of Counsel........................................51 6.1.3 HSR Act...................................................51 6.1.4 Required PUC and Other Consents...........................51 6.1.5 Injunction; Litigation....................................51 6.1.6 Documents.................................................51 6.1.7 Related Closings..........................................52 6.2 Conditions Precedent to Obligations of Seller Parties...........52 6.2.1 Performance of Agreements; Representations and Warranties.52 6.2.2 Opinion of Counsel........................................52 6.2.3 HSR Act...................................................52 6.2.4 Required PUC and Other Consents...........................52 6.2.5 Injunction; Litigation....................................53 6.2.6 Documents.................................................53 6.2.7 Related Closings..........................................53 6.3 Termination.....................................................53 ARTICLE 7 CERTAIN ADDITIONAL COVENANTS....................................54 7.1 Certain Taxes and Expenses......................................54 7.2 Maintenance of Books and Records................................54 7.3 Survival........................................................54 7.4 Indemnification.................................................57 7.4.1 General Indemnification Obligations.......................57 7.4.2 General Indemnification Procedures........................58 7.4.3 Indemnification for Negligence............................61 7.5 UCC Matters.....................................................62 7.6 Financial Statements............................................62 7.7 Collection of Receivables.......................................62 ARTICLE 8 MISCELLANEOUS...................................................62 8.1 Construction....................................................62 8.2 Notices.........................................................63 8.3 Successors and Assigns..........................................65 8.4 Exhibits and Schedules..........................................65 8.5 Governing Law...................................................65 8.6 Dispute Resolution..............................................65 8.7 Severability....................................................67 8.8 No Third Party Beneficiaries....................................67 8.9 Entire Agreement................................................67 8.10 Amendment and Waiver............................................67 8.11 Counterparts....................................................67 8.12 Headings........................................................67 8.13 Definitions.....................................................68 Ohio 8.14 No Implied Representation.......................................68 8.15 Construction of Certain Provisions..............................68 8.16 Bulk Sales......................................................68 Ohio v Ohio vi Ohio vii Ohio List of Schedules Schedule 1.1.1(a) ............................................... ...Real Estate Schedule 1.1.52 ..................................................IDRB Documents Schedule 2.2.12 .................................................Excluded Assets Schedule 3.3 ................................ No Violation of Laws or Agreements Schedule 3.4 ...............................................Financial Statements Schedule 3.5 .........................................................No Changes Schedule 3.6 ..........................................................Contracts Schedule 3.7 .........................Permits and Compliance with Laws Generally Schedule 3.8 ..................................Environmental Matters - Generally Schedule 3.8.10 .................................Compliance with Water Standards Schedule 3.8.11 ................................................Deed Restriction Schedule 3.9 ...........................................Seller Parties' Consents Schedule 3.10 .............................................................Title Schedule 3.11 ...........................................Real Estate Proceedings Schedule 3.12 .............................................................Taxes Schedule 3.15 ...................................................Labor Relations Schedule 3.16.1 ..........................................Employee Benefit Plans Schedule 3.16.4 .............................Employee Benefit Plans - Compliance Schedule 3.16.9 .................Employee Benefit Plans - Extraordinary Benefits Schedule 3.17 ................................Absence of Undisclosed Liabilities Schedule 3.18 ..............................No Pending Litigation or Proceedings Schedule 3.19 ...............................................Supply of Utilities Schedule 3.20 ................................................Seller's Insurance Schedule 3.22 ..........................................................WARN Act Schedule 3.23 ...............................................Condition of Assets Schedule 3.25 ........................................................All Assets Schedule 3.27 .................................................Product Liability Schedule 4.7 ..................................................Buyer's Insurance Schedule 5.1 ................................................Conduct of Business Schedule 5.9.1 ........................................................Employees Schedule 5.9.2 .................................Collective Bargaining Agreements Schedule 5.12 ..................................................Former Employees Schedule 5.15 ..............................................Citizens' Guarantees Schedule 5.16 ...............................................Schedule of Permits Schedule 6.1.7 ......................................Related Purchase Agreements viii Ohio TABLE OF EXHIBITS Exhibit A - Form of Assumption Agreement Exhibit B - Form of Assignment and Bill of Sale Exhibit C - Intentionally Omitted Exhibit D - Form of Retained IDRB Obligations Agreement Exhibit E - Form of Seller's Opinion of Counsel Exhibit F - Form of Buyer's Opinion of Counsel ix Ohio ASSET PURCHASE AGREEMENT THIS IS AN ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of October 15, 1999, by and among Citizens Utilities Company, a Delaware corporation ("Citizens"), and each of the wholly-owned subsidiaries of Citizens named on the signature page hereof (collectively with Citizens, "Seller" or the "Seller Parties"), and American Water Works Company, Inc., a Delaware corporation ("Parent"), and Ohio-American Water Company, an Ohio corporation ("Buyer"). Background 1. Citizens Utilities Company of Ohio is a public utility engaged, among other things, in the business of storing, supplying, distributing and selling water to the public, wastewater treatment, and related services and activities in the State of Ohio (the "Business"). 2. Parent is a holding company which desires to cause the Buyer to purchase substantially all of the assets, properties and rights of the Seller Parties relating to the Business, and Seller desires to sell, and to cause the sale of, such assets, properties and rights, on the terms and subject to the conditions set forth in this Agreement. Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: 1.1.1 "Acquired Assets" means, subject to Section 2.2, all of each Seller Party's right, title, and interest in, under and to all of the assets, properties and rights exclusively used in the Business as a going concern of every kind, nature and description existing on the Closing Date, wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the assets, properties and rights exclusively relating to the Business enumerated below: 1 Ohio (a) all real property described in Schedule 1.1.1(a), together with all fixtures, fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, railroad crossing agreements, hereditaments, tenements, privileges and other appurtenances thereto or otherwise exclusively related to the Business (such as appurtenant rights in and to public streets) (the "Real Estate"); (b) to the extent not included in clause (a) above, all water tanks, reservoirs, water works, plant and systems, purification and filtration systems, pumping stations, pumps, wells, mains, water pipes, hydrants, equipment, machinery, vehicles, tools, dies, spare parts, materials, water supplies, fixtures and improvements, construction in progress, jigs, molds, patterns, gauges and production fixtures and other tangible personal property, in transit or otherwise, used exclusively in the Business (the "Equipment and Other Tangible Personal Property"); (c) notwithstanding the provisions of Section 2.2 but subject to Section 2.4, all of Seller's water appropriation and flowage rights to the extent not transferred to Buyer upon assignment of the Contracts and Permits to Buyer; (d) all notes receivable, accounts receivable, accrued utility revenues, materials and supplies (at average cost net of reserve for obsolescence) and prepayments attributable in each case exclusively to the Business; (e) all deferred capital costs and other deferred charges (excluding deferred taxes collectable) attributable exclusively to the Business of which recovery in future rates is probable; (f) Intellectual Property and goodwill, licenses and sublicenses granted and obtained with respect thereto; (g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements and instruments relating to the sale of any assets, services, properties, materials or products, including all customer contracts, operating contracts and distribution contracts relating exclusively to the conduct of the Business; (ii) orders, contracts, supply agreements and other agreements relating exclusively to the purchase of any assets, services, properties, materials, or products for the Business; (iii) all leases of Real Estate exclusively related to the Business; (iv) all other contracts, agreements and instruments related exclusively to the Business (other than contracts, agreements and instruments included in the definition of Real Estate or Permits); and (v) any such contracts, agreements and other instruments referred to in clauses (i) - (iv) inclusive, entered into between the date hereof and the Closing Date which are consistent with the terms of this Agreement and are entered into in the ordinary course of business consistent with past practice, and including in the case of clauses (i) - (iv) all such contracts, agreements and instruments more specifically listed or described in Schedule 3.6 (and specifically including one Collective Bargaining Agreement to the extent provided in Section 5.9.2, but specifically excluding any contract, agreement and instrument listed or described on Schedule 2.2.12) (the "Contracts"); 2 Ohio (h) subject to Section 2.4 hereof, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority relating exclusively to the conduct of the Business and all pending applications therefor (the "Permits"); (i) books, records, ledgers, files, documents (including originally executed copies of written Contracts, to the extent available, and copies to the extent not available), correspondence, Tax returns relating exclusively to the Business, memoranda, forms, lists, plats, architectural plans, drawings, and specifications, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the Transferred Employees (to the extent such transfer is not prohibited by law), photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent exclusively relating to the Business, the Acquired Assets or the Transferred Employees; (j) all rights or choses in action arising out of occurrences before or after the Closing Date and exclusively related to any of the Acquired Assets, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Seller; provided, however, that (notwithstanding the foregoing provisions of this Section 1.1.1(j)), to the extent that Seller pays or discharges a liability related to the Business or any of the Acquired Assets and related to such right or chose in action (whether by reason of indemnification under this Agreement or otherwise), Buyer will reassign or reconvey to Seller such right or chose in action to the extent that such right or chose in action relates to a recovery of amounts paid to Buyer; and (k) all rights to insurance and condemnation proceeds (i) to the extent relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing but only to the extent that the proceeds exceed the amount of the write-down of the net book value of such Acquired Assets on the books and records of Seller as a result of such damage, destruction, taking or other impairment; (ii) to the extent they relate to amounts paid by Buyer for Damages to the extent Buyer does not receive payment pursuant to Section 7.4.1(a), but only to the extent Buyer is entitled to indemnification by Seller pursuant to Sections 7.3 and 7.4, and (iii) as provided in Section 4 of the agreement attached as Exhibit D hereto. 1.1.2."Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.3."Affected Participant" has the meaning set forth as Section 5.11.1 hereof. 3 Ohio 1.1.4."Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. 1.1.5."Agreement" has the meaning set forth in the introduction hereof. 1.1.6."American Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.7."American Savings Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof 1.1.9 "Assumed Benefit Liabilities" has the meaning set forth in Section 3.16.6 hereof. 1.1.10 Intentionally Omitted. 1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2 hereof. 1.1.13 "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof). 1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under a Benefit Plan. 1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof. 1.1.17 "Bonds" means any of the bonds issued pursuant to the Indentures of Trust, the proceeds from the issuance of which were advanced to Seller pursuant to any of the IDRB Documents. 1.1.18 "Business" has the meaning set forth in the Background section hereof. 4 Ohio 1.1.19 Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. 1.1.20 "Buyer" has the meaning set forth in the introduction hereof. 1.1.21 "Buyer's IDRB Obligations" means the obligations of Parent and Buyer set forth in Section 5.24 (a) and in the instruments to be executed and delivered by Parent and Buyer on or prior to the Closing Date in accordance with Section 5.24 (a). 1.1.22 "Buyer's Accountants" means PricewaterhouseCoopers LLP or any firm of independent public accountants hereafter designated by Buyer for purposes of this Agreement. 1.1.23 Intentionally Omitted. 1.1.24 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.25 "CERCLA" has the meaning set forth in Section 3.8.2 hereof. 1.1.26 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof. 1.1.27 "Citizens" has the meaning set forth in the introduction hereof. 1.1.28 "Closing" has the meaning set forth in Section 2.5 hereof. 1.1.29 "Closing Date" has the meaning set forth in Section 2.5 hereof. 1.1.30 "Closing Statement of Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.31 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.32 "Collective Bargaining Agreement" means the agreement identified as such on Schedule 3.6 hereto. 1.1.33 "Competing Transaction" has the meaning set forth in Section 5.2. 1.1.34 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof. 1.1.35 "Control" with respect to any Person means the ownership, directly or indirectly, of at least a majority of the voting power of each class of capital stock of such Person entitled to vote in the election of directors of such Person generally. 5 Ohio 1.1.36 "Damages" has the meaning set forth in Section 7.4.1 hereof. 1.1.37 "Disclosure Schedules" means the Schedules referenced in Articles 3, 4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3. 1.1.38 "Dispute" has the meaning set forth in Section 8.6. 1.1.39 "Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.40 "Environmental Laws" has the meaning set forth in Section 3.8 hereof. 1.1.41 "Equipment and Other Tangible Personal Property" has the meaning set forth in Section 1.1.1(b) hereof. 1.1.42 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.43 "ERISA Affiliate" means (a) any corporation included with any of the Seller Parties in a controlled group of corporations within the meaning of Section 414(b) of the Code; (b) any trade or business (whether or not incorporated) which is under common control with any of the Seller Parties within the meaning of Section 414 of the Code; any member of an affiliated service group of which any of the Seller Parties is a member within the meaning of Section 414(m) of the Code; or (d) any other person or entity treated as an affiliate of any of the Seller Parties under Section 414(o) of the Code. 1.1.44 "Excluded Assets" has the meaning set forth in Section 2.2 hereof. 1.1.45 "Financial Statements" has the meaning set forth in Section 3.4 hereof. 1.1.46 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof. 1.1.47 "Former Employees" means all salaried and hourly employees once employed by Seller or any of its Affiliates, but who are no longer so employed on the Closing Date. 1.1.48 "FTC" has the meaning set forth in Section 5.5 hereof. 1.1.49 "GAAP" has the meaning set forth in Section 3.4 hereof. 1.1.50 "Hazardous Substance" has the meaning set forth in Section 3.8 hereof. 1.1.51 "HSR Act" has the meaning set forth in Section 3.9 hereof. 6 Ohio 1.1.52 "IDRB Documents" shall mean the Loan Agreements, the Tax Regulatory Agreements, the Project Tax Certificates, and the other Contracts related thereto to which Citizens is a party and which are listed on Schedule 1.1.52. 1.1.53 "IDRB Financings" shall mean the indebtedness arising under the Loan Agreements included among the IDRB Documents. 1.1.54 "Indemnified Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.55 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.56 "Intellectual Property" means the trademarks, patents, trade names and copyrights and applications therefor, inventions, trade secrets, and confidential business information (including know-how, formulas, water filtration, purification and pumping processes and techniques, technical data, designs, drawings, customer and supplier lists, and business and marketing plans and proposals), all computer software (including data and related documentation and object and source codes), whether in magnetic format or hard copy, and tangible embodiments thereof (in whatever form or medium) of Seller, in each case, utilized exclusively in the Business. 1.1.57 "Interim Statement of Net Assets" means the Citizens Water Resources Statement of Net Assets - Ohio, June 30, 1999, which is attached hereto as Schedule 3.4. 1.1.58 "Interim Statement of Net Assets Date" means June 30, 1999. 1.1.59 "IRS" has the meaning set forth in Section 3.16.2 hereof. 1.1.60 "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). 1.1.61 "Material Adverse Effect" means a change or effect (or series of related changes or effects) which has or is reasonably likely to have a material adverse change in or effect upon the business, assets, condition (financial or otherwise), or results of operations of the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. For purpose of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect (a) if it arises from general business, economic or financial market conditions, from conditions generally effecting the industries in which Seller competes, or from the transactions contemplated 7 Ohio by this Agreement, or (b) solely with respect to matters arising prior to Closing, to the extent that either (i) Seller realizes the benefit of insurance maintained by Citizens on or prior to the Closing Date and Buyer receives the cash proceeds of such insurance to the extent required by Section 1.1.1(k), or (ii) Seller arranges for Buyer to recover payments in respect of such occurrence or condition from any other source (whether in a lump sum or stream of payments), it being understood and agreed that a Material Adverse Effect may have occurred irrespective of such insurance recovery if the occurrence or condition giving rise to such recovery also causes a non-monetary material adverse change in or effect upon the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. 1.1.62 "Mortgage Indenture" means Indenture of Mortgage and Deed of Trust between BNY Western Trust Company (successor in interest to Wells Fargo Bank, N.A.) and First Interstate Bank of California (as successor trustee to Marine Midland, N.A., formerly the Marine Midland Trust Company of New York). 1.1.63 "OSHA" has the meaning set forth in Section 3.7.1 hereof. 1.1.64 "PCBs" has the meaning set forth in Section 3.8.6 hereof. 1.1.65 "Permits" has the meaning set forth in Section 1.1.1(h) hereof. 1.1.66 "Permitted Exceptions" has the meaning set forth in Section 3.10 hereof; provided, however, that from and after the Closing, Permitted Exceptions shall not include any Lien arising under or resulting from the Mortgage Indenture. 1.1.67 "Person" means an individual, a corporation, a partnership, an association, an Authority, a trustor other entity or organization. 1.1.68 "Pre-Existing Conditions" has the meaning set forth in Section 2.3.1(d). 1.1.69 "Prime Rate" means the rate per annum announced from time to time during the reference period by Citibank N.A. as its United States prime, reference or base rate for commercial loans. 1.1.70 "PUC" has the meaning set forth in Section 5.5 hereof. 1.1.71 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.72 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof. 1.1.73 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof. 8 Ohio 1.1.74 "Related Purchase Agreements" as the meaning set forth in Section 6.1.7 hereof. 1.1.75 "Release" or "Released" has the meaning set forth in Section 3.8 hereof. 1.1.76 "Remedial Action" has the meaning set forth in Section 3.8 hereof. 1.1.77 "Retained IDRB Indebtedness" means the indebtedness of the Seller owing to the issuers of the Bonds and arising under the Loan Agreements included among the IDRB Documents but only to the extent not included in the Assumed Indebtedness. 1.1.78 "Retained Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.79 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.80 "SEC" means the U.S. Securities and Exchange Commission. 1.1.81 "Securities Filings" has the meaning set forth in Section 5.8.2 hereof. 1.1.82 "Seller" and "Seller Parties" have the respective meaning set forth in the introduction hereof. 1.1.83 "Seller's Accountants" means KPMG LLP or any other firm of independent public accountants hereafter designated by Seller for purposes of this Agreement. 1.1.84 "Seller's Adjusted Amount" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.85 "Seller's Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.86 "Seller's 401(k) Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.87 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f) hereof. 1.1.88 "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall profits, social security (or similar unemployment), disability, transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise and other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 9 Ohio 1.1.89 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.90 "Threshold Amount" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.91 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i) hereof. 1.1.92 "Transferred Accounts" has the meaning set forth in Section 5.11.2 hereof. 1.1.93 "Transaction Documents" has the meaning set forth in Section 3.2 hereof. 1.1.94 "Transferred Employees" has the meaning set forth in Section 5.9.2 hereof. 1.1.95 "Union Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.96 "VEBAs" has the meaning set forth in Section 5.12 hereof. 1.1.97 "WARN Act" means the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. section 2102- 2109, as amended. ARTICLE 2 THE TRANSACTION 2.1 Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 2.5 below, Citizens shall, and shall cause the other Seller Parties to, sell, assign, transfer, deliver and convey to Buyer, and Parent shall cause Buyer to purchase, the Acquired Assets for the Purchase Price specified in Section 2.6. 2.2 Excluded Assets. The following assets of Seller shall be excluded from the Acquired Assets (the "Excluded Assets"): 2.2.1 assets of the Seller used in both the Business and in Citizens' gas, electric or communications businesses, the material items of which are described on Schedule 2.2.12; 2.2.2 cash and cash equivalents in transit, in hand or in bank accounts. 2.2.3 except as otherwise set forth herein, assets attributable or related to any Benefit Plan; 10 Ohio 2.2.4 the stock record and minute books of Seller; 2.2.5 Acquired Assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; 2.2.6 except to the extent set forth in Sections 2.9, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member, and which are treated as Retained Liabilities under Section 2.3.3(b) below. 2.2.7 customer and other deposits held in Seller's accounts; 2.2.8 accounts owing by and among Seller and its Affiliates; 2.2.9 notes receivable and other receivables (other than note and accounts receivable attributable exclusively to the Business); 2.2.10 all deferred tax assets or collectibles; 2.2.11 duplicate copies of all books and records transferred to Buyer; and 2.2.12 those certain items listed on Schedule 2.2.12. 2.3 Assumption of Certain Liabilities 2.3.1 Buyer shall not assume any liabilities of Citizens or Seller or any of their Affiliates, except that Buyer shall assume the following specific liabilities and obligations: (a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; (b) except as set forth in Section 2.3.3(b), all liabilities and obligations of Seller in respect of the Contracts and Permits assigned or transferred to Buyer pursuant to this Agreement in accordance with the respective terms thereof, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (c) the Buyer's IDRB Obligations; (d) any liability, obligation or responsibility of Seller for conditions at the Real Estate, whether based on statutory or common law, now or hereafter in effect, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising 11 Ohio from the presence or Release or threat of Release of Hazardous Substances into the environment at the Real Estate or into or from any building, structure, pipeline or other facility at the Real Estate, or from violation of any law relating to the foregoing, including without limitation, any CERCLA or similar liability under any federal or state law or regulation, except to the extent Buyer has given written notice of a claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to the expiration of the claims period set forth in Section 7.3.2(a) or (b) (and if Buyer has given written notice prior to the expiration of such claims period, to the extent that such claim is not entitled to indemnification under Sections 7.3 and 7.4) (the foregoing, the "Pre-Existing Conditions"); (e) all liabilities and obligations of Seller related to unperformed service obligations, easement and right-of-way relocation obligations, and construction work in progress, and all engineering and construction required to complete scheduled construction and other capital projects for the Business, in each case relating to the Business and outstanding on or arising after the Closing Date except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (f) liability for accrued but unused vacation pay for the Transferred Employees to the extent provided in Section 5.9.2; (g) any liability, obligation or responsibility relating to customer deposits held by Seller on the Closing Date and relating to the Business; and (h) all liabilities and obligations imposed on Buyer by any PUC in connection with the operation of the Business or the ownership of the Acquired Assets, including with respect to any liability of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the financial statements of Seller. 2.3.2 Any liabilities or obligations which are assumed by Buyer pursuant to Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities." At the Closing, Parent shall cause Buyer to execute and deliver to Seller an assumption agreement, in substantially the form of the Assumption Agreement attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which Buyer shall assume the Assumed Liabilities. Each of Parent and Buyer hereby irrevocably and unconditionally waives and releases the Seller Parties from all Assumed Liabilities and all liabilities or obligations exclusively relating to the Business or the Acquired Assets to the extent arising from events or occurrences after the Closing or to the extent otherwise relating to the period after the Closing, including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). 2.3.3 Buyer shall not assume any liabilities, commitments or obligations (contingent or absolute and whether or not determinable as of the Closing) of any of the Seller Parties or any of their Affiliates except for the Assumed Liabilities as specifically and expressly 12 Ohio provided for above, whether such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Buyer hereunder as Assumed Liabilities are being retained by the Seller Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby irrevocably and unconditionally waives and releases Buyer from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Without limitation to the foregoing, all of the following shall be considered Retained Liabilities and not Assumed Liabilities (except as specified below) for the purposes of this Agreement: (a) any product liability, toxic tort or similar claim for injury to person or property, regardless of when made or asserted, to the extent that it arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any of the Seller Parties or any of their Affiliates prior to Closing, or alleged to have been made by any of such Persons, or to the extent that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product distributed or sold by or on behalf of any of the Seller Parties or any of their Affiliates prior to Closing, including any claim referred to above in this Section 2.3.3(a) relating to water quality standards, any claim relating to any product delivered in connection with the performance of services provided by Seller and any claim seeking recovery for consequential damages, lost revenue or income; (b) all refund obligations relating to the advances existing on the Closing Date for construction of facilities relating to the Business; (c) except to the extent set forth in Section 2.9, any federal, state, foreign or local income or other Tax payable with respect to the business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member. (d) any liability or obligation associated with or in connection with any common plant assets of Seller (other than the liabilities and obligations exclusively related to any common plant assets included among the Acquired Assets); (e) except as provided in Section 2.3.1 above, any liability or obligation with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any of the Seller Parties or any of their Affiliates, whether or not employed by Buyer after the Closing, that arises out of or relates to events or conditions to the extent occurring before the Closing Date; (f) except to the extent set forth in Section 2.3.1(d), any liability, obligation or responsibility of any of the Seller Parties, or any of their Affiliates or predecessors, whether based on statutory or common law, but only as any such law is interpreted, amended and 13 Ohio in effect on the Closing Date, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment or into or from any building, structure, pipeline or other facility or relating to or arising from the generation, use, storage, treatment, disposal, transport or other handling of Hazardous Substances or sale or product containing Hazardous Substances from violation of any law relating to the foregoing (but only as such law is interpreted, amended and in effect on the Closing Date) including without limitation, any (A) CERCLA or similar liability under any federal or state law or regulation as interpreted, amended and in effect on the Closing Date or (B) any such liability associated with businesses or assets of the Seller Parties other than the Business or the Acquired Assets; (g) liabilities and obligations relating to the Business to the extent arising prior to Closing (unless otherwise constituting Assumed Liabilities) arising by operation of law under any common law or statutory doctrine (including successor liability or de facto merger); (h) any obligation or liability arising under any contract, commitment, instrument or agreement (1) except for Buyer's IDRB Obligations and subject to the penultimate sentence of Section 2.4, that is not transferred to Buyer as part of the Acquired Assets, or (2) that relates to any breach or default (or to the extent that it relates to an event which would, with the passing of time or the giving of notice, or both, constitute a default) under any Contract, instrument or agreement or to any services to be provided by Seller under any such Contract, instrument or agreement to the extent that such services were performed or were required to have been performed on or prior to the Closing Date; (i) any liability or obligation in respect of the Excluded Assets; (j) any liability or obligation of any of the Seller Parties or any of their Affiliates existing as a result of any act, failure to act or other state of facts or occurrence which constitutes a breach or violation of any of Seller's representations, warranties, covenants or agreements contained in this Agreement, except to the extent set forth in Section 7.4; or (k) except for the Assumed Liabilities as specifically and expressly set forth herein, any liability to the extent arising out of or relating to the ownership or operation of the Acquired Assets or the Business prior to the Closing Date (including any predecessor operations), any claims, obligations or litigation to the extent arising out of or relating to events or conditions occurring before the Closing Date, and any liability associated with any business other than the Business. 2.4 Consent of Third Parties. On the Closing Date, Citizens shall cause Seller to assign to Buyer, and Parent shall cause Buyer to assume, the Contracts and the Permits which are to be transferred to Buyer as provided in this Agreement by means of the Assumption Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent (or result in a breach or violation thereof) of the other party thereto or any other third party, 14 Ohio and such consent shall not be obtained prior to Closing, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets. In order, however, to provide Buyer the full realization and value of every Contract of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Buyer, in the name of Seller or otherwise as Buyer shall specify, take all reasonable actions (including without limitation the appointment of Buyer as attorney-in-fact for Seller to proceed at Buyer's sole cost and expense) and do or cause to be done all such things as shall in the reasonable opinion of Buyer be necessary (a) to assure that the rights of Seller or its Affiliates under such Contracts shall be preserved for the benefit of Buyer and (b) to facilitate receipt of the consideration to be received by Seller or its Affiliates in and under every such Contract. To the extent that Buyer does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract "assigned or transferred to Buyer pursuant to this Agreement" within the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in any way diminish the obligations of Seller to obtain consents and approvals under this Agreement. 2.5 Closing. Subject to the terms and conditions of this Agreement, the closing of the sale and purchase of the Acquired Assets (the "Closing") shall take place at 10 a.m., East Coast time, on a date mutually satisfactory to Buyer and Seller which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in Sections 6.1 and 6.2 hereof (other than those conditions which require the delivery of any documents or the taking of other action, at the Closing) at the offices of Fleischman and Walsh, LLP, 1400 Sixteenth Street, N.W., Washington, D.C. 20036, or on such other date and at such other time or place as may be mutually agreed upon by the parties hereto (the "Closing Date"). Upon payment of the Initial Cash Payment by Buyer and confirmed receipt thereof by Seller or the Escrow Agent pursuant to Section 2.6.2 below, Seller shall operate the Business at the direction of and under the control of Buyer. Notwithstanding the foregoing, the Closing shall be deemed to be effective as of 11:59 p.m. on the Closing Date for all purposes. 2.6 Purchase Price 2.6.1 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price be paid by Buyer for the purchase of the Acquired Assets (the "Purchase Price") shall be: (i) $35,140,000 in cash (the "Base Cash Purchase Price," the Base Cash Purchase Price as adjusted in accordance with Section 2.6.3, Section 2.6.5 and Section 2.6.6 is referred to as the "Initial Cash Payment"), subject to adjustment pursuant to the provisions of this Agreement (including Section 2.6.3, Section 2.6.4, Section 2.6.5, Section 2.6.6 and Section 2.9 of this Agreement) and (ii) the assumption by Buyer of the Assumed Liabilities. 2.6.2 Payment of Initial Cash Payment. Subject to the terms and conditions of this Agreement, the Initial Cash Payment shall be paid by Buyer on the Closing Date by federal other wire transfer of immediately available funds to the account designated by Seller in writing at least two (2) Business Days prior to the Closing Date. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Buyer shall deliver the Initial 15 Ohio Cash Payment to Buyer's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. Upon receipt, the Escrow Agent shall invest the Initial Cash Payment in an interest-bearing account mutually agreed upon by Seller and Buyer. At Closing, Parent shall sign and deliver to Citizens a statement which confirms that the Closing has occurred and which instructs the Escrow Agent to transfer to Citizens the funds representing the Initial Cash Payment, plus an amount representing the interest earned after the Closing Date until the date the funds are transferred, to an account that Citizens shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to Buyer. The fees and expenses of Escrow Agent shall be paid by Buyer. 2.6.3 Estimated Closing Statement. At least five (5) business days prior to the Closing Date, Citizens shall deliver to Parent and Buyer a statement of net assets (the "Estimated Statement of Net Assets") reflecting its good faith calculation of the Acquired Assets of the Business as of the last day of the latest calendar month for which financial statements of Seller are available (the "Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall be prepared in the same manner and utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999). The Base Cash Purchase Price shall be increased or decreased on a dollar for dollar basis by the amount, if any, by which the Estimated Adjusted Net Assets is greater than or less than $19,807,252 (such increase or decrease, as the case may be, is referred to herein as the "Estimated Net Asset Adjustment"). 2.6.4 Post-Closing Adjustment to Purchase Price. (a) Within 90 days after the Closing, Citizens shall prepare and deliver to Parent and Buyer a Statement of Net Assets (the "Closing Statement of Net Assets") which reflects the Acquired Assets, as of 11:59 p.m. on the Closing Date, based on actual financial performance and calculated in the same manner, utilizing the same accounting principles, policies and methods utilized in preparing the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999), together with (A) an audit report of Seller's Accountants stating that the Closing Statement of Net Assets has been prepared utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets and (B) a calculation of Citizens' determination of the amount of increase or decrease in the amount of the Acquired Assets of the Business from the Interim Statement of Net Assets Date to the Closing Date which is derived from the Closing Statement of Net Assets ("Seller's Adjustment Amount"). The Closing Statement of Net Assets shall not give effect to any purchase accounting treatment arising from Buyer's purchase of the Acquired Assets. Buyer shall pay the fees and expenses of Seller's Accountants incurred in connection with this Section 2.6.4. Buyer agrees to cooperate, and agrees to cause Buyer's Accountants to cooperate, with Citizens and Seller's Accountants in connection with the preparation of the Closing Statement of Net Assets, and related information, and shall provide to Citizens and Seller's Accountants such books, records and information as may be reasonably requested from time to time, including the work papers of Buyer's Accountants. Citizens will give Buyer and its representatives access during the normal business hours of Citizens to the personnel, books and records of Citizens and the work papers of Seller's 16 Ohio Accountants to assist Buyer in the review of the Closing Statement of Net Assets and related matters. Buyer agrees that, following the Closing through the date on which the Closing Statement of Net Assets is delivered, it will not take any actions with respect to any accounting books, records, policies or procedures on which the Closing Statement of Net Assets is to be based that would make it impossible or impracticable to calculate the Acquired Assets in the manner and utilizing the methods required hereby. Without limiting the generality of the foregoing, no changes shall be made in any reserve or other account existing as of the date of the Interim Statement of Net Assets except in the ordinary course or as a result of events occurring after the date of the Interim Statement of Net Assets and, in such event, only in a manner consistent with past practices of Seller. (b) Parent or Buyer may dispute any amounts reflected on the Closing Statement of Net Assets, in the Seller's Adjustment Amount or in the Statement of Certain Assumed Liabilities, provided, however, that Buyer shall notify Citizens in writing of each disputed amount, and specify the amount thereof in dispute and the basis of such dispute, within 30 days of the Buyer's receipt of the Closing Statement of Net Assets and the Seller's Adjustment Amount (such 30 day period hereinafter referred to as the "Review Period"). In the event of a dispute with respect to the Closing Statement of Net Assets, the Seller's Adjustment Amount or the Statement of Certain Assumed Liabilities, Buyer and Seller shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Buyer and Seller are unable to reach a resolution of such differences within 30 days of receipt of Buyer's written notice of dispute to Seller, Buyer and Seller shall submit the amounts remaining in dispute (together with any amounts remaining in dispute pursuant to Section 2.6.4(b) of each of the Related Purchase Agreements) for resolution to an independent accountant firm of national reputation mutually appointed by Seller and Buyer (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall be requested to determine and report to the parties, within 30 days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Buyer and the Seller Parties so that the Seller Parties' share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to the Third Accounting Firm that is unsuccessfully disputed by the Buyer (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed amounts so submitted by the Buyer to the Third Accounting Firm. Buyer shall pay the fees and expenses of Buyer's Accountants incurred in connection with this Section 2.6.4(b). Seller's Adjustment Amount, if there are no disputes with respect thereto, or Seller's Adjustment Amount as adjusted after the resolution of all disputes with respect thereto in accordance herewith, shall be referred to as the "Final Net Asset Adjustment." (c) If the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment exceeds the Initial Cash Payment, then within five (5) business days after final determination thereof Buyer shall pay Seller the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. If the Initial Cash Payment exceeds the sum of the Base Cash 17 Ohio Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment, then within five (5) business days after final determination thereof Seller shall pay Buyer the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. 2.6.5 Adjustment for Certain Liabilities. Concurrent with the delivery of the Estimated Statement of Net Assets, Citizens also shall deliver to Parent and Buyer a statement reflecting (i) the customer and other deposits held by Seller on the Closing Date and relating to the Business, (ii) the items specified in Section 2.9 to the extent set forth therein, and (iii) without duplications of any amount included in clause (i), above any payments received by Seller under the Contracts and Permits for obligations not performed as of the Closing Date (the "Statement of Certain Assumed Liabilities"). The Statement of Certain Assumed Liabilities shall reflect Citizens' good faith calculation of such liabilities as of the Closing Date. The Base Cash Purchase Price shall be decreased by the net amount set forth in the Statement of Certain Assumed Liabilities. Concurrent with the delivery of the Closing Statement of Net Assets, Citizens also shall deliver to Parent a statement showing any adjustments to the Statement of Certain Assumed Liabilities and the Base Cash Purchase Price shall be further adjusted to give effect to any such adjustments to the Statement of Certain Assumed Liabilities. 2.6.6 Additional Adjustment to the Purchase Price. The Base Cash Purchase Price shall be decreased by an amount equal to the proceeds of Seller's sale of the property described in Item 7 of Schedule 3.5 (net of expenses) less the sum of (i) the federal and state income taxes payable by Seller in respect of those proceeds and (ii) the book value of such property, as of June 30, 1999, on Seller's books. 2.7 Deliveries and Proceedings at Closing. Subject to the terms and conditions of this Agreement, at the Closing: 2.7.1 Deliveries to Buyer. Citizens shall, and shall cause Seller to deliver to Buyer: (a) bills of sale and instruments of assignment to the Acquired Assets, duly executed by Seller, substantially in the form of Exhibit B hereto and; (b) the consents to transfer, of all transferable or assignable Contracts, Intellectual Property, Permits (including Environmental Permits), to the extent specifically required hereunder; (c) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Seller (together with any other transfer forms necessary to transfer title to such vehicles); 18 Ohio (d) special warranty deeds of conveyance with respect to the parcels of Real Estate owned in fee simple by Seller (or, with respect to any such parcel which was acquired by Seller (or its predecessor in interest, in cases involving mergers) by deed without covenant or warranty of title, a quit claim deed without covenant or warranty of title) to Buyer, duly executed and acknowledged by Seller and in recordable form; (e) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Real Estate, duly executed by the Seller Parties (the "FIRPTA Affidavit"); (f) the certificates, opinions and other documents required to be delivered by the Seller Parties pursuant to Section 6.1 hereof and certified resolutions evidencing the authority of the Seller Parties as set forth in Section 3.2 hereof; (g) all agreements and other documents required by this Agreement; (h) a receipt for the payment of the Initial Cash Payment duly executed by Citizens; and (i) all such other instruments of conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer to Buyer the Acquired Assets in accordance with this Agreement and where necessary or desirable, in recordable form. 2.7.2 Deliveries By Buyer to the Seller Parties. Parent shall, and shall cause Buyer to deliver to the Seller Parties: (a) wire transfer of immediately available funds in an amount equal to the Initial Cash Payment; (b) the Assumption Agreement, duly executed by Buyer; (c) the certificates, opinions and other documents required to be delivered by Buyer pursuant to Section 6.2 hereof; (d) all of the instruments contemplated by Section 5.24(a) to the extent not previously executed and delivered by Parent; and (e) all such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Parent and Buyer to assume the Assumed Liabilities in accordance with this Agreement. 2.8 Allocation of Consideration. Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual 19 Ohio assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Authority or in any proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in any legal requirement. 2.9 Prorations. The parties hereto agree that the following expenses shall be calculated and pro rated as of the Closing Date, with Seller responsible for such expenses and to receive the benefit for the same for the period through and including the Closing Date, and Buyer to be responsible for and to receive the benefit of the same after the Closing Date: 2.9.1 personal and real property taxes (on the basis on which the same were assessed and paid) and sales, occupation and use taxes, in each case, to the extent relating to the Business and except as otherwise provided in Section 7.1; 2.9.2 electric, fuel, gas, telephone, sewer and utility charges, in each case, to the extent relating to the Business; 2.9.3 rentals and other charges under Contracts to be assumed by Buyer pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h)); and 2.9.4 charges under maintenance and service contracts and other Contracts (except to the extent provided in Section 2.3.3(h)), and fees under Permits to be transferred to Buyer as part of the Acquired Assets; 2.9.5 water, sewer and other similar types of taxes, and installments on special benefit assessments; and 2.9.6 payroll expenses, payroll taxes, reimbursable employee business expenses and the financial cost of the accrued vacation of each Transferred Employee. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER Each of the Seller Parties jointly and severally represent and warrant to Parent and Buyer as follows: 20 Ohio 3.1 Qualification; No Interest in Other Entities 3.1.1 Each of the Seller Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as presently being conducted. Each of the Seller Parties is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of the business conducted by it or such Seller Party's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of the Seller Parties do not have a Material Adverse Effect. 3.1.2 No shares of any corporation or any ownership or other investment interest, either of record, beneficially or equitably, in any Person are included in the Acquired Assets. 3.2 Authorization and Enforceability. Each of the Seller Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements and instruments to be executed by them in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents"). The execution, delivery and performance by each of the Seller Parties of this Agreement and the Transaction Documents to which such Seller Party is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by each of the Seller Parties, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by the Seller Parties. This Agreement is a legal, valid and binding obligation of each Seller Party, enforceable against them in accordance with its terms except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which each of the Seller Parties is a party will be duly executed and delivered by each of the Seller Parties and will constitute the legal, valid and binding obligations of each of the Seller Parties, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 3.3 No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the Transaction Documents by each of the Seller Parties do not, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents by the Seller Parties, will not: (a) contravene any provision of the Restated Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of the other Seller Parties; or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or give to others any interests or rights therein under (i) any indenture, 21 Ohio mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which any of the Seller Parties is a party, or by which the Business or any of the Acquired Assets may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, Liens, interests or rights which, individually and in the aggregate, do not have a Material Adverse Effect or will be cured, waived or terminated prior to the Closing Date, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, to which any of the Seller Parties is subject, other than those violations or conflicts which individually and in the aggregate would not have a Material Adverse Effect. 3.4 Financial Statements. Citizens has previously delivered to Buyer the statement of income of the Business (the "Income Statement") and the Interim Statement of Net Assets contained in Schedule 3.4 (collectively, the "Financial Statements"). The Income Statement (a) fairly presents in all material respects the results of operations of the Business in accordance with generally accepted accounting principles ("GAAP") consistently applied except for the omission of full footnotes to the Income Statement and (b) has in all material respects been derived from the books and records of Seller and reflects the separation of the operation associated with the Business from other operations of Citizens. The Interim Statement of Net Assets (a) has in all material respects been derived from the books and records of Seller and reflects the separation of the operations associated with the Business from other operations of Citizens; (b) fairly presents in all material respects the Acquired Assets as of the Interim Statement of Net Assets Date; and (c) has in all material respects been prepared in accordance with GAAP consistently applied except for the omission of full footnotes to such Interim Statement of Net Assets. The financial statements included in the Annual Report to each PUC for the year ended December 31, 1998, were prepared in all material respects in accordance with the rules and regulations of such PUC. 3.5 No Changes. Since the Interim Statement of Net Assets Date to the date hereof, except as disclosed in Schedule 3.5, the Seller Parties have conducted the Business as presently operated only in the ordinary course of business consistent with past practice. Since the Interim Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has not been: 3.5.1 any Material Adverse Effect; 3.5.2 prior to the date of this Agreement, any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any Transferred Employee, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the Transferred Employees participate) to which any of the Transferred Employees may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan other than in any such case (i) in the ordinary course consistent with past practice, (ii) as required by law, or (iii) as required by the Collective Bargaining Agreement; 22 Ohio 3.5.3 any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or the provision of discounts, rebates or allowances; 3.5.4 any disposition of or failure to keep in effect any rights in, to or for the use of any Permit of the Business which individually or in the aggregate would have a Material Adverse Effect; 3.5.5 any damage, destruction or loss affecting the Business which individually or in the aggregate would have a Material Adverse Effect whether or not covered by insurance; 3.5.6 prior to the date of this Agreement, any change by Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP and is set forth on Schedule 3.5; or 3.5.7 prior to the date of this Agreement, any sale, transfer or other disposition of any material assets, properties or rights of the Business, except in the ordinary course of business consistent with past practice. 3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a list of all Contracts (other than (i) with respect to which the Business' total annual liability or expense is less than (a) $250,000 per such Contract and (b) $6,123,000 per all such Contracts (when taken together with similar contracts omitted from Schedule 3.6 of the Related Purchase Agreements), and (ii) Contracts that may be terminated by Seller, without penalty, on notice of 90 days or less) except line extension agreements and similar agreements and construction and design contracts. Seller has furnished to Buyer a correct and complete copy of each written agreement listed in Schedule 3.6. Except as disclosed on Schedule 3.6, with respect to each Contract, neither Seller nor, to the Seller Parties' knowledge, any other party thereto, is in breach or default, and to the Seller Parties' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the Contract, except in each case where such breaches, terminations, modifications, accelerations or defaults, individually or in the aggregate, do not have a Material Adverse Effect. Except as set forth in Schedule 3.6, there are no disputes pending or to the best of the Seller Parties' knowledge, threatened, under or in respect of any of the Contracts, other than those that individually and in the aggregate do not have a Material Adverse Effect. 3.7 Permits and Compliance With Laws Generally. 3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in compliance with all Permits required to operate the Business as presently operated and to own, lease or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes, including Environmental Laws (as defined below), except to the extent that any failure to possess, or to comply with, any Permit, laws, rules, regulations or orders would not, individually or 23 Ohio in the aggregate, have a Material Adverse Effect. Except as disclosed in Schedule 3.7, the Business is conducted by Seller in compliance with all applicable laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA"), zoning, building and similar laws and Environmental Laws), rules, regulations, ordinances, codes, judgments and orders, except for such failures to comply which do not individually or in the aggregate have a Material Adverse Effect. Except as disclosed on Schedule 3.7, all Permits of Seller relating to the operation of the Business are in full force and effect, other than those the failure of which to be in full force and effect would not individually or in the aggregate have a Material Adverse Effect. There are no proceedings pending or, to the Seller Parties' knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Permits presently possessed by Seller other than those revocations, cancellations, suspensions or modifications which do not individually or in the aggregate have a Material Adverse Effect. 3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the knowledge of the Seller Parties, threatened, by any Authority or other Person with respect to any alleged (i) violation by Seller or any Affiliate of Seller relating to the Business of any law, ordinance, rule, regulation, code or order of any Authority; or (ii) failure by Seller or any Affiliate to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets), except, in each case, where such violations or failures, individually or in the aggregate, would not have a Material Adverse Effect. 3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and with such exceptions as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect: 3.8.1 Seller has not disposed of or arranged for the disposal of or Released any Hazardous Substances, other than in conformity with Environmental Laws, at any Real Estate, or, in connection with the Business or Acquired Assets, at any other facility, location, or other site. 3.8.2 Seller has not received any written notice or request for information with respect to, and to the best of the Seller Parties' knowledge, Seller has not been designated a potentially liable party for Remedial Action, in connection with any Real Estate, or, as of the date hereof, with respect to the Business or Acquired Assets, at any other facility, location, or other site under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or comparable state statutes. 3.8.3 To the best of the Seller Parties' knowledge, except for such use or storage of Hazardous Substances as is incidental to the conduct of the Business, which use and storage is or has been in compliance with Environmental Laws, and which use and storage has not caused any condition that requires Remedial Action, no Real Estate has been used for the storage, 24 Ohio treatment, generation, processing, production or disposal of any Hazardous Substances or as a landfill or other waste disposal site in violation of any Environmental Law. 3.8.4 To the best of the Seller Parties' knowledge, underground storage tanks are not, and have not in the past been, located on or under any Real Estate. 3.8.5 There are no pending or unresolved claims against Seller or the Business for investigatory costs, cleanup, removal, remedial or response costs, or natural resource damages arising out of any Releases or threat of Release of any Hazardous Substances at any Real Estate or, as of the date hereof, with respect to the Business or the Acquired Assets or at any other facility, location, or other site. 3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing materials are located at or in any Real Estate in violation of Environmental Laws or which require Remedial Action. 3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance managed or generated by or on behalf of Seller at the Real Estate or in connection with the Business or Acquired Assets has come to be located at any site that is listed or formally proposed for listing under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), or any similar state list or that is the subject of federal, state, or local enforcement actions or investigations. 3.8.8 The Seller Parties know of no facts or circumstances related to environmental matters (i) in connection with the operation of the Business or (ii) concerning the Real Estate, that are reasonably likely to result in any material reduction in the quality or quantity of water available for supply to the Seller Parties' customers. 3.8.9 The Seller Parties will within thirty (30) days of the date hereof provide Buyer with copies of all written environmental audits or investigations of which they are aware (after due inquiry) prepared for the Real Estate or operations of the Business. 3.8.10 Except as set forth in Schedule 3.8.10 or Citizens' Annual Report on Form 10-K for the year ended December 31, 1998: (a) The Seller Parties (including for purposes of Section 3.8.10(a) and (b), Affiliates and predecessors of the Seller Parties) are and have been for the past three years in full compliance with all federal and state primary drinking water standards; (b) The Seller Parties are and have been for the past three years in full compliance with all federal and state secondary drinking water standards; and (c) As to all outstanding violations of state or federal drinking water standards, as of the date hereof, the Seller Parties have completed or are in the process of 25 Ohio completion in accordance with all applicable deadlines, all actions required by Environmental Law or Authorities to correct or otherwise respond to such violations. 3.8.11 Except as set forth in Schedule 3.8.11, none of the Seller Parties will be required to place any notice or restriction relating to the presence of Hazardous Substances in the deed to any Real Estate, or in any written instrument accompanying this Agreement, and no Real Estate has such a notice or restriction in its deed or any other written instrument relating to the purchase, lease or rental of such property. For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way respond to any presence, Release or threat of Release of Hazardous Substances; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substances so it does not endanger or threaten to endanger public or employee health or welfare or the environment; or (z) perform studies, investigations or monitoring necessary or required to investigate the foregoing; (B) "Environmental Laws" means any common law or federal, state or local law, statutes, rule, regulation, ordinance, code, judgment or order relating to the protection of the environment or human health and safety and includes, but is not limited to, CERCLA (42 U.S.C. section 9601, et seq.), the Clean Water Act (33 U.S.C. section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. section 2701 et seq.), each as has been or may be interpreted or amended as of the Closing Date and the regulations promulgated pursuant thereto and in effect as of the Closing Date; (C) "Released" means released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or polluting substance or waste or contaminant under or pursuant to any Environmental Law, including petroleum products, PCBs and radioactive materials. 3.9 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by the Selling Parties of this Agreement, the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by the Seller Parties, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except (i) as required by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) as specified on Schedule 3.9, (iii) as required by the IDRB Documents, and (iv) for such other consents, approvals, authorizations, registrations or filings the failure of which to obtain or make would not individually or in the aggregate have a Material Adverse Effect or which are obtained by the Closing Date. 3.10 Title. Seller has good and valid title to all of the Acquired Assets constituting personal property, good and marketable title in fee simple to all of the owned Acquired Assets constituting Real Estate and good and valid leasehold title to all of the leased Acquired Assets constituting Real Estate, in each case, free and clear of Liens subject only to the Permitted Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set forth in Schedule 26 Ohio 3.10 hereto, (b) Liens securing Taxes, assessments, governmental charges or levies, or the claims of materialmen, mechanics, carriers and like persons, all of which are not yet due and payable or which are being contested in good faith or (c) such other Liens which, individually or in the aggregate, do not have a Material Adverse Effect (it being understood that to the extent a Permitted Exception relates to or arises from a Retained Liability, Seller shall still be liable for such Retained Liability to the extent set forth herein). 3.11 Real Estate. 3.11.1 As of the date hereof, Seller has not received any written or oral notice for assessments for public improvements against the Real Estate which remains unpaid, and to the best knowledge of the Seller Parties, no such assessment has been proposed. Except as set forth on Schedule 3.11, as of the date hereof, there is no pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate and to the best knowledge of the Seller Parties no such proceeding is threatened. 3.11.2 Except as disclosed on Schedule 3.6, as of the date hereof, Seller is not a lessee under any Contract relating to the use or occupancy of the Real Estate involving annual payments in excess of $100,000. 3.11.3 Each parcel of the Real Estate has physical and, to Seller's knowledge, legal vehicular and pedestrian access to and from public roadways as may be reasonably necessary to the operation of the Business except where the failure to have such access does not have a Material Adverse Effect. To Seller's knowledge, no fact or condition exists which would result in the termination of (a) the current access from each parcel of the Real Estate, and (b) continued use, operation, maintenance, repair and replacement of all existing and currently committed water lines used by Seller in connection with the Business, except where such termination would not have a Material Adverse Effect. 3.12 Taxes. The Seller Parties have (a) timely filed all material returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (b) paid all Taxes that are shown to have come due pursuant to such returns or reports and (c) paid all other material Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due. To the best of the Seller Parties' knowledge, all such returns or reports have been prepared in accordance with all applicable laws and requirements in all material respects. Except to the extent disclosed on Schedule 3.12, none of the assets of the Business or constituting any of the Acquired Assets (a) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (b) is "tax-exempt use property" within the meaning of Section 168(h) of the Code or (c) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. 27 Ohio 3.13 Patents and Intellectual Property Rights. To the best of the Seller Parties' knowledge, the operations of Seller do not make any unauthorized use of any Intellectual Property except for any such unauthorized uses which do not have a Material Adverse Effect. Assuming the consents listed as item XII on Schedule 3.9 are obtained, Buyer will not lose any of Seller's rights to, or be required to pay increased royalties for, any Intellectual Property included in the Acquired Assets as a result of the Closing and the consummation of the transactions contemplated by this Agreement, except for any such rights or such increased royalties the loss or payment of which would, individually or in the aggregate, not have a Material Adverse Effect. 3.14 Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Interim Statement of Net Assets or arising since the date thereof have arisen out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; the allowance for collection losses on the Interim Statement of Net Assets has been determined in accordance with GAAP consistent with past practice. 3.15 Labor Relations. As of the date hereof, except as set forth in Schedule 3.15, to best of the knowledge of the Seller Parties, there has been no union organizing efforts with respect to the Business conducted within the last three (3) years and there are none now being conducted with respect to the Business. Except as set forth in Schedule 3.15, Seller has not at any time during the three (3) years prior to the date of this Agreement had, nor, to the best of the Seller Parties' knowledge, is there now threatened, a strike, work stoppage or work slow down with respect to or affecting the Business which had or could reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as set forth in Schedule 3.15, (i) no Employee is represented by any union or other labor organization and (ii) there is no unfair labor practice charge pending or, to the best knowledge of the Seller Parties, threatened against Seller relating to any of the Employees as related to the Business which could reasonably be expected to have a Material Adverse Effect. 3.16 Employee Benefit Plans. 3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive, deferred compensation, excess benefit, employment contract, stock purchase, stock ownership, stock option, supplemental unemployment, vacation, sabbatical, sick-day, severance or other material employee benefit plan, program or arrangement (other than those required to be maintained by law), whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic, (i) maintained by, or contributed to by Citizens or any of its Affiliates, in respect of any Employee or Former Employee, or (ii) with respect to which Citizens or any of its Affiliates has any liability in respect of any Employee or Former Employee (the"Benefit Plans"). Except as disclosed on Schedule 3.16.1, neither Citizens nor any of its Affiliates maintains any bonus, pension or welfare benefit plan, program or arrangement, including any deferred compensation arrangement, for directors, consultants or independent contractors of the Business. 28 Ohio 3.16.2 A true and complete copy of each Benefit Plan and related trust agreements and (to the extent applicable) a copy of each Benefit Plan's current summary plan description and in the case of an unwritten Benefit Plan, a written description thereof, has been furnished to Buyer. In addition, to the extent applicable, Buyer has been provided a copy of the most recent Internal Revenue Service ("IRS") determination letter issued to each Benefit Plan and a copy of the most recent IRS Form 5500 together with all schedules and accountants' statement filed, and actuarial reports prepared, on behalf of each Benefit Plan. 3.16.3 Each Benefit Plan which is intended to be qualified under Section 401(a) of the Code (as designated on Schedule 3.16.1) is so qualified, and will remain so qualified upon the timely making of certain amendments required by law during the applicable remedial amendment period, and any trust forming a part of such a Benefit Plan is tax exempt under Section 501(a) of the Code. Each such Benefit Plan has been amended, as and when necessary, to comply with the Tax Reform Act of 1986 and upon timely filing of an Application for Determination with the Internal Revenue Service, will be eligible to make further such amendments under the"remedial amendment period." 3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code. 3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the Code or ERISA. 3.16.6 Neither Citizens nor any ERISA Affiliate and, to the knowledge of the Seller Parties, no other Person, has taken any action or failed to take any action with respect to any Benefit Plan that may subject Buyer or any Benefit Plan under which liabilities may be assumed by Buyer under Sections 5.10, 5.11 or 5.12 ("Assumed Benefit Liabilities") to any material liability or Tax under the Code or ERISA. 3.16.7 Neither Citizens nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Benefit Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, including any contingent liability under Section 4204 of ERISA or withdrawal liability arising from the actions of Citizens or any ERISA Affiliate contemplated by this Agreement. All contributions that Citizens or any ERISA Affiliate have been obliged to make to any Benefit Plan, including any multiemployer plan, have been duly and timely made. 3.16.8 There are no pending or, to the knowledge of the Seller Parties, threatened claims (other than routine claims for benefits), assessments, complaints, proceedings or investigations of any kind in any court or governmental agency with respect to any Benefit Plan which could reasonably be expected to give rise to a material liability to Buyer. 29 Ohio 3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides benefits, including without limitation, death or medical benefits, beyond termination of service or retirement other than (i) coverage mandated by law, or (ii) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code. Seller's Retiree Medical Plan contains provisions permitting Seller to modify or terminate retiree medical benefits at any time, without prior notice to any covered individual. Except with respect to retirees, "grandfathered" employees and collectively bargained employees, Seller knows of no reason why its ability to effect those provisions would be limited. 3.16.10 With respect to each Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, Citizens and each ERISA Affiliate have complied in all material respects with the continuation coverage requirements of the Code and ERISA. 3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.17, Seller has no liabilities with respect to the Business which would constitute Assumed Liabilities, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, except: 3.17.1 the liabilities which would decrease the Base Cash Purchase Price pursuant to Section 2.6.5 to the extent assumed by Buyer at Closing; 3.17.2 liabilities arising in the ordinary course of business under any Contract or Permit or with respect to any agreement or instrument included within the definition of Real Estate; and 3.17.3 those liabilities incurred, consistent with past business practice, in or as a result of the normal and ordinary course of business and reflected in the books and records related to the Business; 3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; and 3.17.5 those other liabilities, which individually and in the aggregate, would not have a Material Adverse Effect. 3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule 3.18, there are no actions, suits, investigations or proceedings pending against or, to the best of the Seller Parties' knowledge, threatened, against or affecting, Seller, the Business or any of the Acquired Assets before any court or arbitrator or Authority which individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there are currently no outstanding judgments, decrees or orders of any court or Authority against any of the Seller Parties, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets (other than any PUC order relating to rates, tariffs and similar 30 Ohio matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. 3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real Estate has adequate arrangements for supplies of electricity, gas, oil, coal and/or sewer for all operations at the 1998 or current operating levels, whichever is greater. Except as set forth on Schedule 3.19, there are no actions or proceedings pending or, to the best of the Seller Parties' knowledge, threatened, that would adversely affect the supply of electricity, gas, coal or sewer to the Real Estate except for those which individually and in the aggregate would not have a Material Adverse Effect. 3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by Seller, together with the risks insured against, coverage limits and deductible amounts. 3.21 Relationship with Customers. As of the date hereof, Seller does not have any current customer which accounted for more than 5% of the net sales of the Business (taken together with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) for the immediately preceding 12-month period. 3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth in Schedule 3.22 hereto, within six months prior to the date hereof, (i) Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; or (b) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; (ii) Seller has not been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar state or local law; and (iii) none of Seller's employees who are employed in connection with the Business has suffered an "employment loss" (as defined in the WARN Act) . 3.23 Condition of Assets. Except as set forth on Schedule 3.23, the buildings, machinery, equipment, tools, furniture, improvements and other fixed tangible assets of the Business included in the Acquired Assets, taken as a whole and taken together with the similar assets included among the assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements, are in good operating condition and repair, reasonable wear and tear excepted. 3.24 Brokerage. None of the Seller Parties or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to Buyer or its Affiliates. 31 Ohio 3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded Assets, the Acquired Assets include all assets, rights, properties and contracts the use of which is necessary to the continued conduct of the Business by Buyer substantially in the manner as it was conducted prior to the Closing Date, including the service of all utility customers in substantially the same manner and at substantially the same service levels as provided by Seller on the date hereof. 3.26 Year 2000 Matters. Citizens has (1) initiated a review and assessment of all mission critical areas within the Business and related operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by any Seller Party (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in Citizens' Annual report on Form 10-K for the fiscal year ended December 31, 1998 and Citizens' Quarterly reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in accordance with that timetable. Seller has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to Seller after making reasonable inquiries of such suppliers and vendors. Seller makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. 3.27 Product Liability. Except as disclosed in Schedule 3.27 and except for those liabilities which individually or in the aggregate would not have a Material Adverse Effect, there are no (a) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties, unasserted, with respect to any product liability or similar claim that relates to any product or service sold by Seller or the Business to others or (b) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties unasserted, with respect to any claim for the breach of any express or implied product warranty or a similar claim with respect to any product or service sold by Seller or the Business to others. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER Parent and Buyer jointly and severally represent and warrant to Seller as follows: 4.1 Organization and Good Standing. 4.1.1 Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 32 Ohio 4.1.2 Buyer is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business. Buyer is qualified to do business and is in good standing in all jurisdictions wherein the nature of the business conducted by it or Buyer's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such failures of Buyer do not have a material adverse effect on its ability to perform its obligations under this Agreement and the Transaction Documents. 4.2 Authorization and Enforceability. Each of Buyer and Parent has full corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which either of them is a party. The execution, delivery and performance by Buyer and Parent of this Agreement and the Transaction Documents to which Buyer and/or Parent is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by Buyer and Parent, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by Buyer and Parent. This Agreement is a legal, valid and binding obligation of Buyer and Parent, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which Buyer and Parent is a party will be duly executed and delivered by Buyer and Parent and will constitute the legal, valid and binding obligations of Buyer and Parent, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 4.3 No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Transaction Documents by Buyer and/or Parent do not, and the consummation of the transactions contemplated hereby and thereby will not, (a) contravene any provision of the Articles of Incorporation or Bylaws of Buyer or the Certificate of Incorporation or Bylaws of Parent; or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, authorization, proof of dedication or other agreement or commitment, oral or written, to which Parent or Buyer is a party, or by which any of their assets or properties may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, interests or rights which, individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation to which Buyer or Parent is subject other than those violations and conflicts which 33 Ohio individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.4 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by Buyer and Parent of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by Buyer or Parent except (i) as required by the HSR Act, (ii) as specified on Schedule 3.9 and (iii) for such consents, approvals, authorizations, registrations or filings, the failure to obtain or make would not individually or in the aggregate have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.5 Financing. Buyer and Parent have, and at the Closing Date, will have sufficient resources to pay the Purchase Price, and Parent, Buyer or the other Affiliates of Parent that are buyers of the assets and businesses being acquired pursuant to the Related Purchase Agreements have, and at the Closing Date, will have sufficient resources to pay the purchase prices set forth in the Related Purchase Agreements. 4.6 Brokerage. None of Parent, Buyer or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to the Seller Parties. 4.7 Insurance. Schedule 4.7 lists the policies and contracts in effect as of the date hereof for casualty and property insurance covering Buyer's assets and properties and the operation of Buyer's business, together with the risks insured against, coverage limits and deductible amounts. ARTICLE 5 ADDITIONAL COVENANT 5.1 Conduct of Business. Except (i) as otherwise specifically permitted by this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the prior written consent of Buyer, from and after the date of this Agreement and up to and including the Closing Date, each of the Seller Parties agree that: 5.1.1 Seller shall conduct the Business as presently operated and only in the ordinary course of business consistent with past practice. 5.1.2 They shall promptly inform Buyer in writing of any specific event or circumstance of which they are aware, or of which they receive notice, that has or is likely to have, individually or in the aggregate, taken together with the other events or circumstances, a Material Adverse Effect on the Acquired Assets or the Assumed Liabilities. 34 Ohio 5.1.3 Seller shall not: (a) change or modify in any material respect existing credit and collection policies, procedures and practices with respect to accounts receivable; (b) enter into any contract or commitment, waive any right or enter into any other transaction (except in the ordinary course of business) which would have a Material Adverse Effect; (c) except in the event of service interruption, emergency or casualty loss, commit to acquire subsequent to the Closing Date on behalf of the Business any capital asset or group of capital assets costing in excess of $1,000,000 that is not included in the capital budget of Seller for fiscal year 2000 and which, if so acquired, would be included in the Acquired Assets; commencing December 1, 1999, accept or receive customer advances for construction in excess of $9,000,000 (when combined with customer advances relating to the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) per each of the next four consecutive three-month periods unless pursuant to an existing tariff, Contract or Permit of Seller; or sell or lease or agree to sell or lease or otherwise dispose of any assets included in the Acquired Assets except in the ordinary course of the conduct of the Business, consistent with past practice; (d) except in the ordinary course of business, consistent with past practice or as required under any of Seller's debt instruments or indentures, mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets; (e) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any Transferred Employee except (i) as required by law, (ii) in the ordinary course, consistent with past practice and (iii) as required by the Collective Bargaining Agreement in existence on the date hereof; provided, however, no individual Employee shall in any event receive a compensation increase in excess of seven percent (7%) except as required by the Collective Bargaining Agreement in existence on the date hereof; (f) other than in the ordinary course of business consistent with past practice, sell or otherwise transfer any assets necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; (g) change the Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP or any Authority; (h) intentionally and wilfully take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 35 Ohio 3.25 hereof (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful omission to take action); or (i) prepay, redeem, retire, refund or otherwise extinguish any of the Assumed Indebtedness. 5.2 Negotiations. Neither Citizens nor any Person controlled by Citizens or under common control with Citizens (each such person being a "Section 5.2 Affiliate"), nor any officer, director, employee, representative or agent of Citizens or any of their Section 5.2 Affiliates, shall, directly or indirectly, solicit or initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into an agreement with any Person or group of Persons (other than Parent, Buyer or any Person controlled by Parent or Buyer or under common control with Parent, Buyer or any Persons providing financing to the parties hereto in connection with facilitating the consummation of the transactions contemplated by this Agreement) concerning any acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) that would result in the transfer to any such Person or group of Persons of ten percent (10%) of the Acquired Assets (as measured by net book value of such assets on the date of each such transaction) or the acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) involving the Seller Parties, if such acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) would be inconsistent, in any respect, with the obligations of the Seller Parties hereunder (any of the foregoing transactions, a "Competing Transaction"). 5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties will provide Buyer with a supplement or amendment to the Disclosure Schedules with respect to any matter, condition or occurrence which is required to be set forth or described in the Disclosure Schedules. For the avoidance of doubt, a matter, condition or occurrence shall only be "required" to be set forth or described in the Disclosure Schedules if the failure to be so disclosed would result in a breach of the applicable representation or warranty (qualified by Material Adverse Effect where applicable) on the date hereof or on the Closing Date. In addition, Seller shall have the right at any time and from time to time prior to the Closing to supplement or amend the Disclosure Schedules. Seller may provide Disclosure Schedules with respect to any representation or warranty of this Agreement whether or not a specific schedule is referred to therein. In the event that any supplement or amendment of such Disclosure Schedules shall be provided later than five (5) business days prior to the Closing Date, the Buyer shall have the right to delay the Closing for a period of five (5) business days in order for Buyer to review such supplement or amendment. No such supplement or amendment shall be deemed to cure any breach of or alter any representation or warranty made in this Agreement so as to permit the Closing to occur unless Buyer specifically agrees thereto in writing. The Seller Parties shall promptly inform Buyer, and Buyer will promptly inform the Seller Parties of any fact or event which comes to their attention, the existence of which constitutes or likely will constitute a breach in any material respects of any representation or warranty in this Agreement. In addition, Parent will, within five (5) days of receipt thereof, forward to Seller (i) any title report Buyer receives from a title company with respect to the Real Estate and (ii) any written 36 Ohio communication regarding a specific Lien or title defect affecting a specifically identified parcel of the Real Estate sent to the President, Treasurer or General Counsel of Parent or the President or Corporate Counsel of any other Buyer Party, and sent by a party other than the Seller Parties, their legal counsel, financial advisors or representatives. 5.4 Mutual Covenants. The parties mutually covenant from the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement, including Section 5.8 hereof): 5.4.1 to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents; 5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but not waiver) of the conditions to the Closing of the transactions contemplated herein (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and 5.4.3 to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 5.5 Filings and Authorizations. The parties hereto will as promptly as practicable, make or cause to be made all such filings and submissions under laws, rules and regulations applicable to it or its Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act and with the applicable public utility commission (each, a "PUC"). Any such filings and supplemental information will be in substantial compliance with the requirements of the applicable law, rule or regulation. Each of Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission to the PUC or which is necessary under the HSR Act. The Seller Parties, on the one hand and Buyer and Parent, on the other, shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Authority, including the PUC, the United States Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division"), and shall comply promptly with any such inquiry or request. Each of Citizens, Seller, Parent and Buyer will use its reasonable efforts to obtain any clearance required under the HSR Act and from the PUC for the purchase and sale of the Acquired Assets in accordance with the terms and conditions hereof. Notwithstanding the foregoing, nothing contained in this Agreement will require or obligate any party or their respective Affiliates: (i) to initiate, pursue or defend any litigation (or threatened litigation) to which any Authority (including the PUC, the Antitrust Division and the FTC) is a party; (ii) to agree or otherwise become subject to any material limitations on (A) the right of Buyer or its Affiliates effectively to control or operate the Business 37 Ohio or the right of Seller or its Affiliates effectively to control or operate Citizens' other businesses, (B) the right of Buyer or its Affiliates to acquire or hold the Business or the right of Seller or its Affiliates to hold the Excluded Assets or Citizens' other businesses, or (C) the right of Buyer to exercise full rights of ownership of the Business or all or any material portion of the Acquired Assets or the right of Citizens to exercise full rights of ownership of Citizens' other businesses or all or any material portion of the Excluded Assets; or (iii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, assets or operations of Citizens, Seller, Parent, Buyer, any Affiliate of Buyer or the Business. The parties agree that no representation, warranty or covenant of Buyer, Parent, or Citizens contained in this Agreement shall be breached or deemed breached as a result of the failure by Parent and Buyer on the one hand or the Seller Parties, on the other, to take any of the actions specified in the preceding sentence. 5.6 Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law (in which case the parties shall make reasonable efforts to consult with each other prior to such required announcement). 5.7 Further Assurances. Each of Citizens, Parent, Buyer and Seller, from time to time after the Closing, at Buyer's or Seller's request, will execute, acknowledge and deliver to the applicable person such other instruments of conveyance and transfer and will take such other actions and execute such other documents, certifications, and further assurances as Buyer or Seller, as the case may be, may reasonably require in order to transfer, in accordance with the terms and conditions of this Agreement, more effectively in Buyer or to put Buyer more fully in possession of any of the Acquired Assets or better to enable Buyer to complete, perform and discharge any of the Assumed Liabilities. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.8 Cooperation. 5.8.1 Parent, Buyer, Citizens and Seller shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 5.8.2 Without limiting the foregoing, neither Parent and Buyer, nor Citizens and Seller (nor any of their respective Affiliates) shall make any filings pursuant to federal or state securities laws ("Securities Filings") or make any consent solicitations to holders of Assumed Indebtedness which include any information about Seller, Buyer (or their respective Affiliates) or the transactions contemplated hereby without consulting with the other 38 Ohio party and providing the other party a reasonable opportunity to review and comment on such information, it being understood and agreed that any party may so disclose such information in its reasonable judgment to the extent such party's counsel advises it that such disclosure is advisable under applicable law. Each of Parent, Buyer, Citizens and Seller shall, and shall cause their respective Affiliates to, comply with all applicable federal and state securities laws in connection with this Agreement and the transactions contemplated hereby (including any solicitation of consents of holders of Assumed Indebtedness), and all information supplied by any party for inclusion in any Securities Filing or consent solicitation, including, without limitation, any proxy or information statement, or any registration statement on Form S-4 shall be true and correct in all material respect and shall not contain any untrue statement of a material fact or omit to state any material fact which is required to be stated therein or which is necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. 5.8.3 During the first 90 days after the Closing Date (180 days for Trademarks on tanks), Buyer shall have the right to use all of the logos, trademarks and trade identification of Seller as are located at the Real Estate or on the Acquired Assets (collectively, the "Trademarks"). Buyer's use of the Trademarks shall be in accordance with such reasonable quality control standards as may be promulgated by Seller and provided to Buyer. If Seller shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Seller shall have the right to terminate Buyer's right under this Section 5.8.3 to use the Trademarks. 5.8.4 Seller shall give Buyer and its representatives (including Buyer's Accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, full access to the properties, contracts, employees, books, records and affairs of Seller to the extent relating to the Business and the Acquired Assets, and shall cause its officers, employees, agents and representatives to furnish to Buyer all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as Buyer may reasonably request. Except to the extent disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4, no investigation or receipt of information by Buyer pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller Parties under this Agreement or the conditions to the obligations of Parent or Buyer under this Agreement. All information provided to Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement dated August 2, 1999 between Citizens and Parent. 5.9 Employees; Employee Benefits. 5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and hourly employees actively employed (as of the date of this Agreement) in each division by Seller or any of its Affiliates whose primary responsibilities relate to the Business. Schedule 5.9.1 lists job classifications and number of employees in each job classification of those employees whose terms 39 Ohio and conditions of employment are subject to the Collective Bargaining Agreement ("Union Employees"). All individuals referred to on Schedule 5.9.1 are herein referred to as the "Employees." No later than March 1, 2000, Buyer and Seller shall determine the number of Employees to whom Buyer will offer employment, which number shall be at least equal to 250 (when combined with offers made by Buyer or Affiliates of Buyer to employees of Affiliates of Seller in connection with the Related Purchase Agreements) (the "Base Number"), and such additional number of Employees, if any, whom Buyer also wishes to employ. Upon determination of such Employees, Seller will supplement Schedule 5.9.1 with the name, job title, unused vacation, current base salary or hourly wage, date of hire and assigned location of each Transferred Employee (as that term is defined below). At the Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose all the information required under the preceding sentence as of the most recent practicable date prior to Closing. 5.9.2 Effective as of the Closing, Buyer shall offer employment to at least the Base Number of those employees included on Schedule 5.9.1. All Employees to whom Buyer offers employment and who accept such employment are herein referred to as the "Transferred Employees." In the event any Employees do not accept Buyer's offer of employment, Buyer shall offer employment to such additional employees (the identity of whom shall be determined by Buyer and Seller) as are necessary to bring the total number of Transferred Employees to the Base Number. Subject to the provisions of this Section 5.9 and Section 5.12, Buyer shall provide each Transferred Employee with base compensation at least equal to that provided by Seller on the Closing Date, and employee benefits which are substantially comparable to those provided by Buyer to its other similarly situated employees. Except as otherwise provided under the terms of any assumed collective bargaining agreement and under terms of Section 5.12, Buyer shall provide each Union Transferred Employee with compensation at least equal to that provided by Seller immediately prior to the Closing Date and with the benefits provided to Buyer's similarly situated collectively bargained employees. On and after the Closing Date, Buyer shall assume Seller's obligations under, and be bound by the provisions of, the collective bargaining agreement between Citizens Utilities Company of Ohio and the International Union of Operating Engineers, Local Union 18S (the "Ohio Union"), dated March 12, 1997 (the "Ohio Agreement"), to the extent of provisions covering Transferred Employees, as in effect on the date of this Agreement. With respect to any amendment, extension, or renegotiation of the Ohio Agreement, the contract as so amended, extended or renegotiated will be assumed if, but only if, (i) in connection with such amendment, extension or renegotiation, the Ohio Union agrees to substitute for Seller's employee pension plan (to the extent required to be provided under the Ohio Agreement) Parent's employee pension plan, and (ii) the other terms and conditions of those collective bargaining agreements pertaining to the Transferred Employees on the Closing Date are substantially identical to the terms and conditions of such Collective Bargaining Agreement as in effect on the date of this Agreement. Each collective bargaining agreement pertaining to Transferred Employees shall be identified on a Schedule 5.9.2 to be prepared by Seller and submitted to Buyer on or before the Closing Date. Seller shall cooperate with Buyer in Buyer's efforts to contact the unions representing Transferred Employees. Buyer agrees (i) to credit the service of each Transferred Employee with Seller and its Affiliates before the Closing, for all purposes under all employee benefit plans and arrangements maintained 40 Ohio by Buyer (and/or any of its Affiliates) for the benefit of any Transferred Employee (including without limitation for purposes of attainment of retirement dates and payment of optional forms of benefits), other than for purposes of benefit accrual under any "defined benefit plan", within the meaning of Section 3(35) of ERISA, (ii) to provide accrued vacation to Transferred Employees in the year in which the Closing occurs, equal to the excess, if any, of the accrued vacation to which the Transferred Employee would otherwise be entitled under Seller's vacation plan during that year over the amount of accrued vacation the Transferred Employee had taken during that year, and, thereafter, to provide vacation to Transferred Employees on the same basis as provided to similarly situated employees of Buyer, with service credit as provided in (i) hereof, (iii) to provide severance benefits to Transferred Employees terminated by Buyer that are substantially comparable to those benefits provided by Buyer to similarly situated employees, and (iv) to comply with all applicable legal requirements with respect to Union Employees (including without limitation any applicable duty to bargain with those employees' bargaining representative). Buyer shall be responsible for providing to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of Closing reduced by the number of vacation days such Transferred Employee has taken on or before Closing. Nothing in this Section 5.9 shall limit Buyer's authority to terminate the employment of any Transferred Employee at any time and for whatever reason. Until the second anniversary of the Closing Date, neither Seller nor any of its Affiliates shall directly or indirectly solicit or offer employment to any Transferred Employee then employed by Buyer or its Affiliates. 5.9.3 Except as specifically provided in Sections 5.9 and 5.12, Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by Buyer as the result of any claims against Buyer or its Affiliates that are made by any Employees or Former Employees (or the Beneficiary of any Employee or Former Employee) who are not made offers to become employees of Buyer or its Affiliates including, without limitation, claims asserted against Buyer as a result of their termination by Seller or its Affiliates. 5.9.4 Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation claims or the benefits provided under the Benefit Plans, whether paid before or after the Closing) owed to any Transferred Employee or the Beneficiary of any Transferred Employee or any Water Sector Retiree or the Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Seller or any of its Affiliates and such Transferred Employee or Beneficiary or (ii) any benefit claim or expense (including medical expenses) incurred before Closing under any Benefit Plan. For purposes of this Agreement, a medical expense shall be deemed to be incurred when the services giving rise to a claim are rendered, regardless of when billed or paid. Without limiting the foregoing, Seller shall be responsible for the payment of any employee benefits that become due to any Transferred Employees as a result of their termination by Seller. 41 Ohio 5.9.5 Except as otherwise specifically provided in Section 5.9, 5.11 or 5.12, Buyer shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation, claims or the benefits provided under any employee benefit plan or arrangement of Buyer incurred after Closing) owed to any Transferred Employee or Beneficiary of any Transferred Employee or any Water Sector Retiree or Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Buyer or any of its Affiliates and any Transferred Employee or (ii) any benefit claim or expense (including medical expense) incurred after Closing under any employee benefit plan sponsored or contributed to by Buyer or an ERISA Affiliate after Closing. Notwithstanding the foregoing, Buyer shall not be responsible for the payment of any employee benefits that become due to any Transferred Employees under any Benefit Plan (other than the Assumed Benefit Liabilities). 5.9.6 Buyer agrees to reimburse Seller for its proportionate share (as defined below) of any amount in excess of $1,000,000 paid by Seller as severance under Citizens' severance plan as in effect on the date hereof to any Employees (when such amount paid by Seller is aggregated with amounts paid by Citizens to other employees as referenced in Section 5.9.6 of the Related Purchase Agreements) provided (i) Buyer does not hire such Employees in accordance with the provisions of Sections 5.9, 5.11 and 5.12 and (ii) Seller provides notice to those Employees on or before the Closing Date to the effect that their employment will be terminated on or shortly after the Closing Date. Buyer will pay such reimbursement to Citizens within 5 days after receipt of a list of the Employees showing which are entitled to severance pay, the amounts of that severance pay and certifying that those amounts have been paid. The Buyer's "proportionate share" means the amount obtained by multiplying the amount in excess of $1,000,000 by a fraction, the numerator of which is the amount of severance paid by Seller to Employees under Section 5.9.6 of this Agreement and the denominator of which is the sum of (i) the amount paid by Seller to Employees under Section 5.9.6 of this Agreement and (ii) the aggregate amount paid by Citizens under Section 5.9.6 of each of the Related Purchase Agreements. 5.9.7 Until the second anniversary of the Closing Date, Buyer shall not directly or indirectly solicit or offer employment to any active employee of Seller, other than the Transferred Employees. 5.10 Employee Pension Plan. 5.10.1 At least fifteen days prior to the Closing Date, Seller shall take any and all actions necessary to cease benefit accruals and fully vest all Transferred Employees in their accrued benefits under the Citizens Pension Plan ("Seller's Pension Plan" or "Citizens Pension Plan"). Seller shall retain liability and related assets for benefits accrued through the Closing Date by Transferred Employees under Seller's Pension Plan. 5.10.2 As of the Closing Date except as may be required under the Ohio Agreement, Transferred Employees shall be covered under the American Pension Plan, and shall be 42 Ohio given credit for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, subsidized benefits, and entitlement to optional forms of payment, but not for accrual of benefits. 5.11 Employee Savings Plan. 5.11.1 Effective upon the date of the transfer described in Section 5.11.2, subject to the terms and conditions of this Agreement, Parent shall cause the Savings Plan for Employees of American Water Works Company, Inc. (the "American Savings Plan") to assume the liability of the Seller's 401(k) Plan for the account balances of those Transferred Employees participating in the Seller's 401(k) Plan on the Closing Date (the "Affected Participants") that are transferred to the American Savings Plan. As of the Closing Date, Affected Participants shall be 100% vested in their account balances under the Seller's 401(k) Plan. Transferred Employees shall be given credit under the American Savings Plan for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, contribution levels and optional forms of benefit payment, to the same extent that credit for such service has been given by Seller and its Affiliates. 5.11.2 Buyer shall deliver to Seller as soon as practicable, but in no event later than ninety (90) days after Closing (i) a certified copy of the American Savings Plan and any amendment necessary to effectuate the transfer of assets and the assumption of account balances in accordance with this Section 5.11, (ii) a certified copy of the trust agreement for the American Savings Plan; (iii) the most recent favorable determination letter from the IRS with respect to the American Savings Plan; and (iv) an opinion from Buyer's legal counsel acceptable to Seller that the American Savings Plan, as so amended, complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of, and the transfer of assets and assumption of benefit liabilities by, the American Savings Plan. Seller shall deliver to Buyer as soon as practicable, but in no event later than ninety (90) days after Closing, an opinion from Seller's legal counsel acceptable to Buyer that the Seller's 401(k) Plan complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of the Seller's 401(k) Plan, and the transfer of assets to, and assumptions of benefit limitations by, the American Savings Plan. As soon as practicable, but in any event within 120 days after Closing, Seller shall cause the trustee of the Seller's 401(k) Plan to transfer in cash and promissory notes representing outstanding loans to Affected Participants to the trustee of the American Savings Plan an amount equal to the sum of the account balances of the Transferred Employees (the "Transferred Accounts") calculated as of the most recent valuation date under the Seller's 401(k) Plan (which shall, in any event, be within thirty (30) days of the transfer). Both the Seller Parties and Buyer will file any IRS Form 5310A that is required with respect to the transfer contemplated by this Section 5.11 date at least 30 days prior to the transfer. Upon the transfer described in this Section 5.11, Buyer and the American Savings Plan shall be responsible for all benefits attributable to the Transferred Accounts to which Transferred Employees were entitled under the Seller's 401(k) Plan as of such date, and Seller and the Seller's 401(k) Plan shall cease to have any liability, contingent or otherwise, for such benefits. 43 Ohio 5.12 Welfare Benefits. 5.12.1 Within sixty (60) days after the Closing, Seller agrees to transfer to trusts established by Buyer under Section 501(c)(9) of the Code ("Buyer's VEBAs") the amount held under any trust established by Seller under Section 501(c)(9) of the Code ("Seller's VEBAs") to fund post-retirement health care and life insurance benefits attributable to the Business, including Former Employees identified on Schedule 5.12 (the "Water Sector Retirees") and any "grandfathered" Transferred Employees as set forth on Schedule 5.12. Buyer agrees to provide post-retirement health care and life insurance benefits to the Water Sector Retirees and, as applicable, Transferred Employees who become eligible for such benefits after Closing and further agrees that Buyer's VEBAs will apply an amount at least equal to the sum of the assets (and earnings thereon calculated at the rate of return generated by Buyer's VEBAs) transferred from Seller's VEBAs to provide post-retirement health care and life insurance benefits for such employees. Upon Closing, Buyer shall be responsible for all obligations of the Seller Parties to provide post-retirement health care and life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing and the Seller Parties shall cease to have any liability, contingent or otherwise, for such benefits. In consideration of such transfer, Buyer agrees not to terminate or materially modify those post-retirement health and life benefit provisions applicable to such grandfathered Transferred Employees and Water Sector Retirees as such provisions are in effect immediately prior to the Closing Date. 5.12.2 Buyer shall take all action necessary and appropriate to ensure that, as of the Closing Date, Buyer provides medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefits (including retiree medical benefits) to Transferred Employees that, in the case of Non-Union Transferred Employees and Union Transferred Employees are substantially similar to those benefits provided by Buyer under its corresponding welfare benefit plans (the "Buyer's Welfare Plans"). For purposes of determining eligibility to participate, and entitlement to benefits, in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, waiting periods, and requirements for evidence of insurability under the Buyer Welfare Plans shall be waived in Buyer's Welfare Plans for Transferred Employees and retirees of the Water Sector and their respective Beneficiaries, and Transferred Employees and retirees of the Water Sector and their respective Beneficiaries shall receive credit under the Buyer Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees and retirees of the Water Sector and their respective Beneficiaries who had credited service under a Seller Welfare Plan, together with each such individual's service, copayment, deductible and out-of-pocket payment amounts under such plan. 5.12.3 Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the 44 Ohio Closing Date. Seller shall provide to Buyer prior to the Closing Date a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such Account, and balances standing to their credit as of the Closing Date. 5.13 Taxes. The Seller Parties, on the one hand, and Parent and Buyer, on the other, shall (a) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (b) each retain and provide the other with any records or other information which may be relevant to such return, audit, examination or proceeding, and (c) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 5.14 Intentionally Omitted. 5.15 Citizens' Guarantees and Surety Instruments. Each of Parent and Buyer shall use its reasonable efforts to assist Citizens in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed on Schedule 5.15. For purposes of this Section 5.15 and Section 5.16, reasonable efforts: (a) shall include Parent's or Buyer's assumption of the Contracts and the Permits on the terms set forth in this Agreement; and (b) shall include an obligation on the part of Parent or Buyer to provide a guarantee, letter of credit, bond or other required surety instrument at Closing to the extent required by any Contract or Permit and in general to provide an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business. 5.16 Intentionally Omitted. 5.17 Schedule of Permits. No later than March 13, 2000, Citizens shall deliver to Buyer a schedule, to be identified as Schedule 5.17, which sets forth all material Permits required for the use of the Acquired Assets and the operation of the Business by Buyer substantially in the manner as it was conducted prior to the date hereof. For purposes of this Section 5.17, material Permits shall include those required for the service of all utility customers at substantially the same service levels as provided by Seller on the date of this Agreement. All Permits listed on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule 3.9 shall be so designated. Seller has made or will make prior to the Closing Date timely applications for renewals of all such Permits 45 Ohio listed on Schedule 5.17, which under applicable law must be filed prior to the Closing Date to maintain the Permits listed on Schedule 5.17 in full force and effect. 5.18 Title Information. No later than March 13, 2000, Seller shall use its reasonable efforts to deliver to Buyer true, correct and complete copies of all existing title policies, surveys, leases, deeds, instruments and agreements relating to title to the Real Estate in Seller's possession. 5.19 Transaction with Related Parties. Effective as of the Closing Date, except as otherwise provided in Sections 5.9 through 5.12, 5.15, 5.24, 5.26, 5.27 and 2.7.1(j) of this Agreement, Seller shall have terminated and canceled all contracts, commitments and agreements (including employment relationships) relating to the Acquired Assets or the Business, between Seller, any Affiliate of Seller (including Citizens), any officer or director of any Seller Party, or any Affiliate of the foregoing. Seller shall be solely liable for any contractual or other claims, express or implied arising out of the termination and cancellation of any of the foregoing raised by any party thereto. 5.20 Approval by Citizens. Citizens shall, as the sole owner of common stock of each other Seller Party, vote all of such shares of common stock to approve this Agreement and the transactions contemplated hereby. 5.21 Supplemental Information 5.21.1 Citizens shall provide Buyer, within fifteen (15) days after the execution or the date of receipt thereof, a copy of (a) each Contract (other than with respect to which the Business' total annual liability or expense is less than $100,000 per such Contract) entered into by Seller after the date hereof and prior to the Closing Date; (b) a copy of any written notice for assessments for public improvements against the Real Estate received after the date hereof and prior to the Closing Date; (c) a copy of the filing of any condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate received after the date hereof but prior to the Closing Date; and (d) a copy of any Contract where Seller is a lessee relating to the use or occupancy of the Real Estate and where such Contract involves annual payments in excess of $100,000 entered into by Seller after the date hereof and prior to the Closing Date. 5.21.2 Within fifteen (15) days after the receipt of notice of violation, Citizens shall notify Buyer of any violations of state or federal drinking water standards which, if such violations existed on the date hereof, would be required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly notify Buyer of the actions proposed to be taken by Seller to correct or otherwise respond to such violations. 5.22 Non-Competition. The Seller Parties agree that for a period of fifteen (15) years after the Closing Date no Seller Party nor any Affiliate of a Seller Party shall directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of or be otherwise connected in any substantial manner with any entity (other than Buyer and 46 Ohio its successors and assigns) engaged in the business of storing, supplying and distributing water in the States in which Buyer acquires any Acquired Assets, whether or not such business is subject to regulation by a PUC (it being understood that the individual directors of Seller and Citizens are not Affiliates of a Seller Party). 5.23 Intentionally Omitted. 5.24 IDRB Obligations. (a) Buyer's IDRB Obligations. Each party acknowledges that (x) Citizens is and after the Closing Date shall continue to be and shall remain the primary obligor with respect to the Retained IDRB Indebtedness outstanding immediately after the Closing Date to the same extent as though no sale of the Acquired Assets had been made and that Parent and Buyer shall have no payment obligations with respect to such Retained IDRB Indebtedness, and (y) the IDRB Documents require Citizens not to take or permit to be taken any action which would have the effect, directly or indirectly, of subjecting the interest on any of the Bonds to federal or state (other than Illinois) income taxation. Accordingly, Parent and Buyer covenant and agree at Closing to execute and deliver to Citizens an agreement substantially in the form attached hereto as Exhibit D, with respect to each issuer of Bonds relating to Retained IDRB Documents that will be outstanding after the Closing Date, and (ii) so long as any such Bonds are outstanding, to cause the Acquired Assets that were acquired, constructed, improved or equipped with the proceeds of such Bonds to be used as facilities for the furnishing of water (that is, (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof) or sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code, or Section 142(a)(5) of the Code as the case may be. (b) IDRB Construction Funds. Citizens hereby represents that there will be no construction funds or unspent bond proceeds available after the Closing Date that are held by the trustees of the Bonds relating to the Retained IDRB Indebtedness. (c) Consents and Opinions. The parties shall use their respective best commercially reasonable efforts to obtain all consents and legal opinions as may be required under the Retained IDRB Documents to enable Seller to retain all Retained IDRB Indebtedness and to sell the Acquired Assets to Buyer. 5.25 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller may, at Seller's written election delivered to Buyer no later than five (5) days prior to the Closing Date, direct that all or a portion of the Initial Cash Payment be delivered to a "qualified intermediary" as defined in Treasury Regulation ss.1.1031(k) - (g)(4) as to enable Seller's 47 Ohio relinquishment of the Acquired Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall reasonably cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller reasonably requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions reasonably required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. Seller shall indemnify and hold Buyer harmless from any cost, expense or liability arising from its cooperating under this Section 5.25. 5.26 Transition Plan. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a transitional services team, which shall include expertise from various functional specialties associated with or involved in providing billing, payroll and other support services provided to Seller by any automated or manual process using facilities or employees that are not included among the Acquired Assets or Transferred Employees. Such team will be responsible for preparing, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. The transition plan will set forth reasonable arrangements providing Buyer, at Buyer's sole expense, with appropriate access to Seller's relevant computer systems to allow for a full conversion of the relevant data and functionality to Buyer's systems on the Closing Date. Buyer and Seller shall use their commercially reasonable efforts to cause their representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan no later than 60 days prior to the Closing Date. 5.27 Procedures regarding Refunds of Advances. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a working group of appropriate subject matter experts to determine the appropriate obligations of Parent and Buyer regarding notification and the provision of other accurate and timely data to Citizens to enable Citizens timely and accurately to satisfy the refund obligations described in Section 2.3.3(b). Such working group will be responsible for preparing a comprehensive agreement no later than March 13, 2000, which agreement shall be executed by the parties at Closing. Among other arrangements, the parties would require that the customers and developers owed refunds provide joint notices to Buyer and Citizens. 5.28 Title Insurance. Prior to Closing, Seller shall cooperate with Buyer and use commercially reasonable efforts to assist Buyer if Buyer desires to obtain ALTA title insurance 48 Ohio commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issuing ALTA (or its local equivalent) form of title insurance policies insuring good, valid, indefeasible fee simple title to the Real Estate in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Liens or other exceptions to title other than Permitted Exceptions (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyers' request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION 6.1 Conditions Precedent to Obligations of Buyer and Parent. The obligations of Buyer and Parent to cause the purchase of the Acquired Assets and the assumption of the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer and Parent in their sole discretion): 6.1.1 Performance of Agreements; Representations and Warranties. Seller shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Seller shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 3.25), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a Material Adverse Effect; provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso); and provided further, that the representation and warranty set forth in Section 3.5.1 shall be deemed to be true and correct on and as of the Closing Date if any Material Adverse Effect that may have arisen or occurred between the execution date of this Agreement and the Closing Date shall have been cured or remedied such that such Material Adverse Effect is not continuing as of the Closing Date. Buyer shall have been furnished with a 49 Ohio certificate of the Chief Financial Officer or other Vice President of Citizens dated the Closing Date, certifying to the foregoing. 6.1.2 Opinion of Counsel. Buyer shall have received from L. Russell Mitten II, Vice President and General Counsel of Seller, an opinion dated the Closing Date, in form and substance satisfactory to Buyer, to the effect set forth in Exhibit E hereto. 6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.1.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby, and such order shall not contain any restrictions or conditions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the Business in existence as of the date of this Agreement applicable to Seller be continued following the transactions contemplated hereby) which would have a Material Adverse Effect or a material adverse effect on any other regulated business of Buyer in the state in which the PUC has jurisdiction, and such order shall be final and unappealable; Seller shall have obtained all statutory, regulatory and other consents and approvals which are required in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business in the manner contemplated by Section 3.25 hereof other than those the failure of which to obtain would not have a Material Adverse Effect. Seller shall have also obtained (i) all consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing, free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture) and (ii) all consents required under Contracts and Permits relating to Seller's water appropriation and flowage rights to the extent reasonably sufficient to enable Buyer to service the customers of the Business and to service future commitments under such Contracts. 6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Buyer's ownership of all or any material portion of the Acquired Assets, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which would reasonably be expected to materially limit or materially adversely affect Buyer's ownership of the Acquired Assets. 6.1.6 Documents. Seller and Citizens shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 2.7 hereof and shall have made arrangements reasonably satisfactory to Buyer to deliver to Buyer as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the Business. 6.1.7 Related Closings. Buyer shall be reasonably satisfied that the consummation of each of the asset purchase and sale transactions contemplated by those certain 50 Ohio purchase agreements described on Schedule 6.1.7 (the "Related Purchase Agreements") will occur concurrently with the Closing. 6.2 Conditions Precedent to Obligations of Seller Parties. The obligations of the Seller Parties to cause the sale of the Acquired Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by the Seller Parties in their sole discretion): 6.2.1 Performance of Agreements; Representations and Warranties. Parent and Buyer shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Buyer and Parent shall be true and correct on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 4.2), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a material adverse effect on the respective ability of Buyer and Parent to perform their obligations under this Agreement and the Transaction Documents, provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso). Seller shall have been furnished with a certificate of the President or Vice President of Parent and Buyer, dated the Closing Date, certifying to the foregoing. 6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price & Rhoads, counsel to Parent and Buyer, an opinion dated the Closing Date, in form and substance satisfactory to Seller, to the effect set forth in Exhibit F hereto. 6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.2.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby and such order shall not contain any restrictions or conditions which would have a material adverse effect on Seller's business activities in the State in which the PUC has jurisdiction or any significant adverse effect on Citizens' acquisition and divestiture activities in that State (including divestiture of the Acquired Assets), and such order shall be final and unappealable; Seller shall have obtained all statutory and regulatory consents and approvals which are required in order to consummate the transactions contemplated hereby, other than those the failure of which to obtain would not have a material adverse effect on 51 Ohio the Seller after the Closing. Seller shall have obtained (i) all consents and legal opinions required under the Retained IDRB Documents to enable Seller to retain the Retained IDRB Indebtedness until maturity and to sell the Acquired Assets to Buyer at the Closing (in each case without any change in the tax-exempt status of the Retained IDRB Indebtedness and without any event of taxability relating to the matters set forth in Section 7.4.1(a)(D)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture), and (iii) all other consents required or advisable in order for Seller to transfer Acquired Assets without incurring material liability under any Contract, Permit or Real Estate instrument. 6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Seller's ownership of all or any material portion of its properties, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which could reasonably be expected to materially limit or materially adversely affect Seller's ownership of any of its properties. 6.2.6 Documents. Parent and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Sections 2.7, 5.24 and 5.27, and shall have taken such actions as Seller may have requested pursuant to Section 5.25 hereof. 6.2.7 Related Closings. Seller shall be reasonably satisfied that the consummation of each of the Related Purchase Agreements will occur concurrently with Closing. 6.3 Termination. This Agreement may be terminated at anytime prior to the Closing Date: 6.3.1 by mutual written consent of the Seller Parties, Buyer and Parent; 6.3.2 by any of the Seller Parties, Parent or Buyer if: (i) any governmental or regulatory body the consent of which is a condition to the obligations of the Seller Parties, Parent and Buyer to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful; (ii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, judgment or decree shall have become final and nonappealable; or (iii) the Closing shall not have occurred on or before March 31, 2001; provided, however, that the right to terminate this Agreement under this Section 6.3.2(iii) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; and provided, further, that if Closing has not occurred by such date because the conditions precedent to Closing set forth in the first sentence of Section 6.1.4 and the first sentence of Section 6.2.4 have not been fulfilled, then such date shall be automatically extended to September 30, 2001; or 52 Ohio 6.3.3 If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Section 6.3, this Agreement shall become void and of no further force and effect, except for the provisions of Section 5.6 relating to publicity, Sections 3.24 and 4.6 relating to brokerage and Section 7.1 relating to expenses. Nothing in this Section 6.3 shall be deemed to release either party from any liability for any willful breach by such party of the terms and provisions of this Agreement. ARTICLE 7 CERTAIN ADDITIONAL COVENANTS 7.1 Certain Taxes and Expenses. Citizens shall be solely responsible for all state and local sales, use, transfer, real property transfer and other similar taxes, fees and charges that are calculated based on the value of the Acquired Assets being transferred arising from and with respect to the sale and purchase of the Acquired Assets and Buyer shall be solely responsible for all transfer, registration, documentary stamp, recording and other similar fees and charges arising from and with respect to the transfer and recording of title documentation relating to the Acquired Assets. Parent shall be responsible for all costs and expenses relating to the assumption by or assignment to Parent or Buyer of the Assumed Indebtedness. Except as otherwise provided in this Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 7.2 Maintenance of Books and Records. The Seller Parties, on the one hand, and Buyer and Parent, on the other hand, shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets or the Assumed Liabilities or the conduct of the Business (whether in the possession of the Seller Parties or Buyer or Parent). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least 30 days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 7.2 shall be during normal business hours and upon not less than two (2) business days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 7.3 Survival 53 Ohio 7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j), all representations, warranties, covenants and agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing: (a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (b) the covenants contained in Section 5.2 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; (c) the representations and warranties contained in Sections 3.12 and 3.16 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought following the expiration of the applicable statute of limitations (or extensions or waivers thereof); (d) the representations and warranties contained in Section 3.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (e) the representations and warranties contained in Section 3.10 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (f) the representations and warranties contained in Section 3.7 and 3.17 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (g) the representations and warranties contained in Sections 3.3, 3.5, 3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (h) the representations and warranties contained in Section 3.11 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; 54 Ohio (i) the representations and warranties contained in Section 4.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (j) the representations and warranties contained in Sections 4.3 and 4.4 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (k) the representations and warranties contained in Section 4.5 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; and (l) all other representations and warranties contained in this Agreement and the related indemnity obligations contained in Section 7.4 shall terminate on and no further action or claim with respect thereto may be brought after, the second anniversary of the Closing Date; (m) such representations and warranties specified in the foregoing clauses (c) through (k), and the covenants contained in Section 5.1, 5.2, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such party has been given written notice setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims prior to the relevant anniversary of the Closing Date or the 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. If any claim for indemnification is asserted or could be asserted with respect to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and the Buyer or Parent is also entitled to indemnification in respect of that claim for breach or asserted breach of any other representation or warranty in this Agreement for which there is a shorter survival period, such shorter period will apply to such claim except to the extent that such claim is a product liability, toxic tort or similar claim (as described in Section 2.3.3(a)) brought by a private party litigant. 7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by Buyer or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C): (a) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), for any action or claim with respect to the Pre-Existing Conditions; (b) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), with respect to the presence of Hazardous Substances at any locations other than the Real Estate; and 55 Ohio (c) after the third anniversary of the Closing Date, for any action or claim with respect to any other Retained Liability; Provided, however, that the foregoing time limitations shall not apply to any such claims which have been the subject of a written notice from Parent and/or Buyer to the Seller Parties prior to such period setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims; and, provided, further, that the foregoing time limitations shall also not apply to any such claims: (u) with respect to Taxes; (v) with respect to any liability of the types that appear as "Trade Payables" or "Other Current and Accrued Liabilities" on the financial statements of Seller; (w) not exclusively related to the Acquired Assets or not exclusively related to the Business; and (x) with respect to any of the matters discussed in Section 3.16 hereof. For purposes of Sections 7.3.2(a) and (b), a "Change of Control of Citizens" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), other than an underwriter engaged in a firm commitment underwriting on behalf of Citizens, is or becomes the beneficial owner (as such term is used in Rule 13D-3 and 13D-5 under the Exchange Act, except that for purposes of this clause (i) a person shall be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding shares of common stock of the Company; (ii) all or substantially all of Citizens' and its Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any person or group of persons acting in concert; (iii) Citizens is merged or consolidated with any other person, whether or not Citizens is the surviving corporation in such merger or consolidation; or (iv) Citizens is liquidated or dissolved or adopts a plan of liquidation. 7.4 Indemnification. Seller, Parent and Buyer agree as follows: 7.4.1 General Indemnification Obligations. (a) Seller shall indemnify Buyer and its directors, officers and other Affiliates (including Parent) and hold Buyer and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by the Seller Parties in this Agreement or in any document or certificate required to be furnished to Buyer by any of the Seller Parties pursuant to this Agreement (including the Transaction Documents); (B) subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; (C) subject to Section 7.3.2, the ownership, operation or use of any of the businesses or assets of the Seller Parties or their Affiliates (other than the Business and the Acquired Assets) whether before, on or after the Closing Date; and (D) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Retained IDRB Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement. 56 Ohio (b) Buyer and Parent shall indemnify Seller, and their directors, officers and other Affiliates (including Citizens) and hold Seller and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by Parent or Buyer in this Agreement or in any document or certificate required to be furnished to Seller by Parent or Buyer pursuant to this Agreement (including the Transaction Documents), including the Buyer's IDRB Obligations; (B) any Assumed Liabilities after the Closing Date; (C) the ownership, operation or use of the Business or the Acquired Assets after the Closing Date (except to the extent resulting from Retained Liabilities or to the extent resulting from breaches by the Seller Parties of representations, warranties, covenants or agreements hereunder or in the other Transaction Documents); (D) any claim by a Transferred Employee or a Former Employee referred to on Schedule 5.12 or the Beneficiary of any such employee or former employee for post-retirement health care or life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing; and (E) any violation by Parent or Buyer, or any assignee, lessee or successor of Parent or Buyer, of the covenants and agreements as provided by Section 5 of Exhibit D hereto. (c) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including any governmental penalty or punitive damages assessed or asserted against the party seeking indemnification and including costs of investigation, clean-up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and reasonable expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened, incident to the successful enforcement of this Agreement). For purposes of this Section 7.4, the determination of whether any breach of any representation, covenant or agreement has occurred, and the calculation of the amount of Damages incurred by the Indemnified Party arising out of or resulting from any breach of a representation, covenant or agreement by any party hereto, the references to a "Material Adverse Effect" or materiality (or other correlative terms) shall be disregarded, provided that no such breach shall be found to have occurred due to facts or circumstances arising from an occurrence or condition described in Section 1.1.61(a). Notwithstanding the foregoing, Damages shall not include the loss of profits of the party seeking indemnification, or punitive damages unless the party seeking indemnification has had punitive damages assessed or asserted against it. (d) Notwithstanding any language contained in any Transaction Document (including deeds to Real Estate and instruments delivered by Seller to the Title Company), representations and warranties as to Real Estate set forth in Section 3.10 and 3.11 will not be merged into any Transaction Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement, shall control. No provision set forth in any Transaction Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. 7.4.2 General Indemnification Procedures. 57 Ohio (a) A party seeking indemnification pursuant to this Section 7.4 (an "Indemnified Party") shall give prompt written notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party after receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided, that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, solely the Indemnifying Party shall be obligated to satisfy and discharge the Third Party Claim, (B) such Third Party Claim does not include a request or demand for injunctive or other equitable relief by an Authority and (C) the Indemnifying Party makes reasonably adequate provision to assure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that is reasonably likely to result. The Indemnifying Party shall be deemed to have satisfied the condition set forth in clause (C) of the proceeding sentence if it is a regulated utility. (b) Neither the Indemnified Party nor the Indemnifying Party shall settle any Third Party Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (d) Amounts paid in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price. (e) Subject to Section 7.4.2(f) and Section 7.4.2(i), neither Parent nor Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages incurred unless the aggregate amount of Damages incurred by Parent or Buyer (or the other Persons for which they can claim indemnification), together with all other claims for Damages under Section 7.4.2(e) of each of the Related Purchase Agreements, exceeds $6,123,000 in the aggregate (the "Threshold Amount"), in which case Seller shall then be liable for Damages in excess of the Threshold Amount. Subject to Section 7.4.2(f) and Section 7.4.2(i), the cumulative aggregate indemnity obligation of Citizens and its Affiliates under Section 7.4 of this Agreement and the Related Purchase Agreements shall not exceed $60,000,000 (the "Ceiling"). 58 Ohio (f) Notwithstanding the foregoing, the parties acknowledge that Parent or Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages in respect of intentional and wilful breaches of covenants or agreements in this Agreement or any of the Retained Liabilities other than the Specified Liabilities irrespective of the Threshold Amount or the Ceiling (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful breach). As used herein, the "Specified Liabilities" shall mean the Retained Liabilities arising from claims made after the Closing Date which (i) do not relate to matters within the scope of clauses (u), (v), (w) and (x) of Section 7.3.2; (ii) were not known to the Seller Parties on or prior to Closing; and (iii) relate exclusively to the Acquired Assets or the Business prior to the Closing Date. Notwithstanding anything to the contrary in this Section 7.4, Parent or Buyer (or the other Persons for which they can claim indemnification) shall be entitled to indemnification for Damages in respect of a breach of Section 3.2, 3.12 or 3.16 irrespective of the Threshold Amount or the Ceiling. (g) The rights and remedies of Seller, Parent and Buyer under this Section 7.4 are exclusive and in lieu of any and all other rights and remedies which Seller, Parent and Buyer may have under this Agreement or otherwise for monetary relief with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by Seller, Parent or Buyer in or pursuant to this Agreement or any of the Transaction Documents or (y) any breach or failure to perform any covenant or agreements set forth in this Agreement or any of the Transaction Documents. (h) Except to the extent provided in Section 7.4.2(j) below, no right to indemnification under this Section 7.4 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto including, without limitation, the knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. (i) No party shall have any liability to another party under this Section 7.4 for Damages (and no cost or expense relating to such Damages shall be included in determining the extent of Damages incurred by such party for purposes of Section 7.4.2(e)) to the extent that: (A) the Indemnified Party recovers insurance proceeds covering the Damages or otherwise recovers payments in respect of such Damages from any other source (whether in a lump sum or stream of payments); or (B) the Indemnified Party's Tax liability is actually reduced as a result of a tax benefit to which the Indemnified Party becomes entitled in respect of the Damages. (j) Seller shall have no liability or obligation under this Section 7.4 for any Damages resulting from the inaccuracy or breach of any representation or warranty if 59 Ohio such inaccuracy or breach is disclosed by Seller pursuant to and in accordance with Sections 5.3 and 8.4 hereof; (k) Buyer agrees to use its commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Buyer consistent with its customary risk management practices, appear likely to give rise to a claim against Buyer that is likely to involve one or more insurance policies of Buyer. Any such notice shall be given in good faith by Buyer without regard to the possibility of indemnification payments by Seller under this Section 7.4, and shall be processed by Buyer in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Buyer agrees that (i) if it is entitled to receive payment from Seller for Damages arising under or pursuant to a breach of the representation and warranty set forth in Section 3.10, and (ii) if Buyer has obtained title insurance which may cover the claim or matter giving rise to such Damages, then (iii) such title insurance shall be primary coverage and Buyer will make a claim under the title insurance if such claim can be made in good faith before enforcing its right to receive payment from Seller. Buyer shall be under no obligation to obtain title insurance or prosecute such claim (other than the initial filing of such claim). (l) If at any time subsequent to the receipt by an Indemnified Party of an indemnity payment hereunder, such Indemnified Party (or any Affiliate thereof) receives any recovery, settlement or other similar payment with respect to the Damages for which it received such indemnity payment (including insurance proceeds and other payments pursuant to Section 7.4.2(i)(A) and a tax benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified Party shall promptly pay to the Indemnifying Party an amount equal to the amount of such Recovery, less any expense incurred by such Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment; (m) In the event of any indemnification claim under this Section 7.4 involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Indemnifying Party in the defense of any such claim under this Section 7.4. Without limiting the generality of the foregoing, the Indemnified Party shall furnish the Indemnifying Party with such documentary or other evidence as is then in its or any of its Affiliates' possession as may reasonably be requested by the Indemnifying Party for the purpose of defending against any such claim. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 7.4.3 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, 60 Ohio REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer all inquiries with respect to ownership of the Acquired Assets or the Business to Buyer. In addition, Seller will execute such documents and financing statements as Buyer may reasonably request from time to time to evidence transfer of the Acquired Assets to Buyer in accordance with this Agreement, including any necessary assignment of financing statements. 7.6 Financial Statements. In connection with the preparation and filing of any registration statement or periodic report of Buyer or its Affiliates pursuant to Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, Seller, at Buyer's expense, shall provide Buyer (a) by April 30, 2000 or within 120 days after Buyer's written request therefor if made after January 1, 2000, with the following audited financial statements: (i) a statement of net assets of the Business as of the end of the last fiscal year prior to Closing; and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business for the last fiscal year prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements), including opinions thereon of Seller's Accountants, and (b) within 90 days after Buyer's written request made therefor (provided such request is made after the end of the fiscal quarter described below), the following unaudited statements: (i) a statement of net assets of the Business as of the end of the last fiscal quarter prior to Closing (but only if such quarter is subsequent to the last fiscal year prior to Closing); and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business, for the period from the end of the last fiscal year through the end of the last fiscal quarter prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements). 7.7 Collection of Receivables. Seller agrees that it shall promptly (and in any event no later than five (5) Business Days following receipt) deliver all such payments with respect to accounts receivable from customers of the Business received on and after the Closing Date (including but not limited to negotiable instruments tendered in payment of accounts receivable assigned to Buyer hereunder which shall be duly endorsed by Seller to the order of Buyer) to Buyer. Seller shall cooperate with Buyer in coordinating the transfer of collection agents and customers of the Business who pay their bills through the Automated Clearinghouse (ACH) process to Buyer. ARTICLE 8 MISCELLANEOUS 61 Ohio 8.1 Construction. Parent, Buyer and the Seller Parties have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Parent, Buyer and the Seller Parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean including without limitation. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified. The word "or" shall not be exclusive. Provisions of this Agreement shall apply, when appropriate, to successive events and transactions. Section references refer to this Agreement unless otherwise specified. 8.2 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier addressed to the party at its address set forth below: If to Parent: American Water Works Company 1025 Laurel Oak Road P.O. Box 1770 Voorhees, New Jersey 08043 Fax: (609) 346-8299 Attention: General Counsel with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. 62 Ohio If to Buyer: Ohio-American Water Company 880 Kuhn Drive Chula Vista, CA 91914 Fax: (619) 656-2406 Attention: Corporate Counsel with a copy to Parent and a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Seller: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: Robert J. DeSantis Telecopier: (203) 614-4625 with copies to: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten, II Telecopier: (203) 614-4651 and Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: J. Michael Love Telecopier: (203) 614-5201 63 Ohio and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 8.3 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto; provided that Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the Code. 8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be clearly related to any other paragraph or section, be deemed to be disclosed with respect to that other paragraph or section. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. 8.6 Dispute Resolution. Except as otherwise provided herein, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes 64 Ohio of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"); provided, however, that at the election of either party, the arbitration shall take place before three (3) arbitrators, one arbitrator being selected by Parent, one arbitrator being selected by Citizen, and the third arbitrator, knowledgeable in the general subject matter of the dispute, controversy or claim, being selected by the other two arbitrators. Either party may demand such arbitration in accordance with the procedures set out in the Rules. The parties hereto shall use reasonable efforts to coordinate any arbitration commenced under this Agreement with any arbitration on the same or similar issues commenced under any of the Related Purchase Agreements so that the resolution of the arbitration under this Agreement and the similar issues under the Related Purchase Agreements can be resolved as expeditiously and efficiently as reasonable practicable. Reasonable efforts shall include use of a common arbitrator or panel of arbitrators where practicable. The arbitration shall take place in Newark, New Jersey. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator(s) shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator(s) shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator(s), present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator(s) shall not have the authority to award, exemplary or punitive damages. The arbitrator(s) shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrators' majority decision shall be binding and final. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator(s); provided, however, that if the arbitrator(s) determines that the position taken in the Dispute by the non-prevailing party taken as a whole is unreasonable, the arbitrator(s) may order the non-prevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator(s) shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator(s) and the American Arbitration Association. 65 Ohio (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 8.6 and (ii) if any party, as party of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 8.6. 8.7 Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto and their successors and permitted assigns any rights or remedies under or by reason of this Agreement. 8.9 Entire Agreement. This Agreement, the Schedules and Exhibits hereto and the other Transaction Documents, and the Confidentiality Agreement dated August 2, 1999, between Citizens and Parent, (i) together constitute the entire understanding of the parties (and their affiliates) with respect to the subject matter hereof, and any related matter, (ii) supercede all prior agreements or understandings, written or oral, entered into by any of the parties that concern the subject matter hereof and (iii) are not intended to confer upon any Person other than the parties hereto any benefit, right or remedy. 8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (i) extend the time for the performance of any of the obligations of the other party; (ii) waive any inaccuracies in representations and warranties by the other party; (iii) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (iv) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or extension, as the case may be. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 66 Ohio 8.12 Headings. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 8.13 Definitions. For purposes of this Agreement, references to the knowledge of the Seller Parties (including a reference to "the best of the knowledge of the Seller Parties" and similar references) shall mean the actual knowledge possessed by any of the following officers or employees of Citizens: Chief Financial Officer, Vice President and Treasurer; President, Citizens Public Services; Vice President, Corporate Human Resources; Secretary; Vice President, Water; and the general manager of the Business. 8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE, INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES, PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT, BUYER OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER PARTIES. 8.15 Construction of Certain Provisions. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. 8.16 Bulk Sales. Buyer agrees that it shall not make any filings under any tax bulk sales provisions with respect to the transactions contemplated by this Agreement. [Signatures appear on following page.] 67 Ohio IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. CITIZENS UTILITIES COMPANY By:___________________________________________________________ Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer CITIZENS BUSINESS SERVICES COMPANY CITIZENS RESOURCES COMPANY CITIZENS UTILITIES COMPANY OF OHIO By:___________________________________________________________ Robert J. DeSantis, Vice President AMERICAN WATER WORKS COMPANY, INC. By:___________________________________________________________ Joseph F. Hartnett, Jr., Treasurer OHIO-AMERICAN WATER COMPANY By:___________________________________________________________ Ramon G. Lee, President Pennsylvania EXECUTION COPY ASSET PURCHASE AGREEMENT among CITIZENS UTILITIES COMPANY AND CERTAIN OF ITS AFFILIATES AND AMERICAN WATER WORKS COMPANY, INC. AND PENNSYLVANIA-AMERICAN WATER COMPANY Dated as of October 15, 1999 Pennsylvania TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS......................................................1 1.1 Certain Definitions..............................................1 ARTICLE 2 THE TRANSACTION.................................................10 2.1 Sale and Purchase of Assets.....................................10 2.2 Excluded Assets.................................................10 2.3 Assumption of Certain Liabilities...............................11 2.4 Consent of Third Parties........................................14 2.5 Closing.........................................................15 2.6 Purchase Price..................................................15 2.6.1 Purchase Price............................................15 2.6.2 Payment of Initial Cash Payment...........................15 2.6.3 Estimated Closing Statement...............................16 2.6.4 Post-Closing Adjustment to Purchase Price.................16 2.6.5 Adjustment for Certain Liabilities........................18 2.6.6 Additional Adjustment to the Purchase Price...............18 2.7 Deliveries and Proceedings at Closing...........................18 2.7.1 Deliveries to Buyer.......................................18 2.7.2 Deliveries By Buyer to the Seller Parties.................19 2.8 Allocation of Consideration.....................................20 2.9 Prorations......................................................20 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER.......................20 3.1 Qualification; No Interest in Other Entities....................21 3.2 Authorization and Enforceability................................21 3.3 No Violation of Laws or Agreements..............................21 3.4 Financial Statements............................................22 3.5 No Changes......................................................22 3.6 Contracts.......................................................23 3.7 Permits and Compliance With Laws Generally......................23 3.8 Environmental Matters...........................................24 3.9 Consents........................................................26 3.10 Title...........................................................26 3.11 Real Estate.....................................................27 3.12 Taxes...........................................................27 3.13 Patents and Intellectual Property Rights........................28 3.14 Accounts Receivable.............................................28 3.15 Labor Relations.................................................28 3.16 Employee Benefit Plans..........................................28 3.17 Absence of Undisclosed Liabilities..............................30 3.18 No Pending Litigation or Proceedings............................31 3.19 Supply of Utilities.............................................31 3.20 Insurance.......................................................31 Pennsylvania 3.21 Relationship with Customers.....................................31 3.22 WARN Act........................................................31 3.23 Condition of Assets.............................................32 3.24 Brokerage.......................................................32 3.25 All Assets......................................................32 3.26 Year 2000 Matters...............................................32 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER..............33 4.1 Organization and Good Standing..................................33 4.2 Authorization and Enforceability................................33 4.3 No Violation of Laws or Agreements..............................33 4.4 Consents........................................................34 4.5 Financing.......................................................34 4.6 Brokerage.......................................................34 4.7 Insurance.......................................................34 ARTICLE 5 ADDITIONAL COVENANTS............................................35 5.1 Conduct of Business.............................................35 5.2 Negotiations....................................................36 5.3 Disclosure Schedules............................................36 5.4 Mutual Covenants................................................37 5.5 Filings and Authorizations......................................37 5.6 Public Announcement.............................................38 5.7 Further Assurances..............................................38 5.8 Cooperation.....................................................39 5.9 Employees; Employee Benefits....................................40 5.10 Employee Pension Plan...........................................42 5.11 Employee Savings Plan...........................................43 5.12 Welfare Benefits................................................43 5.13 Taxes...........................................................45 5.14 Intentionally Omitted...........................................45 5.15 Citizens' Guarantees and Surety Instruments.....................45 5.16 Assumption of Seller Debt.......................................45 5.17 Schedule of Permits.............................................48 5.18 Title Information...............................................48 5.19 Transaction with Related Parties................................49 5.20 Approval by Citizens............................................49 5.21 Supplemental Information........................................49 5.22 Non-Competition.................................................49 5.23 Intentionally Omitted...........................................49 5.24 IDRB Obligations................................................50 5.25 Cooperation with Respect to Like-Kind Exchange..................50 5.26 Transition Plan.................................................51 5.27 Procedures regarding Refunds of Advances........................51 5.28 Title Insurance.................................................51 Pennsylvania ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION...............................52 6.1 Conditions Precedent to Obligations of Buyer and Parent.........52 6.1.1 Performance of Agreements; Representations and Warranties.52 6.1.2 Opinion of Counsel........................................53 6.1.3 HSR Act...................................................53 6.1.4 Required PUC and Other Consents...........................53 6.1.5 Injunction; Litigation....................................53 6.1.6 Documents.................................................53 6.1.7 Related Closings..........................................54 6.2 Conditions Precedent to Obligations of Seller Parties...........54 6.2.1 Performance of Agreements; Representations and Warranties.54 6.2.2 Opinion of Counsel........................................54 6.2.3 HSR Act...................................................54 6.2.4 Required PUC and Other Consents...........................54 6.2.5 Injunction; Litigation....................................55 6.2.6 Documents.................................................55 6.2.7 Related Closings..........................................55 6.3 Termination.....................................................55 ARTICLE 7 CERTAIN ADDITIONAL COVENANTS....................................56 7.1 Certain Taxes and Expenses......................................56 7.2 Maintenance of Books and Records................................56 7.3 Survival........................................................57 7.4 Indemnification.................................................59 7.4.1 General Indemnification Obligations.......................59 7.4.2 General Indemnification Procedures........................61 7.4.3 Indemnification for Negligence............................64 7.5 UCC Matters.....................................................64 7.6 Financial Statements............................................64 7.7 Collection of Receivables.......................................65 ARTICLE 8 MISCELLANEOUS...................................................65 8.1 Construction....................................................65 8.2 Notices.........................................................65 8.3 Successors and Assigns..........................................67 8.4 Exhibits and Schedules..........................................67 8.5 Governing Law...................................................67 8.6 Dispute Resolution..............................................68 8.7 Severability....................................................69 8.8 No Third Party Beneficiaries....................................69 8.9 Entire Agreement................................................69 8.10 Amendment and Waiver............................................69 8.11 Counterparts....................................................70 8.12 Headings........................................................70 8.13 Definitions.....................................................70 8.14 No Implied Representation.......................................70 Pennsylvania 8.15 Construction of Certain Provisions..............................71 8.16 Bulk Sales......................................................71 Pennsylvania List of Schedules Schedule 1.1.1(a)................................................... Real Estate Schedule 1.1.10............................................ Assumed Indebtedness Schedule 1.1.52.................................................. IDRB Documents Schedule 2.2.12................................................. Excluded Assets Schedule 3.3................................. No Violation of Laws or Agreements Schedule 3.4............................................... Financial Statements Schedule 3.5......................................................... No Changes Schedule 3.6.......................................................... Contracts Schedule 3.7......................... Permits and Compliance with Laws Generally Schedule 3.8...................................Environmental Matters - Generally Schedule 3.8.10................................. Compliance with Water Standards Schedule 3.8.11................................................ Deed Restriction Schedule 3.9........................................... Seller Parties' Consents Schedule 3.10............................................................. Title Schedule 3.11........................................... Real Estate Proceedings Schedule 3.12............................................................. Taxes Schedule 3.15................................................... Labor Relations Schedule 3.16.1.......................................... Employee Benefit Plans Schedule 3.16.4............................. Employee Benefit Plans - Compliance Schedule 3.16.9................. Employee Benefit Plans - Extraordinary Benefits Schedule 3.17................................ Absence of Undisclosed Liabilities Schedule 3.18.............................. No Pending Litigation or Proceedings Schedule 3.19............................................... Supply of Utilities Schedule 3.20................................................ Seller's.Insurance Schedule 3.22.......................................................... WARN Act Schedule 3.23............................................... Condition of Assets Schedule 3.25........................................................ All Assets Schedule 3.27................................................. Product Liability Schedule 4.7.................................................. Buyer's Insurance Schedule 5.1................................................ Conduct of Business Schedule 5.9.1........................................................ Employees Schedule 5.9.2................................. Collective Bargaining Agreements Schedule 5.12.................................................. Former Employees Schedule 5.15.............................................. Citizens' Guarantees Schedule 5.16............................................... Schedule of Permits Schedule 6.1.7.......................................Related Purchase Agreements Pennsylvania TABLE OF EXHIBITS Exhibit A - Form of Assumption Agreement Exhibit B - Form of Assignment and Bill of Sale Exhibit C - Intentionally Omitted Exhibit D - Form of Retained IDRB Obligations Agreement Exhibit E - Form of Seller's Opinion of Counsel Exhibit F - Form of Buyer's Opinion of Counsel Pennsylvania ASSET PURCHASE AGREEMENT THIS IS AN ASSET PURCHASE AGREEMENT (the "Agreement"), dated as of October 15, 1999, by and among Citizens Utilities Company, a Delaware corporation ("Citizens"), and each of the wholly-owned subsidiaries of Citizens named on the signature page hereof (collectively with Citizens, "Seller" or the "Seller Parties"), and American Water Works Company, Inc., a Delaware corporation ("Parent"), and Pennsylvania-American Water Company, a Pennsylvania corporation ("Buyer"). Background 1. Citizens Utilities Water Company of Pennsylvania is a public utility engaged, among other things, in the business of storing, supplying, distributing and selling water to the public, wholesale water transmission and related services and activities in the State of Pennsylvania (the "Business"). 2. Parent is a holding company which desires to cause the Buyer to purchase substantially all of the assets, properties and rights of the Seller Parties relating to the Business, and Seller desires to sell, and to cause the sale of, such assets, properties and rights, on the terms and subject to the conditions set forth in this Agreement. Terms NOW, THEREFORE, in consideration of the mutual representations, warranties, covenants and agreements contained herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the respective meanings ascribed to them in this Section: 1.1.1 "Acquired Assets" means, subject to Section 2.2, all of each Seller Party's right, title, and interest in, under and to all of the assets, properties and rights exclusively used in the Business as a going concern of every kind, nature and description existing on the Closing Date, wherever such assets, properties and rights are located and whether such assets, properties and rights are real, personal or mixed, tangible or intangible, and whether or not any of such assets, properties and rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements, including all of the assets, properties and rights exclusively relating to the Business enumerated below: (a) all real property described in Schedule 1.1.1(a), together with all fixtures, fittings, buildings, structures and other improvements erected thereon, and easements, rights of way, water lines, rights of use, licenses, railroad crossing agreements, hereditaments, Pennsylvania tenements, privileges and other appurtenances thereto or otherwise exclusively related to the Business (such as appurtenant rights in and to public streets) (the "Real Estate"); (b) to the extent not included in clause (a) above, all water tanks, reservoirs, water works, plant and systems, purification and filtration systems, pumping stations, pumps, wells, mains, water pipes, hydrants, equipment, machinery, vehicles, tools, dies, spare parts, materials, water supplies, fixtures and improvements, construction in progress, jigs, molds, patterns, gauges and production fixtures and other tangible personal property, in transit or otherwise, used exclusively in the Business (the "Equipment and Other Tangible Personal Property"); (c) notwithstanding the provisions of Section 2.2 but subject to Section 2.4, all of Seller's water appropriation and flowage rights to the extent not transferred to Buyer upon assignment of the Contracts and Permits to Buyer; (d) all notes receivable, accounts receivable, accrued utility revenues, materials and supplies (at average cost net of reserve for obsolescence) and prepayments attributable in each case exclusively to the Business; (e) all unamortized debt expense related to the Assumed Indebtedness, deferred capital costs, and other deferred charges (excluding deferred taxes collectable) attributable exclusively to the Business of which recovery in future rates is probable; (f) Intellectual Property and goodwill, licenses and sublicenses granted and obtained with respect thereto; (g) subject to Section 2.4 hereof, (i) contracts, commitments, agreements and instruments relating to the sale of any assets, services, properties, materials or products, including all customer contracts, operating contracts and distribution contracts relating exclusively to the conduct of the Business; (ii) orders, contracts, supply agreements and other agreements relating exclusively to the purchase of any assets, services, properties, materials, or products for the Business; (iii) all leases of Real Estate exclusively related to the Business; (iv) all other contracts, agreements and instruments related exclusively to the Business (other than contracts, agreements and instruments included in the definition of Real Estate or Permits); and (v) any such contracts, agreements and other instruments referred to in clauses (i) - (iv) inclusive, entered into between the date hereof and the Closing Date which are consistent with the terms of this Agreement and are entered into in the ordinary course of business consistent with past practice, and including in the case of clauses (i) - (iv) all such contracts, agreements and instruments more specifically listed or described in Schedule 3.6 (but specifically excluding any contract, agreement and instrument listed or described on Schedule 2.2.12) (the "Contracts"); (h) subject to Section 2.4 hereof, franchises, approvals, permits, authorizations, licenses, orders, registrations, certificates, variances, and other similar permits or rights obtained from any Authority relating exclusively to the conduct of the Business and all pending applications therefor (the "Permits"); 3 Pennsylvania (i) books, records, ledgers, files, documents (including originally executed copies of written Contracts, to the extent available, and copies to the extent not available), correspondence, Tax returns relating exclusively to the Business, memoranda, forms, lists, plats, architectural plans, drawings, and specifications, new product development materials, creative materials, advertising and promotional materials, studies, reports, sales and purchase correspondence, books of account and records relating to the Transferred Employees (to the extent such transfer is not prohibited by law), photographs, records of plant operations and materials used, quality control records and procedures, equipment maintenance records, manuals and warranty information, research and development files, data and laboratory books, inspection processes, in each case, whether in hard copy or magnetic format, in each instance, to the extent exclusively relating to the Business, the Acquired Assets or the Transferred Employees; (j) all rights or choses in action arising out of occurrences before or after the Closing Date and exclusively related to any of the Acquired Assets, including third party warranties and guarantees and all related claims, credits, rights of recovery and set-off and other similar contractual rights, as to third parties held by or in favor of Seller; provided, however, that (notwithstanding the foregoing provisions of this Section 1.1.1(j)), to the extent that Seller pays or discharges a liability related to the Business or any of the Acquired Assets and related to such right or chose in action (whether by reason of indemnification under this Agreement or otherwise), Buyer will reassign or reconvey to Seller such right or chose in action to the extent that such right or chose in action relates to a recovery of amounts paid to Buyer; and (k) all rights to insurance and condemnation proceeds (i) to the extent relating to the damage, destruction, taking or other impairment of the Acquired Assets which damage, destruction, taking or other impairment occurs on or prior to the Closing but only to the extent that the proceeds exceed the amount of the write-down of the net book value of such Acquired Assets on the books and records of Seller as a result of such damage, destruction, taking or other impairment, (ii) to the extent they relate to amounts paid by Buyer for Damages to the extent Buyer does not receive payment pursuant to Section 7.4.1(a), but only to the extent Buyer is entitled to indemnification by Seller pursuant to Sections 7.3 and 7.4, and (iii) as provided in Section 4 of the agreement attached as Exhibit D hereto. 1.1.2 "Adjusted Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.3 "Affected Participant" has the meaning set forth as Section 5.11.1 hereof. 1.1.4 "Affiliate" of any Person means any Person, directly or indirectly controlling, controlled by or under common control with such Person. 1.1.5 "Agreement" has the meaning set forth in the introduction hereof. 4 Pennsylvania 1.1.6 "American Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.7 "American Savings Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.8 "Antitrust Division" has the meaning set forth in Section 5.5 hereof 1.1.9 "Assumed Benefit Liabilities" has the meaning set forth in Section 3.16.6 hereof. 1.1.10 "Assumed Indebtedness" means the liabilities and obligations from and after the Closing Date (except as set forth below) with respect to the IDRB Financings and IDRB Documents set forth on Schedule 1.1.10. For purposes of clarity, except as set forth in the next sentence below, "Assumed Indebtedness" shall not include any liability or obligation to the extent accrued prior to the Closing Date or to the extent arising out of or relating to an event, circumstance or occurrence prior to the Closing Date. "Assumed Indebtedness" shall include the outstanding principal amount and the accrued but unpaid interest owed by Seller on the debt obligations set forth in the first sentence of this definition. 1.1.11 "Assumed Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.12 "Assumption Agreement" has the meaning set forth in Section 2.3.2 hereof. 1.1.13 "Authority" means any federal, state, local or foreign governmental or regulatory entity (or any department, agency, authority or political subdivision thereof). 1.1.14 "Base Cash Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.15 "Beneficiary" means the Person(s) designated by an Employee, by operation of law or otherwise, as entitled to compensation, benefits, insurance coverage, payments or any other goods or services under a Benefit Plan. 1.1.16 "Benefit Plans" has the meaning set forth in Section 3.16.1 hereof. 1.1.17 "Bonds" means any of the bonds issued pursuant to the Indentures of Trust, the proceeds from the issuance of which were advanced to Seller pursuant to any of the IDRB Documents. 1.1.18 "Business" has the meaning set forth in the Background section hereof. 5 Pennsylvania 1.1.19 "Business Day" means any day other than a Saturday, Sunday, or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or obligated by law or executive order to close. 1.1.20 "Buyer" shall have the meaning set forth in the introduction hereof. 1.1.21 "Buyer's IDRB Obligations" means the obligations of Parent and Buyer set forth in Section 5.24 (a) and in the instruments to be executed and delivered by Parent and Buyer on or prior to the Closing Date in accordance with Section 5.24 (a). 1.1.22 "Buyer's Accountants" means PricewaterhouseCoopers LLP or any firm of independent public accountants hereafter designated by Buyer for purposes of this Agreement. 1.1.23 Intentionally Omitted. 1.1.24 "Ceiling" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.25 "CERCLA" has the meaning set forth in Section 3.8.2 hereof. 1.1.26 "CERCLIS" has the meaning set forth in Section 3.8.7 hereof. 1.1.27 "Citizens" has the meaning set forth in the introduction hereof. 1.1.28 "Closing" has the meaning set forth in Section 2.5 hereof. 1.1.29 "Closing Date" has the meaning set forth in Section 2.5 hereof. 1.1.30 "Closing Statement of Net Assets" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.31 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.32 Intentionally Omitted. 1.1.33 "Competing Transaction" has the meaning set forth in Section 5.2. 1.1.34 "Contracts" has the meaning set forth in Section 1.1.1(g) hereof. 1.1.35 "Control" with respect to any Person means the ownership, directly or indirectly, of at least a majority of the voting power of each class of capital stock of such Person entitled to vote in the election of directors of such Person generally. 1.1.36 "Damages" has the meaning set forth in Section 7.4.1 hereof. 6 Pennsylvania 1.1.37 "Disclosure Schedules" means the Schedules referenced in Articles 3, 4 and 5 of this Agreement, as amended or supplemented pursuant to Section 5.3. 1.1.38 "Dispute" has the meaning set forth in Section 8.6. 1.1.39 "Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.40 "Environmental Laws" has the meaning set forth in Section 3.8 hereof. 1.1.41 "Equipment and Other Tangible Personal Property" has the meaning set forth in Section 1.1.1(b) hereof. 1.1.42 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.43 "ERISA Affiliate" means (a) any corporation included with any of the Seller Parties in a controlled group of corporations within the meaning of Section 414(b) of the Code; (b) any trade or business (whether or not incorporated) which is under common control with any of the Seller Parties within the meaning of Section 414 of the Code; any member of an affiliated service group of which any of the Seller Parties is a member within the meaning of Section 414(m) of the Code; or (d) any other person or entity treated as an affiliate of any of the Seller Parties under Section 414(o) of the Code. 1.1.44 "Excluded Assets" has the meaning set forth in Section 2.2 hereof. 1.1.45 "Financial Statements" has the meaning set forth in Section 3.4 hereof. 1.1.46 "FIRPTA Affidavit" has the meaning set forth in Section 2.7.1 hereof. 1.1.47 "Former Employees" means all salaried and hourly employees once employed by Seller or any of its Affiliates, but who are no longer so employed on the Closing Date. 1.1.48 "FTC" has the meaning set forth in Section 5.5 hereof. 1.1.49 "GAAP" has the meaning set forth in Section 3.4 hereof. 1.1.50 "Hazardous Substance" has the meaning set forth in Section 3.8 hereof. 1.1.51 "HSR Act" has the meaning set forth in Section 3.9 hereof. 7 Pennsylvania 1.1.52 "IDRB Documents" shall mean the Loan Agreements, the Tax Regulatory Agreements, the Project Tax Certificates, and the other Contracts related thereto to which Citizens is a party and which are listed on Schedule 1.1.52. 1.1.53 "IDRB Financings" shall mean the indebtedness arising under the Loan Agreements included among the IDRB Documents. 1.1.54 "Indemnified Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.55 "Indemnifying Party" has the meaning set forth in Section 7.4.2(a) hereof. 1.1.56 "Intellectual Property" means the trademarks, patents, trade names and copyrights and applications therefor, inventions, trade secrets, and confidential business information (including know-how, formulas, water filtration, purification and pumping processes and techniques, technical data, designs, drawings, customer and supplier lists, and business and marketing plans and proposals), all computer software (including data and related documentation and object and source codes), whether in magnetic format or hard copy, and tangible embodiments thereof (in whatever form or medium) of Seller, in each case, utilized exclusively in the Business. 1.1.57 "Interim Statement of Net Assets" means the Citizens Water Resources Statement of Net Assets - Pennsylvania, June 30, 1999, which is attached hereto as Schedule 3.4. 1.1.58 "Interim Statement of Net Assets Date" means June 30, 1999. 1.1.59 "IRS" has the meaning set forth in Section 3.16.2 hereof. 1.1.60 "Lien" means any lien, charge, claim, pledge, security interest, conditional sale agreement or other title retention agreement, lease, mortgage, security agreement, right of first refusal, option, restriction, tenancy, license, right of way, easement or other encumbrance (including the filing of, or agreement to give, any financing statement under the Uniform Commercial Code or statute or law of any jurisdiction). 1.1.61 "Material Adverse Effect" means a change or effect (or series of related changes or effects) which has or is reasonably likely to have a material adverse change in or effect upon the business, assets, condition (financial or otherwise), or results of operations of the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. For purpose of this Agreement, an occurrence or condition shall not constitute a Material Adverse Effect (a) if it arises from general business, economic or financial market conditions, from conditions generally effecting the industries in which Seller competes, or from the transactions contemplated by this Agreement, or (b) solely with respect to matters arising prior to Closing, to the extent that 8 Pennsylvania either (i) Seller realizes the benefit of insurance maintained by Citizens on or prior to the Closing Date and Buyer receives the cash proceeds of such insurance to the extent required by Section 1.1.1(k), or (ii) Seller arranges for Buyer to recover payments in respect of such occurrence or condition from any other source (whether in a lump sum or stream of payments), it being understood and agreed that a Material Adverse Effect may have occurred irrespective of such insurance recovery if the occurrence or condition giving rise to such recovery also causes a non-monetary material adverse change in or effect upon the Business or the Acquired Assets, taken as a whole and taken together with the businesses and assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements. 1.1.62 "Mortgage Indenture" means Indenture of Mortgage and Deed of Trust between BNY Western Trust Company (successor in interest to Wells Fargo Bank, N.A.) and First Interstate Bank of California (as successor trustee to Marine Midland, N.A., formerly the Marine Midland Trust Company of New York). 1.1.63 "OSHA" has the meaning set forth in Section 3.7.1 hereof. 1.1.64 "PCBs" has the meaning set forth in Section 3.8.6 hereof. 1.1.65 "Permits" has the meaning set forth in Section 1.1.1(h) hereof. 1.1.66 "Permitted Exceptions" has the meaning set forth in Section 3.10 hereof; provided, however, that from and after the Closing, Permitted Exceptions shall not include any Lien arising under or resulting from the Mortgage Indenture. 1.1.67 "Person" means an individual, a corporation, a partnership, an association, an Authority, a trustor other entity or organization. 1.1.68 "Pre-Existing Conditions" has the meaning set forth in Section 2.3.1(d). 1.1.69 "Prime Rate" means the rate per annum announced from time to time during the reference period by Citibank N.A. as its United States prime, reference or base rate for commercial loans. 1.1.70 "PUC" has the meaning set forth in Section 5.5 hereof. 1.1.71 "Purchase Price" has the meaning set forth in Section 2.6.1 hereof. 1.1.72 "Real Estate" has the meaning set forth in Section 1.1.1(a) hereof. 1.1.73 "Recovery" has the meaning set forth in Section 7.4.2(l) hereof. 9 Pennsylvania 1.1.74 "Related Purchase Agreements" as the meaning set forth in Section 6.1.7 hereof. 1.1.75 "Release" or "Released" has the meaning set forth in Section 3.8 hereof. 1.1.76 "Remedial Action" has the meaning set forth in Section 3.8 hereof. 1.1.77 "Retained IDRB Indebtedness" means the indebtedness of the Seller owing to the issuers of the Bonds and arising under the Loan Agreements included among the IDRB Documents but only to the extent not included in the Assumed Indebtedness. 1.1.78 "Retained Liabilities" has the meaning set forth in Section 2.3 hereof. 1.1.79 "Review Period" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.80 "SEC" means the U.S. Securities and Exchange Commission. 1.1.81 "Securities Filings" has the meaning set forth in Section 5.8.2 hereof. 1.1.82 "Seller" and "Seller Parties" have the respective meaning set forth in the introduction hereof. 1.1.83 "Seller's Accountants" means KPMG LLP or any other firm of independent public accountants hereafter designated by Seller for purposes of this Agreement. 1.1.84 "Seller's Adjusted Amount" has the meaning set forth in Section 2.6.4(a) hereof. 1.1.85 "Seller's Pension Plan" has the meaning set forth in Section 5.10.1 hereof. 1.1.86 "Seller's 401(k) Plan" has the meaning set forth in Section 5.11.1 hereof. 1.1.87 "Specified Liabilities" has the meaning set forth in Section 7.4.2(f) hereof. 1.1.88 "Taxes" means any federal, state, local and foreign income, payroll, withholding, excise, sales, use, personal property, use and occupancy, business and occupation, mercantile, real estate, gross receipts, license, employment, severance, stamp, premium, windfall profits, social security (or similar unemployment), disability, transfer, registration, value added, alternative, or add-on minimum, estimated, or capital stock and franchise and other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not. 10 Pennsylvania 1.1.89 "Third Accounting Firm" has the meaning set forth in Section 2.6.4(b) hereof. 1.1.90 "Threshold Amount" has the meaning set forth in Section 7.4.2(e) hereof. 1.1.91 "Third Party Claim" has the meaning set forth in Section 7.4(b)(i) hereof. 1.1.92 "Transferred Accounts" has the meaning set forth in Section 5.11.2 hereof. 1.1.93 "Transaction Documents" has the meaning set forth in Section 3.2 hereof. 1.1.94 "Transferred Employees" has the meaning set forth in Section 5.9.2 hereof. 1.1.95 "Union Employees" has the meaning set forth in Section 5.9.1 hereof. 1.1.96 "VEBAs" has the meaning set forth in Section 5.12 hereof. 1.1.97 "WARN Act" means the Worker Adjustment and Retraining Notification Act, as codified at 29 U.S.C. section 2102- 2109, as amended. ARTICLE 2 THE TRANSACTION 2.1 Sale and Purchase of Assets. Subject to the terms and conditions of this Agreement, at the Closing referred to in Section 2.5 below, Citizens shall, and shall cause the other Seller Parties to, sell, assign, transfer, deliver and convey to Buyer, and Parent shall cause Buyer to purchase, the Acquired Assets for the Purchase Price specified in Section 2.6. 2.2 Excluded Assets. The following assets of Seller shall be excluded from the Acquired Assets (the "Excluded Assets"): 2.2.1 assets of the Seller used in both the Business and in Citizens' gas, electric or communications businesses, the material items of which are described on Schedule 2.2.12; 2.2.2 cash and cash equivalents in transit, in hand or in bank accounts. 2.2.3 except as otherwise set forth herein, assets attributable or related to any Benefit Plan; 11 Pennsylvania 2.2.4 the stock record and minute books of Seller; 2.2.5 Acquired Assets disposed of by Seller after the date of this Agreement to the extent such dispositions are not prohibited by this Agreement; 2.2.6 except to the extent set forth in Sections 2.9, rights to refunds of Taxes payable with respect to the Business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member, and which are treated as Retained Liabilities under Section 2.3.3(b) below. 2.2.7 customer and other deposits held in Seller's accounts; 2.2.8 accounts owing by and among Seller and its Affiliates; 2.2.9 notes receivable and other receivables (other than note and accounts receivable attributable exclusively to the Business); 2.2.10 all deferred tax assets or collectibles; 2.2.11 duplicate copies of all books and records transferred to Buyer; and 2.2.12 those certain items listed on Schedule 2.2.12. 2.3 Assumption of Certain Liabilities. 2.3.1 Buyer shall not assume any liabilities of Citizens or Seller or any of their Affiliates, except that Buyer shall assume the following specific liabilities and obligations: (a) the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; (b) except as set forth in Section 2.3.3(b), all liabilities and obligations of Seller in respect of the Contracts and Permits assigned or transferred to Buyer pursuant to this Agreement in accordance with the respective terms thereof, except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (c) the Assumed Indebtedness and the Buyer's IDRB Obligations; (d) any liability, obligation or responsibility of Seller for conditions at the Real Estate, whether based on statutory or common law, now or hereafter in effect, 12 Pennsylvania known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment at the Real Estate or into or from any building, structure, pipeline or other facility at the Real Estate, or from violation of any law relating to the foregoing, including without limitation, any CERCLA or similar liability under any federal or state law or regulation, except to the extent Buyer has given written notice of a claim for indemnification pursuant to Sections 7.3 and 7.4 hereof prior to the expiration of the claims period set forth in Section 7.3.2(a) or (b) (and if Buyer has given written notice prior to the expiration of such claims period, to the extent that such claim is not entitled to indemnification under Sections 7.3 and 7.4) (the foregoing, the "Pre-Existing Conditions"); (e) all liabilities and obligations of Seller related to unperformed service obligations, easement and right-of-way relocation obligations, and construction work in progress, and all engineering and construction required to complete scheduled construction and other capital projects for the Business, in each case relating to the Business and outstanding on or arising after the Closing Date except that Buyer shall not assume any liabilities or obligations for any breach or default by, or payment obligations of, Seller under such Contracts and Permits occurring or arising or accruing on or prior to the Closing Date; (f) liability for accrued but unused vacation pay for the Transferred Employees to the extent provided in Section 5.9.2; (g) any liability, obligation or responsibility relating to customer deposits held by Seller on the Closing Date and relating to the Business; and (h) all liabilities and obligations imposed on Buyer by any PUC in connection with the operation of the Business or the ownership of the Acquired Assets, including with respect to any liability of the types that appear as "Accrued Liabilities" and "Non-Current Liabilities" on the financial statements of Seller. 2.3.2 Any liabilities or obligations which are assumed by Buyer pursuant to Section 2.3.1 above are hereinafter referred to as the "Assumed Liabilities." At the Closing, Parent shall cause Buyer to execute and deliver to Seller an assumption agreement, in substantially the form of the Assumption Agreement attached hereto as Exhibit A (the "Assumption Agreement"), pursuant to which Buyer shall assume the Assumed Liabilities. Each of Parent and Buyer hereby irrevocably and unconditionally waives and releases the Seller Parties from all Assumed Liabilities and all liabilities or obligations exclusively relating to the Business or the Acquired Assets to the extent arising from events or occurrences after the Closing or to the extent otherwise relating to the period after the Closing, including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). 13 Pennsylvania 2.3.3 Buyer shall not assume any liabilities, commitments or obligations (contingent or absolute and whether or not determinable as of the Closing) of any of the Seller Parties or any of their Affiliates except for the Assumed Liabilities as specifically and expressly provided for above, whether such liabilities or obligations relate to payment, performance or otherwise, and all liabilities, commitments or obligations not expressly transferred to Buyer hereunder as Assumed Liabilities are being retained by the Seller Parties, (the "Retained Liabilities"). Each of the Seller Parties hereby irrevocably and unconditionally waives and releases Buyer from all Retained Liabilities including any liabilities created or which arise by statute or common law, including CERCLA (it being understood that this shall not constitute a waiver and release of any claims arising out of the contractual relationships and indemnification arrangements between Buyer and Seller). Without limitation to the foregoing, all of the following shall be considered Retained Liabilities and not Assumed Liabilities (except as specified below) for the purposes of this Agreement: (a) any product liability, toxic tort or similar claim for injury to person or property, regardless of when made or asserted, to the extent that it arises out of or is based upon any express or implied representation, warranty, agreement or guarantee made by any of the Seller Parties or any of their Affiliates prior to Closing, or alleged to have been made by any of such Persons, or to the extent that it is imposed or asserted to be imposed by operation of law, in connection with any service performed or product distributed or sold by or on behalf of any of the Seller Parties or any of their Affiliates prior to Closing, including any claim referred to above in this Section 2.3.3(a) relating to water quality standards, any claim relating to any product delivered in connection with the performance of services provided by Seller and any claim seeking recovery for consequential damages, lost revenue or income; (b) all refund obligations relating to the advances existing on the Closing Date for construction of facilities relating to the Business; (c) except to the extent set forth in Section 2.9, any federal, state, foreign or local income or other Tax payable with respect to the business, assets, properties or operations of any of the Seller Parties or any member of any affiliated group of which any of them is a member. (d) any liability or obligation associated with or in connection with any common plant assets of Seller (other than the liabilities and obligations exclusively related to any common plant assets included among the Acquired Assets); (e) except as provided in Section 2.3.1 above, any liability or obligation with respect to compensation or employee benefits of any nature owed to any employees, agents or independent contractors of any of the Seller Parties or any of their Affiliates, whether or not employed by Buyer after the Closing, that arises out of or relates to events or conditions to the extent occurring before the Closing Date; 14 Pennsylvania (f) except to the extent set forth in Section 2.3.1(d), any liability, obligation or responsibility of any of the Seller Parties, or any of their Affiliates or predecessors, whether based on statutory or common law, but only as any such law is interpreted, amended and in effect on the Closing Date, known or unknown, contingent or actual, relating to or arising from pollution, contamination or protection of the environment, human health or safety or natural resources or relating to or arising from the presence or Release or threat of Release of Hazardous Substances into the environment or into or from any building, structure, pipeline or other facility or relating to or arising from the generation, use, storage, treatment, disposal, transport or other handling of Hazardous Substances or sale or product containing Hazardous Substances from violation of any law relating to the foregoing (but only as such law is interpreted, amended and in effect on the Closing Date) including without limitation, any (A) CERCLA or similar liability under any federal or state law or regulation as interpreted, amended and in effect on the Closing Date or (B) any such liability associated with businesses or assets of the Seller Parties other than the Business or the Acquired Assets; (g) liabilities and obligations relating to the Business to the extent arising prior to Closing (unless otherwise constituting Assumed Liabilities) arising by operation of law under any common law or statutory doctrine (including successor liability or de facto merger); (h) any obligation or liability arising under any contract, commitment, instrument or agreement (1) except for Buyer's IDRB Obligations and subject to the penultimate sentence of Section 2.4, that is not transferred to Buyer as part of the Acquired Assets, or (2) that relates to any breach or default (or to the extent that it relates to an event which would, with the passing of time or the giving of notice, or both, constitute a default) under any Contract, instrument or agreement or to any services to be provided by Seller under any such Contract, instrument or agreement to the extent that such services were performed or were required to have been performed on or prior to the Closing Date; (i) any liability or obligation in respect of the Excluded Assets; (j) any liability or obligation of any of the Seller Parties or any of their Affiliates existing as a result of any act, failure to act or other state of facts or occurrence which constitutes a breach or violation of any of Seller's representations, warranties, covenants or agreements contained in this Agreement, except to the extent set forth in Section 7.4; or (k) except for the Assumed Liabilities as specifically and expressly set forth herein, any liability to the extent arising out of or relating to the ownership or operation of the Acquired Assets or the Business prior to the Closing Date (including any predecessor operations), any claims, obligations or litigation to the extent arising out of or relating to events or conditions occurring before the Closing Date, and any liability associated with any business other than the Business. 2.4 Consent of Third Parties. On the Closing Date, Citizens shall cause Seller to assign to Buyer, and Parent shall cause Buyer to assume, the Contracts and the Permits which are 15 Pennsylvania to be transferred to Buyer as provided in this Agreement by means of the Assumption Agreement. To the extent that the assignment of all or any portion of any Contract or Permit shall require the consent (or result in a breach or violation thereof) of the other party thereto or any other third party, and such consent shall not be obtained prior to Closing, this Agreement shall not constitute an agreement to assign any such Contract or Permit included in the Acquired Assets. In order, however, to provide Buyer the full realization and value of every Contract of the character described in the immediately preceding sentence, Seller agrees that on and after the Closing, it will, at the request and under the direction of Buyer, in the name of Seller or otherwise as Buyer shall specify, take all reasonable actions (including without limitation the appointment of Buyer as attorney-in-fact for Seller to proceed at Buyer's sole cost and expense) and do or cause to be done all such things as shall in the reasonable opinion of Buyer be necessary (a) to assure that the rights of Seller or its Affiliates under such Contracts shall be preserved for the benefit of Buyer and (b) to facilitate receipt of the consideration to be received by Seller or its Affiliates in and under every such Contract. To the extent that Buyer does receive the benefits of any such Contract pursuant to the preceding sentence, such Contract shall be a Contract "assigned or transferred to Buyer pursuant to this Agreement" within the meaning of Section 2.3.1(b) hereof. Nothing in this Section 2.4 shall in any way diminish the obligations of Seller to obtain consents and approvals under this Agreement. 2.5 Closing. Subject to the terms and conditions of this Agreement, the closing of the sale and purchase of the Acquired Assets (the "Closing") shall take place at 10 a.m., East Coast time, on a date mutually satisfactory to Buyer and Seller which is no later than the fifth Business Day after satisfaction (or waiver) of the conditions to Closing set forth in Sections 6.1 and 6.2 hereof (other than those conditions which require the delivery of any documents or the taking of other action, at the Closing) at the offices of Fleischman and Walsh, LLP, 1400 Sixteenth Street, N.W., Washington, D.C. 20036, or on such other date and at such other time or place as may be mutually agreed upon by the parties hereto (the "Closing Date"). Upon payment of the Initial Cash Payment by Buyer and confirmed receipt thereof by Seller or the Escrow Agent pursuant to Section 2.6.2 below, Seller shall operate the Business at the direction of and under the control of Buyer. Notwithstanding the foregoing, the Closing shall be deemed to be effective as of 11:59 p.m. on the Closing Date for all purposes. 2.6 Purchase Price. 2.6.1 Purchase Price. Subject to the terms and conditions of this Agreement, the aggregate purchase price be paid by Buyer for the purchase of the Acquired Assets (the "Purchase Price") shall be: (i) $152,280,000 in cash (the "Base Cash Purchase Price," the Base Cash Purchase Price as adjusted in accordance with Section 2.6.3, Section 2.6.5 and Section 2.6.6 is referred to as the "Initial Cash Payment"), subject to adjustment pursuant to the provisions of this Agreement (including Section 2.6.3, Section 2.6.4, Section 2.6.5, Section 2.6.6 and Section 2.9 of this Agreement) and (ii) the assumption by Buyer of the Assumed Liabilities. 2.6.2 Payment of Initial Cash Payment. Subject to the terms and conditions of this Agreement, the Initial Cash Payment shall be paid by Buyer on the Closing Date by federal other wire transfer of immediately available funds to the account designated by Seller in writing at 16 Pennsylvania least two (2) Business Days prior to the Closing Date. If the Closing Date is not a business day on which financial institutions are open and operating, then on or before the last business day on which financial institutions are open and operating before the Closing Date, Buyer shall deliver the Initial Cash Payment to Buyer's lead bank (the "Escrow Agent") in immediately available funds in U.S. dollars. Upon receipt, the Escrow Agent shall invest the Initial Cash Payment in an interest-bearing account mutually agreed upon by Seller and Buyer. At Closing, Parent shall sign and deliver to Citizens a statement which confirms that the Closing has occurred and which instructs the Escrow Agent to transfer to Citizens the funds representing the Initial Cash Payment, plus an amount representing the interest earned after the Closing Date until the date the funds are transferred, to an account that Citizens shall designate at least two (2) business days prior to the date the funds are required to be transferred hereunder. The Escrow Agent shall refund the balance to Buyer. The fees and expenses of Escrow Agent shall be paid by Buyer. 2.6.3 Estimated Closing Statement. At least five (5) business days prior to the Closing Date, Citizens shall deliver to Parent and Buyer a statement of net assets (the "Estimated Statement of Net Assets") reflecting its good faith calculation of the Acquired Assets of the Business as of the last day of the latest calendar month for which financial statements of Seller are available (the "Estimated Adjusted Net Assets"). The Estimated Statement of Net Assets shall be prepared in the same manner and utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999). The Base Cash Purchase Price shall be increased or decreased on a dollar for dollar basis by the amount, if any, by which the Estimated Adjusted Net Assets is greater than or less than $106,248,178 (such increase or decrease, as the case may be, is referred to herein as the "Estimated Net Asset Adjustment"). 2.6.4 Post-Closing Adjustment to Purchase Price. (a) Within 90 days after the Closing, Citizens shall prepare and deliver to Parent and Buyer a Statement of Net Assets (the "Closing Statement of Net Assets") which reflects the Acquired Assets, as of 11:59 p.m. on the Closing Date, based on actual financial performance and calculated in the same manner, utilizing the same accounting principles, policies and methods utilized in preparing the Interim Statement of Net Assets (excluding for this purpose any change required by GAAP or any Authority since June 30, 1999), together with (A) an audit report of Seller's Accountants stating that the Closing Statement of Net Assets has been prepared utilizing the same accounting principles, policies and methods used in the preparation of the Interim Statement of Net Assets and (B) a calculation of Citizens' determination of the amount of increase or decrease in the amount of the Acquired Assets of the Business from the Interim Statement of Net Assets Date to the Closing Date which is derived from the Closing Statement of Net Assets ("Seller's Adjustment Amount"). The Closing Statement of Net Assets shall not give effect to any purchase accounting treatment arising from Buyer's purchase of the Acquired Assets. Buyer shall pay the fees and expenses of Seller's Accountants incurred in connection with this Section 2.6.4. Buyer agrees to cooperate, and agrees to cause Buyer's Accountants to cooperate, with Citizens and Seller's Accountants in connection with the preparation of the Closing Statement of Net Assets, and related information, and shall provide to Citizens and Seller's Accountants such books, records and 17 Pennsylvania information as may be reasonably requested from time to time, including the work papers of Buyer's Accountants. Citizens will give Buyer and its representatives access during the normal business hours of Citizens to the personnel, books and records of Citizens and the work papers of Seller's Accountants to assist Buyer in the review of the Closing Statement of Net Assets and related matters. Buyer agrees that, following the Closing through the date on which the Closing Statement of Net Assets is delivered, it will not take any actions with respect to any accounting books, records, policies or procedures on which the Closing Statement of Net Assets is to be based that would make it impossible or impracticable to calculate the Acquired Assets in the manner and utilizing the methods required hereby. Without limiting the generality of the foregoing, no changes shall be made in any reserve or other account existing as of the date of the Interim Statement of Net Assets except in the ordinary course or as a result of events occurring after the date of the Interim Statement of Net Assets and, in such event, only in a manner consistent with past practices of Seller. (b) Parent or Buyer may dispute any amounts reflected on the Closing Statement of Net Assets, in the Seller's Adjustment Amount or in the Statement of Certain Assumed Liabilities, provided, however, that Buyer shall notify Citizens in writing of each disputed amount, and specify the amount thereof in dispute and the basis of such dispute, within 30 days of the Buyer's receipt of the Closing Statement of Net Assets and the Seller's Adjustment Amount (such 30 day period hereinafter referred to as the "Review Period"). In the event of a dispute with respect to the Closing Statement of Net Assets, the Seller's Adjustment Amount or the Statement of Certain Assumed Liabilities, Buyer and Seller shall attempt to reconcile their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive on the parties. If Buyer and Seller are unable to reach a resolution of such differences within 30 days of receipt of Buyer's written notice of dispute to Seller, Buyer and Seller shall submit the amounts remaining in dispute (together with any amounts remaining in dispute pursuant to Section 2.6.4(b) of each of the Related Purchase Agreements) for resolution to an independent accountant firm of national reputation mutually appointed by Seller and Buyer (such independent accounting firm being herein referred to as the "Third Accounting Firm"), which shall be requested to determine and report to the parties, within 30 days after such submission, upon such remaining disputed amounts, and such report shall be final, binding and conclusive on the parties hereto with respect to the amounts disputed. The fees and disbursements of the Third Accounting Firm shall be allocated between Buyer and the Seller Parties so that the Seller Parties' share of such fees and disbursements shall be in the same proportion that the aggregate amount of such remaining disputed amounts so submitted by Buyer to the Third Accounting Firm that is unsuccessfully disputed by the Buyer (as finally determined by the Third Accounting Firm) bears to the total amount of such remaining disputed amounts so submitted by the Buyer to the Third Accounting Firm. Buyer shall pay the fees and expenses of Buyer's Accountants incurred in connection with this Section 2.6.4(b). Seller's Adjustment Amount, if there are no disputes with respect thereto, or Seller's Adjustment Amount as adjusted after the resolution of all disputes with respect thereto in accordance herewith, shall be referred to as the "Final Net Asset Adjustment." (c) If the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment exceeds the Initial Cash Payment, then within five (5) business days after final determination thereof Buyer shall pay Seller the amount of such excess together with 18 Pennsylvania interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. If the Initial Cash Payment exceeds the sum of the Base Cash Purchase Price plus (or minus, if negative) the Final Net Asset Adjustment, then within five (5) business days after final determination thereof Seller shall pay Buyer the amount of such excess together with interest thereon for the period commencing on the Closing Date through the date of payment calculated at the Prime Rate in cash by federal or other wire transfer of immediately available funds, or certified or bank cashier's check. 2.6.5 Adjustment for Certain Liabilities. Concurrent with the delivery of the Estimated Statement of Net Assets, Citizens also shall deliver to Parent and Buyer a statement reflecting (i) the customer and other deposits held by Seller on the Closing Date and relating to the Business, (ii) the total amount of the Assumed Indebtedness that will be outstanding immediately after the Closing Date, (iii) the items specified in Section 2.9 to the extent set forth therein, and (iv) without duplications of any amount included in clause (i) above any payments received by Seller under the Contracts and Permits for obligations not performed as of the Closing Date (the "Statement of Certain Assumed Liabilities"). The Statement of Certain Assumed Liabilities shall reflect Citizens' good faith calculation of such liabilities as of the Closing Date. The Base Cash Purchase Price shall be decreased by the net amount set forth in the Statement of Certain Assumed Liabilities. Concurrent with the delivery of the Closing Statement of Net Assets, Citizens also shall deliver to Parent a statement showing any adjustments to the Statement of Certain Assumed Liabilities and the Base Cash Purchase Price shall be further adjusted to give effect to any such adjustments to the Statement of Certain Assumed Liabilities. 2.6.6 Additional Adjustment to the Purchase Price. The Base Cash Purchase Price shall be decreased by an amount equal to the proceeds of Seller's sale of the property described in Item 7 of Schedule 3.5 (net of expenses) less the sum of (i) the federal and state income taxes payable by Seller in respect of those proceeds and (ii) the book value of such property, as of June 30, 1999, on Seller's books. 2.7 Deliveries and Proceedings at Closing. Subject to the terms and conditions of this Agreement, at the Closing: 2.7.1 Deliveries to Buyer. Citizens shall, and shall cause Seller to deliver to Buyer: (a) bills of sale and instruments of assignment to the Acquired Assets, duly executed by Seller, substantially in the form of Exhibit B hereto and; (b) the consents to transfer, of all transferable or assignable Contracts, Intellectual Property, Permits (including Environmental Permits), to the extent specifically required hereunder; 19 Pennsylvania (c) title certificates to any motor vehicles included in the Acquired Assets, duly executed by Seller (together with any other transfer forms necessary to transfer title to such vehicles); (d) special warranty deeds of conveyance with respect to the parcels of Real Estate owned in fee simple by Seller (or, with respect to any such parcel which was acquired by Seller (or its predecessor in interest, in cases involving mergers) by deed without covenant or warranty of title, a quit claim deed without covenant or warranty of title) to Buyer, duly executed and acknowledged by Seller and in recordable form; (e) the Foreign Investment in Real Property Tax Act Certification and Affidavit for each parcel of Real Estate, duly executed by the Seller Parties (the "FIRPTA Affidavit"); (f) the certificates, opinions and other documents required to be delivered by the Seller Parties pursuant to Section 6.1 hereof and certified resolutions evidencing the authority of the Seller Parties as set forth in Section 3.2 hereof; (g) all agreements and other documents required by this Agreement; (h) a receipt for the payment of the Initial Cash Payment duly executed by Citizens; and (i) all such other instruments of conveyance as shall, in the reasonable opinion of Buyer and its counsel, be necessary to transfer to Buyer the Acquired Assets in accordance with this Agreement and where necessary or desirable, in recordable form. 2.7.2 Deliveries By Buyer to the Seller Parties. Parent shall, and shall cause Buyer to deliver to the Seller Parties: (a) wire transfer of immediately available funds in an amount equal to the Initial Cash Payment; (b) the Assumption Agreement, duly executed by Buyer; (c) the certificates, opinions and other documents required to be delivered by Buyer pursuant to Section 6.2 hereof; (d) all of the instruments contemplated by Section 5.24(a) to the extent not previously executed and delivered by Parent; and (e) all such other instruments of assumption as shall, in the reasonable opinion of Seller and its counsel, be necessary for Parent and Buyer to assume the Assumed Liabilities in accordance with this Agreement. 20 Pennsylvania 2.8 Allocation of Consideration. Buyer and Seller shall use their good faith efforts to agree upon the allocation (the "Allocation") of the Purchase Price, the Assumed Liabilities and other relevant items (including, for example, adjustments to the Purchase Price) to the individual assets or classes of assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree to such Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree that (i) the values assigned to the assets by the parties' mutual agreement shall be conclusive and final for all purposes, and (ii) neither Buyer nor Seller will take any position before any Authority or in any proceeding that is in any way inconsistent with such Allocation. Notwithstanding the foregoing, if Buyer and Seller cannot agree to an Allocation on or before ninety (90) days after the Closing Date, Buyer and Seller covenant and agree to file and to cause their respective Affiliates to file, all Tax returns and schedules thereto (including, for example, amended returns, claims for refund, and those returns and forms required under Section 1060 of the Code and any Treasury regulations promulgated thereunder) consistent with each of Buyer and Seller's good faith Allocations, unless otherwise required because of a change in any legal requirement. 2.9 Prorations. The parties hereto agree that the following expenses shall be calculated and pro rated as of the Closing Date, with Seller responsible for such expenses and to receive the benefit for the same for the period through and including the Closing Date, and Buyer to be responsible for and to receive the benefit of the same after the Closing Date: 2.9.1 personal and real property taxes (on the basis on which the same were assessed and paid) and sales, occupation and use taxes, in each case, to the extent relating to the Business and except as otherwise provided in Section 7.1; 2.9.2 electric, fuel, gas, telephone, sewer and utility charges, in each case, to the extent relating to the Business; 2.9.3 rentals and other charges under Contracts to be assumed by Buyer pursuant to Section 2.3 (except to the extent provided in Section 2.3.3(h)); and 2.9.4 charges under maintenance and service contracts and other Contracts (except to the extent provided in Section 2.3.3(h)), and fees under Permits to be transferred to Buyer as part of the Acquired Assets; 2.9.5 water, sewer and other similar types of taxes, and installments on special benefit assessments; and 2.9.6 payroll expenses, payroll taxes, reimbursable employee business expenses and the financial cost of the accrued vacation of each Transferred Employee. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER 21 Pennsylvania Each of the Seller Parties jointly and severally represent and warrant to Parent and Buyer as follows: 3.1 Qualification; No Interest in Other Entities. 3.1.1 Each of the Seller Parties is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business as presently being conducted. Each of the Seller Parties is qualified to do business and is in good standing as a foreign corporation in all jurisdictions wherein the nature of the business conducted by it or such Seller Party's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such other failures of the Seller Parties do not have a Material Adverse Effect. 3.1.2 No shares of any corporation or any ownership or other investment interest, either of record, beneficially or equitably, in any Person are included in the Acquired Assets. 3.2 Authorization and Enforceability. Each of the Seller Parties has full corporate power and authority to execute, deliver and perform this Agreement and all other agreements and instruments to be executed by them in connection herewith (such other agreements and instruments being hereinafter referred to collectively as the "Transaction Documents"). The execution, delivery and performance by each of the Seller Parties of this Agreement and the Transaction Documents to which such Seller Party is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by each of the Seller Parties, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by the Seller Parties. This Agreement is a legal, valid and binding obligation of each Seller Party, enforceable against them in accordance with its terms except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which each of the Seller Parties is a party will be duly executed and delivered by each of the Seller Parties and will constitute the legal, valid and binding obligations of each of the Seller Parties, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 3.3 No Violation of Laws or Agreements. The execution, delivery, and performance of this Agreement and the Transaction Documents by each of the Seller Parties do not, and the consummation of the transactions contemplated by this Agreement and the Transaction Documents by the Seller Parties, will not: (a) contravene any provision of the Restated Articles of Incorporation or Bylaws of Citizens or the Articles of Incorporation or Bylaws of the other Seller Parties; or (b) except as set forth on Schedule 3.3, violate, conflict with, result in a breach of, or 22 Pennsylvania constitute a default (or an event which would, with the passage of time or the giving of notice or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of, or result in the creation or imposition of any Lien of any nature whatsoever upon any of the Acquired Assets or give to others any interests or rights therein under (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit or other agreement or commitment, oral or written, to which any of the Seller Parties is a party, or by which the Business or any of the Acquired Assets may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, Liens, interests or rights which, individually and in the aggregate, do not have a Material Adverse Effect or will be cured, waived or terminated prior to the Closing Date, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation, to which any of the Seller Parties is subject, other than those violations or conflicts which individually and in the aggregate would not have a Material Adverse Effect. 3.4 Financial Statements. Citizens has previously delivered to Buyer the statement of income of the Business (the "Income Statement") and the Interim Statement of Net Assets contained in Schedule 3.4 (collectively, the "Financial Statements"). The Income Statement (a) fairly presents in all material respects the results of operations of the Business in accordance with generally accepted accounting principles ("GAAP") consistently applied except for the omission of full footnotes to the Income Statement and (b) has in all material respects been derived from the books and records of Seller and reflects the separation of the operation associated with the Business from other operations of Citizens. The Interim Statement of Net Assets (a) has in all material respects been derived from the books and records of Seller and reflects the separation of the operations associated with the Business from other operations of Citizens; (b) fairly presents in all material respects the Acquired Assets as of the Interim Statement of Net Assets Date; and (c) has in all material respects been prepared in accordance with GAAP consistently applied except for the omission of full footnotes to such Interim Statement of Net Assets. The financial statements included in the Annual Report to each PUC for the year ended December 31, 1998, were prepared in all material respects in accordance with the rules and regulations of such PUC. 3.5 No Changes. Since the Interim Statement of Net Assets Date to the date hereof, except as disclosed in Schedule 3.5, the Seller Parties have conducted the Business as presently operated only in the ordinary course of business consistent with past practice. Since the Interim Statement of Net Assets Date, except as disclosed in Schedule 3.5, there has not been: 3.5.1 any Material Adverse Effect; 3.5.2 prior to the date of this Agreement, any change in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any Transferred Employee, or material change or material addition to, or material modification of, other benefits (including any bonus, profit-sharing, pension or other plan in which any of the Transferred Employees participate) to which any of the Transferred Employees may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or 23 Pennsylvania similar plan other than in any such case (i) in the ordinary course consistent with past practice, (ii) as required by law, or (iii) as required by any collective bargaining agreement, if any; 3.5.3 any alteration in any material respect of the customary practices with respect to the collection of accounts receivable of the Business or the provision of discounts, rebates or allowances; 3.5.4 any disposition of or failure to keep in effect any rights in, to or for the use of any Permit of the Business which individually or in the aggregate would have a Material Adverse Effect; 3.5.5 any damage, destruction or loss affecting the Business which individually or in the aggregate would have a Material Adverse Effect whether or not covered by insurance; 3.5.6 prior to the date of this Agreement, any change by Seller in its method of accounting or keeping its books of account or accounting practices with respect to the Business except as required by GAAP and is set forth on Schedule 3.5; or 3.5.7 prior to the date of this Agreement, any sale, transfer or other disposition of any material assets, properties or rights of the Business, except in the ordinary course of business consistent with past practice. 3.6 Contracts. As of the date of this Agreement, Schedule 3.6 contains a list of all Contracts (other than (i) with respect to which the Business' total annual liability or expense is less than (a) $250,000 per such Contract and (b) $6,123,000 per all such Contracts (when taken together with similar contracts omitted from Schedule 3.6 of the Related Purchase Agreements), and (ii) Contracts that may be terminated by Seller, without penalty, on notice of 90 days or less) except line extension agreements and similar agreements and construction and design contracts. Seller has furnished to Buyer a correct and complete copy of each written agreement listed in Schedule 3.6. Except as disclosed on Schedule 3.6, with respect to each Contract, neither Seller nor, to the Seller Parties' knowledge, any other party thereto, is in breach or default, and to the Seller Parties' knowledge, no event has occurred which with notice or lapse of time would constitute a breach or default, or permit termination, modification, or acceleration, under the Contract, except in each case where such breaches, terminations, modifications, accelerations or defaults, individually or in the aggregate, do not have a Material Adverse Effect. Except as set forth in Schedule 3.6, there are no disputes pending or to the best of the Seller Parties' knowledge, threatened, under or in respect of any of the Contracts, other than those that individually and in the aggregate do not have a Material Adverse Effect. 3.7 Permits and Compliance With Laws Generally. 3.7.1 Except as disclosed on Schedule 3.7, Seller possesses and is in compliance with all Permits required to operate the Business as presently operated and to own, lease 24 Pennsylvania or otherwise hold the Acquired Assets under all applicable laws, rules, regulations, ordinances and codes, including Environmental Laws (as defined below), except to the extent that any failure to possess, or to comply with, any Permit, laws, rules, regulations or orders would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in Schedule 3.7, the Business is conducted by Seller in compliance with all applicable laws (including the Occupational Safety and Health Act and the rules and regulations thereunder ("OSHA"), zoning, building and similar laws and Environmental Laws), rules, regulations, ordinances, codes, judgments and orders, except for such failures to comply which do not individually or in the aggregate have a Material Adverse Effect. Except as disclosed on Schedule 3.7, all Permits of Seller relating to the operation of the Business are in full force and effect, other than those the failure of which to be in full force and effect would not individually or in the aggregate have a Material Adverse Effect. There are no proceedings pending or, to the Seller Parties' knowledge, threatened that seek the revocation, cancellation, suspension or any adverse modification of any such Permits presently possessed by Seller other than those revocations, cancellations, suspensions or modifications which do not individually or in the aggregate have a Material Adverse Effect. 3.7.2 Except as set forth on Schedule 3.7, no outstanding notice, citation, summons or order has been issued, no outstanding complaint has been filed, no outstanding penalty has been assessed and no investigation or review is pending or, to the knowledge of the Seller Parties, threatened, by any Authority or other Person with respect to any alleged (i) violation by Seller or any Affiliate of Seller relating to the Business of any law, ordinance, rule, regulation, code or order of any Authority; or (ii) failure by Seller or any Affiliate to have any Permit required in connection with the conduct of the Business or otherwise applicable to the Business (including the Acquired Assets), except, in each case, where such violations or failures, individually or in the aggregate, would not have a Material Adverse Effect. 3.8 Environmental Matters. Except as set forth on Schedule 3.8 hereto, and with such exceptions as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect: 3.8.1 Seller has not disposed of or arranged for the disposal of or Released any Hazardous Substances, other than in conformity with Environmental Laws, at any Real Estate, or, in connection with the Business or Acquired Assets, at any other facility, location, or other site. 3.8.2 Seller has not received any written notice or request for information with respect to, and to the best of the Seller Parties' knowledge, Seller has not been designated a potentially liable party for Remedial Action, in connection with any Real Estate, or, as of the date hereof, with respect to the Business or Acquired Assets, at any other facility, location, or other site under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or comparable state statutes. 3.8.3 To the best of the Seller Parties' knowledge, except for such use or storage of Hazardous Substances as is incidental to the conduct of the Business, which use and storage is or has been in compliance with Environmental Laws, and which use and storage has not 25 Pennsylvania caused any condition that requires Remedial Action, no Real Estate has been used for the storage, treatment, generation, processing, production or disposal of any Hazardous Substances or as a landfill or other waste disposal site in violation of any Environmental Law. 3.8.4 To the best of the Seller Parties' knowledge, underground storage tanks are not, and have not in the past been, located on or under any Real Estate. 3.8.5 There are no pending or unresolved claims against Seller or the Business for investigatory costs, cleanup, removal, remedial or response costs, or natural resource damages arising out of any Releases or threat of Release of any Hazardous Substances at any Real Estate or, as of the date hereof, with respect to the Business or the Acquired Assets or at any other facility, location, or other site. 3.8.6 To the best of the Seller Parties' knowledge, no polychlorinated biphenyls ("PCBs") or asbestos-containing materials are located at or in any Real Estate in violation of Environmental Laws or which require Remedial Action. 3.8.7 To the best of the Seller Parties' knowledge, no Hazardous Substance managed or generated by or on behalf of Seller at the Real Estate or in connection with the Business or Acquired Assets has come to be located at any site that is listed or formally proposed for listing under CERCLA, the Comprehensive Environmental Response, Compensation and Liability Information System ("CERCLIS"), or any similar state list or that is the subject of federal, state, or local enforcement actions or investigations. 3.8.8 The Seller Parties know of no facts or circumstances related to environmental matters (i) in connection with the operation of the Business or (ii) concerning the Real Estate, that are reasonably likely to result in any material reduction in the quality or quantity of water available for supply to the Seller Parties' customers. 3.8.9 The Seller Parties will within thirty (30) days of the date hereof provide Buyer with copies of all written environmental audits or investigations of which they are aware (after due inquiry) prepared for the Real Estate or operations of the Business. 3.8.10 Except as set forth in Schedule 3.8.10 or Citizens' Annual Report on Form 10-K for the year ended December 31, 1998: (a) The Seller Parties (including for purposes of Section 3.8.10(a) and (b), Affiliates and predecessors of the Seller Parties) are and have been for the past three years in full compliance with all federal and state primary drinking water standards; (b) The Seller Parties are and have been for the past three years in full compliance with all federal and state secondary drinking water standards; and 26 Pennsylvania (c) As to all outstanding violations of state or federal drinking water standards, as of the date hereof, the Seller Parties have completed or are in the process of completion in accordance with all applicable deadlines, all actions required by Environmental Law or Authorities to correct or otherwise respond to such violations. 3.8.11 Except as set forth in Schedule 3.8.11, none of the Seller Parties will be required to place any notice or restriction relating to the presence of Hazardous Substances in the deed to any Real Estate, or in any written instrument accompanying this Agreement, and no Real Estate has such a notice or restriction in its deed or any other written instrument relating to the purchase, lease or rental of such property. For the purposes of these Sections 3.7 and 3.8: (A) "Remedial Action" means all actions to (x) clean up, remove, treat or in any other way respond to any presence, Release or threat of Release of Hazardous Substances; (y) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Substances so it does not endanger or threaten to endanger public or employee health or welfare or the environment; or (z) perform studies, investigations or monitoring necessary or required to investigate the foregoing; (B) "Environmental Laws" means any common law or federal, state or local law, statutes, rule, regulation, ordinance, code, judgment or order relating to the protection of the environment or human health and safety and includes, but is not limited to, CERCLA (42 U.S.C. section 9601, et seq.), the Clean Water Act (33 U.S.C. section 1251 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. section 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. section 300f et seq.) and the Oil Pollution Act of 1990 (33 U.S.C. section 2701 et seq.), each as has been or may be interpreted or amended as of the Closing Date and the regulations promulgated pursuant thereto and in effect as of the Closing Date; (C) "Released" means released, spilled, leaked, discharged, disposed of, pumped, poured, emitted, emptied, injected, leached, dumped or allowed to escape; and (D) "Hazardous Substances" means hazardous or toxic or polluting substance or waste or contaminant under or pursuant to any Environmental Law, including petroleum products, PCBs and radioactive materials. 3.9 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by the Selling Parties of this Agreement, the Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by the Seller Parties, including without limitation in connection with the assignment of the Contracts and Permits contemplated hereby, except (i) as required by the Hart-Scott Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), (ii) as specified on Schedule 3.9, (iii) as required by the IDRB Documents, and (iv) for such other consents, approvals, authorizations, registrations or filings the failure of which to obtain or make would not individually or in the aggregate have a Material Adverse Effect or which are obtained by the Closing Date. 3.10 Title. Seller has good and valid title to all of the Acquired Assets constituting personal property, good and marketable title in fee simple to all of the owned Acquired Assets constituting Real Estate and good and valid leasehold title to all of the leased Acquired Assets 27 Pennsylvania constituting Real Estate, in each case, free and clear of Liens subject only to the Permitted Exceptions. "Permitted Exceptions" as used herein shall mean (a) the Liens set forth in Schedule 3.10 hereto, (b) Liens securing Taxes, assessments, governmental charges or levies, or the claims of materialmen, mechanics, carriers and like persons, all of which are not yet due and payable or which are being contested in good faith or (c) such other Liens which, individually or in the aggregate, do not have a Material Adverse Effect (it being understood that to the extent a Permitted Exception relates to or arises from a Retained Liability, Seller shall still be liable for such Retained Liability to the extent set forth herein). 3.11 Real Estate. 3.11.1 As of the date hereof, Seller has not received any written or oral notice for assessments for public improvements against the Real Estate which remains unpaid, and to the best knowledge of the Seller Parties, no such assessment has been proposed. Except as set forth on Schedule 3.11, as of the date hereof, there is no pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate and to the best knowledge of the Seller Parties no such proceeding is threatened. 3.11.2 Except as disclosed on Schedule 3.6, as of the date hereof, Seller is not a lessee under any Contract relating to the use or occupancy of the Real Estate involving annual payments in excess of $100,000. 3.11.3 Each parcel of the Real Estate has physical and, to Seller's knowledge, legal vehicular and pedestrian access to and from public roadways as may be reasonably necessary to the operation of the Business except where the failure to have such access does not have a Material Adverse Effect. To Seller's knowledge, no fact or condition exists which would result in the termination of (a) the current access from each parcel of the Real Estate, and (b) continued use, operation, maintenance, repair and replacement of all existing and currently committed water lines used by Seller in connection with the Business, except where such termination would not have a Material Adverse Effect. 3.12 Taxes. The Seller Parties have (a) timely filed all material returns and reports for Taxes, including information returns, that are required to have been filed in connection with, relating to, or arising out of, the Business, (b) paid all Taxes that are shown to have come due pursuant to such returns or reports and (c) paid all other material Taxes not required to be reported on returns in connection with, relating to, or arising out of, or imposed on the property of the Business for which a notice of assessment or demand for payment has been received or which have otherwise become due. To the best of the Seller Parties' knowledge, all such returns or reports have been prepared in accordance with all applicable laws and requirements in all material respects. Except to the extent disclosed on Schedule 3.12, none of the assets of the Business or constituting any of the Acquired Assets (a) is property that is required to be treated as owned by another Person pursuant to the "safe harbor lease" provisions of former Section 168(f)(8) of the Code, (b) is 28 Pennsylvania "tax-exempt use property" within the meaning of Section 168(h) of the Code or (c) directly or indirectly secures any debt the interest on which is tax-exempt under Section 103(a) of the Code. 3.13 Patents and Intellectual Property Rights. To the best of the Seller Parties' knowledge, the operations of Seller do not make any unauthorized use of any Intellectual Property except for any such unauthorized uses which do not have a Material Adverse Effect. Assuming the consents listed as item XII on Schedule 3.9 are obtained, Buyer will not lose any of Seller's rights to, or be required to pay increased royalties for, any Intellectual Property included in the Acquired Assets as a result of the Closing and the consummation of the transactions contemplated by this Agreement, except for any such rights or such increased royalties the loss or payment of which would, individually or in the aggregate, not have a Material Adverse Effect. 3.14 Accounts Receivable. The accounts receivable of Seller arising from the Business as set forth on the Interim Statement of Net Assets or arising since the date thereof have arisen out of bona fide sales and deliveries of goods, performance of services and other business transactions in the ordinary course of business consistent with past practice; the allowance for collection losses on the Interim Statement of Net Assets has been determined in accordance with GAAP consistent with past practice. 3.15 Labor Relations. As of the date hereof, except as set forth in Schedule 3.15, to best of the knowledge of the Seller Parties, there has been no union organizing efforts with respect to the Business conducted within the last three (3) years and there are none now being conducted with respect to the Business. Except as set forth in Schedule 3.15, Seller has not at any time during the three (3) years prior to the date of this Agreement had, nor, to the best of the Seller Parties' knowledge, is there now threatened, a strike, work stoppage or work slow down with respect to or affecting the Business which had or could reasonably be expected to have a Material Adverse Effect. As of the date hereof, except as set forth in Schedule 3.15, (i) no Employee is represented by any union or other labor organization and (ii) there is no unfair labor practice charge pending or, to the best knowledge of the Seller Parties, threatened against Seller relating to any of the Employees as related to the Business which could reasonably be expected to have a Material Adverse Effect. 3.16 Employee Benefit Plans. 3.16.1 Schedule 3.16.1 contains a true and complete list of each "employee benefit plan," as defined in Section 3(3) of ERISA (including any "multiemployer plan" as defined in Section 3(37) of ERISA), bonus, incentive, deferred compensation, excess benefit, employment contract, stock purchase, stock ownership, stock option, supplemental unemployment, vacation, sabbatical, sick-day, severance or other material employee benefit plan, program or arrangement (other than those required to be maintained by law), whether written or unwritten, qualified or nonqualified, funded or unfunded, foreign or domestic, (i) maintained by, or contributed to by Citizens or any of its Affiliates, in respect of any Employee or Former Employee, or (ii) with respect to which Citizens or any of its Affiliates has any liability in respect of any Employee or Former 29 Pennsylvania Employee (the"Benefit Plans"). Except as disclosed on Schedule 3.16.1, neither Citizens nor any of its Affiliates maintains any bonus, pension or welfare benefit plan, program or arrangement, including any deferred compensation arrangement, for directors, consultants or independent contractors of the Business. 3.16.2 A true and complete copy of each Benefit Plan and related trust agreements and (to the extent applicable) a copy of each Benefit Plan's current summary plan description and in the case of an unwritten Benefit Plan, a written description thereof, has been furnished to Buyer. In addition, to the extent applicable, Buyer has been provided a copy of the most recent Internal Revenue Service ("IRS") determination letter issued to each Benefit Plan and a copy of the most recent IRS Form 5500 together with all schedules and accountants' statement filed, and actuarial reports prepared, on behalf of each Benefit Plan. 3.16.3 Each Benefit Plan which is intended to be qualified under Section 401(a) of the Code (as designated on Schedule 3.16.1) is so qualified, and will remain so qualified upon the timely making of certain amendments required by law during the applicable remedial amendment period, and any trust forming a part of such a Benefit Plan is tax exempt under Section 501(a) of the Code. Each such Benefit Plan has been amended, as and when necessary, to comply with the Tax Reform Act of 1986 and upon timely filing of an Application for Determination with the Internal Revenue Service, will be eligible to make further such amendments under the"remedial amendment period." 3.16.4 Except as disclosed in Schedule 3.16.4, each Benefit Plan has been operated and administered in all material respects in accordance with its terms and all applicable laws, including ERISA and the Code. 3.16.5 None of the Acquired Assets is subject to a Lien or Tax under the Code or ERISA. 3.16.6 Neither Citizens nor any ERISA Affiliate and, to the knowledge of the Seller Parties, no other Person, has taken any action or failed to take any action with respect to any Benefit Plan that may subject Buyer or any Benefit Plan under which liabilities may be assumed by Buyer under Sections 5.10, 5.11 or 5.12 ("Assumed Benefit Liabilities") to any material liability or Tax under the Code or ERISA. 3.16.7 Neither Citizens nor any ERISA Affiliate has incurred or expects to incur any withdrawal liability with respect to any Benefit Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA, including any contingent liability under Section 4204 of ERISA or withdrawal liability arising from the actions of Citizens or any ERISA Affiliate contemplated by this Agreement. All contributions that Citizens or any ERISA Affiliate have been obliged to make to any Benefit Plan, including any multiemployer plan, have been duly and timely made. 30 Pennsylvania 3.16.8 There are no pending or, to the knowledge of the Seller Parties, threatened claims (other than routine claims for benefits), assessments, complaints, proceedings or investigations of any kind in any court or governmental agency with respect to any Benefit Plan which could reasonably be expected to give rise to a material liability to Buyer. 3.16.9 Except as disclosed on Schedule 3.16.9, no Benefit Plan provides benefits, including without limitation, death or medical benefits, beyond termination of service or retirement other than (i) coverage mandated by law, or (ii) death or retirement benefits under a Benefit Plan qualified under Section 401(a) of the Code. Seller's Retiree Medical Plan contains provisions permitting Seller to modify or terminate retiree medical benefits at any time, without prior notice to any covered individual. Except with respect to retirees, "grandfathered" employees and collectively bargained employees, Seller knows of no reason why its ability to effect those provisions would be limited. 3.16.10 With respect to each Benefit Plan that is a "group health plan" within the meaning of Section 607 of ERISA and that is subject to Section 4980B of the Code, Citizens and each ERISA Affiliate have complied in all material respects with the continuation coverage requirements of the Code and ERISA. 3.17 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 3.17, Seller has no liabilities with respect to the Business which would constitute Assumed Liabilities, either direct or indirect, matured or unmatured or absolute, contingent or otherwise, except: 3.17.1 the Assumed Indebtedness and those other liabilities which would decrease the Base Cash Purchase Price pursuant to Section 2.6.5 to the extent assumed by Buyer at Closing; 3.17.2 liabilities arising in the ordinary course of business under any Contract or Permit or with respect to any agreement or instrument included within the definition of Real Estate; and 3.17.3 those liabilities incurred, consistent with past business practice, in or as a result of the normal and ordinary course of business and reflected in the books and records related to the Business; 3.17.4 the obligations and liabilities set forth in Sections 5.9, 5.10, 5.11 and 5.12 hereof; and 3.17.5 those other liabilities, which individually and in the aggregate, would not have a Material Adverse Effect. 31 Pennsylvania 3.18 No Pending Litigation or Proceedings. Except as disclosed in Schedule 3.18, there are no actions, suits, investigations or proceedings pending against or, to the best of the Seller Parties' knowledge, threatened, against or affecting, Seller, the Business or any of the Acquired Assets before any court or arbitrator or Authority which individually or in the aggregate, would have a Material Adverse Effect. Except as disclosed in Schedule 3.18, there are currently no outstanding judgments, decrees or orders of any court or Authority against any of the Seller Parties, which relate to or arise out of the conduct of the Business or the ownership, condition or operation of the Business or the Acquired Assets (other than any PUC order relating to rates, tariffs and similar matters arising in the ordinary course of business) which individually or in the aggregate would have a Material Adverse Effect. 3.19 Supply of Utilities. Except as set forth on Schedule 3.19, the Real Estate has adequate arrangements for supplies of electricity, gas, oil, coal and/or sewer for all operations at the 1998 or current operating levels, whichever is greater. Except as set forth on Schedule 3.19, there are no actions or proceedings pending or, to the best of the Seller Parties' knowledge, threatened, that would adversely affect the supply of electricity, gas, coal or sewer to the Real Estate except for those which individually and in the aggregate would not have a Material Adverse Effect. 3.20 Insurance. Schedule 3.20 lists the Seller Parties' policies and contracts in effect as of the date hereof for insurance covering the Acquired Assets or Assumed Liabilities and the operation of the facilities constituting the Business owned or held by Seller, together with the risks insured against, coverage limits and deductible amounts. 3.21 Relationship with Customers. As of the date hereof, Seller does not have any current customer which accounted for more than 5% of the net sales of the Business (taken together with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) for the immediately preceding 12-month period. 3.22 WARN Act. Except as contemplated by Section 5.9 hereby or as set forth in Schedule 3.22 hereto, within six months prior to the date hereof, (i) Seller has not effectuated (a) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; or (b) a "mass layoff" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of the Business; (ii) Seller has not been affected by any transaction or engaged in layoffs or employment terminations with respect to the Business sufficient in number to trigger application of any similar state or local law; and (iii) none of Seller's employees who are employed in connection with the Business has suffered an "employment loss" (as defined in the WARN Act) . 3.23 Condition of Assets. Except as set forth on Schedule 3.23, the buildings, machinery, equipment, tools, furniture, improvements and other fixed tangible assets of the Business included in the Acquired Assets, taken as a whole and taken together with the similar assets included 32 Pennsylvania among the assets being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements, are in good operating condition and repair, reasonable wear and tear excepted. 3.24 Brokerage. None of the Seller Parties or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to Buyer or its Affiliates. 3.25 All Assets. Except as set forth on Schedule 3.25 and for the Excluded Assets, the Acquired Assets include all assets, rights, properties and contracts the use of which is necessary to the continued conduct of the Business by Buyer substantially in the manner as it was conducted prior to the Closing Date, including the service of all utility customers in substantially the same manner and at substantially the same service levels as provided by Seller on the date hereof. 3.26 Year 2000 Matters. Citizens has (1) initiated a review and assessment of all mission critical areas within the Business and related operations (including those affected by suppliers and vendors) that it reasonably believes could be adversely affected by the "Year 2000 Problem" (that is, the risk that computer applications used by any Seller Party (or suppliers and vendors) may be unable to recognize and properly perform date-sensitive functions involving certain dates prior to and any date after December 31, 1999), (ii) developed a plan and timeline for addressing the Year 2000 Problem all as set forth in Citizens' Annual report on Form 10-K for the fiscal year ended December 31, 1998 and Citizens' Quarterly reports on Form 10-Q for the periods ending March 31, 1999 and June 30, 1999, and (iii) to date, implemented that plan substantially in accordance with that timetable. Seller has contingency plans that are dedicated to ensuring that established and expected levels of customer service are maintained without interruption, while core business functionality is preserved during the millennium transition. With respect to its suppliers and vendors, the foregoing representation and warranty is expressly limited to matters known to Seller after making reasonable inquiries of such suppliers and vendors. Seller makes no representation or warranty with respect to the receipt or accuracy of any response received from any vendor or supplier. 3.27 Product Liability. Except as disclosed in Schedule 3.27 and except for those liabilities which individually or in the aggregate would not have a Material Adverse Effect, there are no (a) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties, unasserted, with respect to any product liability or similar claim that relates to any product or service sold by Seller or the Business to others or (b) liabilities of the Seller Parties or their Affiliates, fixed or contingent, asserted or, to the knowledge of the Seller Parties unasserted, with respect to any claim for the breach of any express or implied product warranty or a similar claim with respect to any product or service sold by Seller or the Business to others. 33 Pennsylvania ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND BUYER Parent and Buyer jointly and severally represent and warrant to Seller as follows: 4.1 Organization and Good Standing. 4.1.1 Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. 4.1.2 Buyer is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and has all requisite corporate power and authority to own, lease and operate the Acquired Assets and the Business. Buyer is qualified to do business and is in good standing in all jurisdictions wherein the nature of the business conducted by it or Buyer's ownership or use of assets and properties make such qualification necessary, except such failures to be qualified or to be in good standing, if any, which when taken together with all such failures of Buyer do not have a material adverse effect on its ability to perform its obligations under this Agreement and the Transaction Documents. 4.2 Authorization and Enforceability. Each of Buyer and Parent has full corporate power and authority to execute, deliver and perform this Agreement and the other Transaction Documents to which either of them is a party. The execution, delivery and performance by Buyer and Parent of this Agreement and the Transaction Documents to which Buyer and/or Parent is a party have been duly authorized by all necessary corporate action on the part of each of them. This Agreement has been duly executed and delivered by Buyer and Parent, and as of the Closing Date the other Transaction Documents will be duly executed and delivered by Buyer and Parent. This Agreement is a legal, valid and binding obligation of Buyer and Parent, enforceable against them in accordance with its terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. As of the Closing Date, each of the other Transaction Documents to which Buyer and Parent is a party will be duly executed and delivered by Buyer and Parent and will constitute the legal, valid and binding obligations of Buyer and Parent, enforceable against them in accordance with its respective terms, except as such enforceability may be limited by applicable laws relating to bankruptcy, insolvency, fraudulent conveyance, reorganization or affecting creditors' rights generally and except to the extent that injunctive or other equitable relief is within the discretion of a court. 4.3 No Violation of Laws or Agreements. The execution, delivery and performance of this Agreement and the Transaction Documents by Buyer and/or Parent do not, and 34 Pennsylvania the consummation of the transactions contemplated hereby and thereby will not, (a) contravene any provision of the Articles of Incorporation or Bylaws of Buyer or the Certificate of Incorporation or Bylaws of Parent; or (b) violate, conflict with, result in a breach of, or constitute a default (or an event which would with the passage of time or the giving of notice, or both, constitute a default) under, or result in or permit the termination, modification, acceleration, or cancellation of (i) any indenture, mortgage, loan or credit agreement, license, instrument, lease, contract, plan, permit, authorization, proof of dedication or other agreement or commitment, oral or written, to which Parent or Buyer is a party, or by which any of their assets or properties may be bound or affected, except for such violations, conflicts, breaches, terminations, modifications, accelerations, cancellations, interests or rights which, individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents, or (ii) any judgment, injunction, writ, award, decree, restriction, ruling, or order of any court, arbitrator or Authority or any applicable constitution, law, ordinance, rule or regulation to which Buyer or Parent is subject other than those violations and conflicts which individually or in the aggregate do not have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.4 Consents. No consent, approval or authorization of, or registration or filing with, any Person (governmental or private) is required in connection with the execution, delivery and performance by Buyer and Parent of this Agreement, the other Transaction Documents, or the consummation of the transactions contemplated hereby or thereby by Buyer or Parent except (i) as required by the HSR Act, (ii) as specified on Schedule 3.9 and (iii) for such consents, approvals, authorizations, registrations or filings, the failure to obtain or make would not individually or in the aggregate have a material adverse effect on their respective ability to perform their obligations under this Agreement and the Transaction Documents. 4.5 Financing. Buyer and Parent have, and at the Closing Date, will have sufficient resources to pay the Purchase Price, and Parent, Buyer or the other Affiliates of Parent that are buyers of the assets and businesses being acquired pursuant to the Related Purchase Agreements have, and at the Closing Date, will have sufficient resources to pay the purchase prices set forth in the Related Purchase Agreements. 4.6 Brokerage. None of Parent, Buyer or their Affiliates have made any agreement or taken any other action which might cause any Person to become entitled to a broker's or finder's fee or commission as a result of the transactions contemplated hereunder which could result in liability to the Seller Parties. 4.7 Insurance. Schedule 4.7 lists the policies and contracts in effect as of the date hereof for casualty and property insurance covering Buyer's assets and properties and the operation of Buyer's business, together with the risks insured against, coverage limits and deductible amounts. 35 Pennsylvania ARTICLE 5 ADDITIONAL COVENANTS 5.1 Conduct of Business. Except (i) as otherwise specifically permitted by this Agreement, (ii) as set forth in Schedule 5.1 hereto or (iii) with the prior written consent of Buyer, from and after the date of this Agreement and up to and including the Closing Date, each of the Seller Parties agree that: 5.1.1 Seller shall conduct the Business as presently operated and only in the ordinary course of business consistent with past practice. 5.1.2 They shall promptly inform Buyer in writing of any specific event or circumstance of which they are aware, or of which they receive notice, that has or is likely to have, individually or in the aggregate, taken together with the other events or circumstances, a Material Adverse Effect on the Acquired Assets or the Assumed Liabilities. 5.1.3 Seller shall not: (a) change or modify in any material respect existing credit and collection policies, procedures and practices with respect to accounts receivable; (b) enter into any contract or commitment, waive any right or enter into any other transaction (except in the ordinary course of business) which would have a Material Adverse Effect; (c) except in the event of service interruption, emergency or casualty loss, commit to acquire subsequent to the Closing Date on behalf of the Business any capital asset or group of capital assets costing in excess of $1,000,000 that is not included in the capital budget of Seller for fiscal year 2000 and which, if so acquired, would be included in the Acquired Assets; commencing December 1, 1999, accept or receive customer advances for construction in excess of $9,000,000 (when combined with customer advances relating to the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements) per each of the next four consecutive three-month periods unless pursuant to an existing tariff, Contract or Permit of Seller; or sell or lease or agree to sell or lease or otherwise dispose of any assets included in the Acquired Assets except in the ordinary course of the conduct of the Business, consistent with past practice; (d) except in the ordinary course of business, consistent with past practice or as required under any of Seller's debt instruments or indentures, mortgage, pledge or subject to any Lien (other than Permitted Liens) any of the Acquired Assets; 36 Pennsylvania (e) change any compensation or benefits or grant any material new compensation or benefits payable to or in respect of any Transferred Employee except (i) as required by law, and (ii) in the ordinary course, consistent with past practice; provided, however, no individual Employee shall in any event receive a compensation increase in excess of seven percent (7%); (f) other than in the ordinary course of business consistent with past practice, sell or otherwise transfer any assets necessary, or otherwise material to the conduct of, the Business which would constitute Acquired Assets; (g) change the Seller's method of accounting or keeping its books of account or accounting practices with respect to the Business, except as required by GAAP or any Authority; (h) intentionally and wilfully take or omit to take any action which if taken or omitted prior to the date hereof would constitute or result in a breach of any representations or warranties set forth in Sections 3.1, 3.2, 3.3, 3.4, 3.7, 3.8, 3.10, 3.14, 3.16 and 3.25 hereof (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful omission to take action); or (i) prepay, redeem, retire, refund or otherwise extinguish any of the Assumed Indebtedness. 5.2 Negotiations. Neither Citizens nor any Person controlled by Citizens or under common control with Citizens (each such person being a "Section 5.2 Affiliate"), nor any officer, director, employee, representative or agent of Citizens or any of their Section 5.2 Affiliates, shall, directly or indirectly, solicit or initiate or participate in any way in discussions or negotiations with, or provide any information or assistance to, or enter into an agreement with any Person or group of Persons (other than Parent, Buyer or any Person controlled by Parent or Buyer or under common control with Parent, Buyer or any Persons providing financing to the parties hereto in connection with facilitating the consummation of the transactions contemplated by this Agreement) concerning any acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) that would result in the transfer to any such Person or group of Persons of ten percent (10%) of the Acquired Assets (as measured by net book value of such assets on the date of each such transaction) or the acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) involving the Seller Parties, if such acquisition, merger, consolidation, liquidation, dissolution, disposition or other transaction (or series of such transactions) would be inconsistent, in any respect, with the obligations of the Seller Parties hereunder (any of the foregoing transactions, a "Competing Transaction"). 5.3 Disclosure Schedules. As promptly as practicable, the Seller Parties will provide Buyer with a supplement or amendment to the Disclosure Schedules with respect to any 37 Pennsylvania matter, condition or occurrence which is required to be set forth or described in the Disclosure Schedules. For the avoidance of doubt, a matter, condition or occurrence shall only be "required" to be set forth or described in the Disclosure Schedules if the failure to be so disclosed would result in a breach of the applicable representation or warranty (qualified by Material Adverse Effect where applicable) on the date hereof or on the Closing Date. In addition, Seller shall have the right at any time and from time to time prior to the Closing to supplement or amend the Disclosure Schedules. Seller may provide Disclosure Schedules with respect to any representation or warranty of this Agreement whether or not a specific schedule is referred to therein. In the event that any supplement or amendment of such Disclosure Schedules shall be provided later than five (5) business days prior to the Closing Date, the Buyer shall have the right to delay the Closing for a period of five (5) business days in order for Buyer to review such supplement or amendment. No such supplement or amendment shall be deemed to cure any breach of or alter any representation or warranty made in this Agreement so as to permit the Closing to occur unless Buyer specifically agrees thereto in writing. The Seller Parties shall promptly inform Buyer, and Buyer will promptly inform the Seller Parties of any fact or event which comes to their attention, the existence of which constitutes or likely will constitute a breach in any material respects of any representation or warranty in this Agreement. In addition, Parent will, within five (5) days of receipt thereof, forward to Seller (i) any title report Buyer receives from a title company with respect to the Real Estate and (ii) any written communication regarding a specific Lien or title defect affecting a specifically identified parcel of the Real Estate sent to the President, Treasurer or General Counsel of Parent or the President or Corporate Counsel of any other Buyer Party, and sent by a party other than the Seller Parties, their legal counsel, financial advisors or representatives. 5.4 Mutual Covenants. The parties mutually covenant from the date of this Agreement to the Closing Date (and subject to the other terms of this Agreement, including Section 5.8 hereof): 5.4.1 to cooperate with each other in determining whether filings are required to be made or consents required to be obtained in any jurisdiction in connection with the consummation of the transactions contemplated by this Agreement and in making or causing to be made any such filings promptly and in seeking to obtain timely any such consents; 5.4.2 to use all reasonable efforts to obtain promptly the satisfaction (but not waiver) of the conditions to the Closing of the transactions contemplated herein (each party hereto shall furnish to the other and to the other's counsel all such information as may be reasonably required in order to effectuate the foregoing action); and 5.4.3 to advise the other parties promptly if such party determines that any condition precedent to its obligations hereunder will not be satisfied in a timely manner. 5.5 Filings and Authorizations. The parties hereto will as promptly as practicable, make or cause to be made all such filings and submissions under laws, rules and 38 Pennsylvania regulations applicable to it or its Affiliates as may be required to consummate the terms of this Agreement, including all notifications and information to be filed or supplied pursuant to the HSR Act and with the applicable public utility commission (each, a "PUC"). Any such filings and supplemental information will be in substantial compliance with the requirements of the applicable law, rule or regulation. Each of Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission to the PUC or which is necessary under the HSR Act. The Seller Parties, on the one hand and Buyer and Parent, on the other, shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, any Authority, including the PUC, the United States Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice (the "Antitrust Division"), and shall comply promptly with any such inquiry or request. Each of Citizens, Seller, Parent and Buyer will use its reasonable efforts to obtain any clearance required under the HSR Act and from the PUC for the purchase and sale of the Acquired Assets in accordance with the terms and conditions hereof. Notwithstanding the foregoing, nothing contained in this Agreement will require or obligate any party or their respective Affiliates: (i) to initiate, pursue or defend any litigation (or threatened litigation) to which any Authority (including the PUC, the Antitrust Division and the FTC) is a party; (ii) to agree or otherwise become subject to any material limitations on (A) the right of Buyer or its Affiliates effectively to control or operate the Business or the right of Seller or its Affiliates effectively to control or operate Citizens' other businesses, (B) the right of Buyer or its Affiliates to acquire or hold the Business or the right of Seller or its Affiliates to hold the Excluded Assets or Citizens' other businesses, or (C) the right of Buyer to exercise full rights of ownership of the Business or all or any material portion of the Acquired Assets or the right of Citizens to exercise full rights of ownership of Citizens' other businesses or all or any material portion of the Excluded Assets; or (iii) to agree or otherwise be required to sell or otherwise dispose of, hold separate (through the establishment of a trust or otherwise), or divest itself of all or any portion of the business, assets or operations of Citizens, Seller, Parent, Buyer, any Affiliate of Buyer or the Business. The parties agree that no representation, warranty or covenant of Buyer, Parent, or Citizens contained in this Agreement shall be breached or deemed breached as a result of the failure by Parent and Buyer on the one hand or the Seller Parties, on the other, to take any of the actions specified in the preceding sentence. 5.6 Public Announcement. No party hereto shall make or issue, or cause to be made or issued, any public announcement or written statement concerning this Agreement or the transactions contemplated hereby without the prior written consent of the other party (which will not be unreasonably withheld or delayed), unless counsel to such party advises that such announcement or statement is required by law (in which case the parties shall make reasonable efforts to consult with each other prior to such required announcement). 5.7 Further Assurances. Each of Citizens, Parent, Buyer and Seller, from time to time after the Closing, at Buyer's or Seller's request, will execute, acknowledge and deliver to the applicable person such other instruments of conveyance and transfer and will take such other actions 39 Pennsylvania and execute such other documents, certifications, and further assurances as Buyer or Seller, as the case may be, may reasonably require in order to transfer, in accordance with the terms and conditions of this Agreement, more effectively in Buyer or to put Buyer more fully in possession of any of the Acquired Assets or better to enable Buyer to complete, perform and discharge any of the Assumed Liabilities. Each party shall cooperate and deliver such instruments and take such action as may be reasonably requested by the other party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby. 5.8 Cooperation. 5.8.1 Parent, Buyer, Citizens and Seller shall cooperate and shall cause their respective Affiliates, officers, employees, agents and representatives to cooperate to ensure the orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business resulting from the transactions contemplated hereby. 5.8.2 Without limiting the foregoing, neither Parent and Buyer, nor Citizens and Seller (nor any of their respective Affiliates) shall make any filings pursuant to federal or state securities laws ("Securities Filings") or make any consent solicitations to holders of Assumed Indebtedness which include any information about Seller, Buyer (or their respective Affiliates) or the transactions contemplated hereby without consulting with the other party and providing the other party a reasonable opportunity to review and comment on such information, it being understood and agreed that any party may so disclose such information in its reasonable judgment to the extent such party's counsel advises it that such disclosure is advisable under applicable law. Each of Parent, Buyer, Citizens and Seller shall, and shall cause their respective Affiliates to, comply with all applicable federal and state securities laws in connection with this Agreement and the transactions contemplated hereby (including any solicitation of consents of holders of Assumed Indebtedness), and all information supplied by any party for inclusion in any Securities Filing or consent solicitation, including, without limitation, any proxy or information statement, or any registration statement on Form S-4 shall be true and correct in all material respect and shall not contain any untrue statement of a material fact or omit to state any material fact which is required to be stated therein or which is necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. 5.8.3 During the first 90 days after the Closing Date (180 days for Trademarks on tanks), Buyer shall have the right to use all of the logos, trademarks and trade identification of Seller as are located at the Real Estate or on the Acquired Assets (collectively, the "Trademarks"). Buyer's use of the Trademarks shall be in accordance with such reasonable quality control standards as may be promulgated by Seller and provided to Buyer. If Seller shall notify Buyer in writing of Buyer's material failure to comply with such reasonable quality control standards and Buyer continues to not comply with such reasonable quality control standards for more than 20 days after receipt of such notice, Seller shall have the right to terminate Buyer's right under this Section 5.8.3 to use the Trademarks. 40 Pennsylvania 5.8.4 Seller shall give Buyer and its representatives (including Buyer's Accountants, consultants, counsel and employees), upon reasonable notice and during normal business hours, full access to the properties, contracts, employees, books, records and affairs of Seller to the extent relating to the Business and the Acquired Assets, and shall cause its officers, employees, agents and representatives to furnish to Buyer all documents, records and information (and copies thereof), to the extent relating to the Business and the Acquired Assets, as Buyer may reasonably request. Except to the extent disclosed in the Disclosure Schedules in accordance with Sections 5.3 and 8.4, no investigation or receipt of information by Buyer pursuant to, or in connection with, this Agreement, shall diminish or obviate any of the representations, warranties, covenants or agreements of the Seller Parties under this Agreement or the conditions to the obligations of Parent or Buyer under this Agreement. All information provided to Buyer under this Agreement shall be held subject to the terms and conditions of the Confidentiality Agreement dated August 2, 1999 between Citizens and Parent. 5.9 Employees; Employee Benefits. 5.9.1 Schedule 5.9.1 lists divisions and the number of all salaried and hourly employees actively employed (as of the date of this Agreement) in each division by Seller or any of its Affiliates whose primary responsibilities relate to the Business. Schedule 5.9.1 lists job classifications and number of employees in each job classification of those employees whose terms and conditions of employment are subject to a collective bargaining agreement ("Union Employees"). All individuals referred to on Schedule 5.9.1 are herein referred to as the "Employees." No later than March 1, 2000, Buyer and Seller shall determine the number of Employees to whom Buyer will offer employment, which number shall be at least equal to 250 (when combined with offers made by Buyer or Affiliates of Buyer to employees of Affiliates of Seller in connection with the Related Purchase Agreements) (the "Base Number"), and such additional number of Employees, if any, whom Buyer also wishes to employ. Upon determination of such Employees, Seller will supplement Schedule 5.9.1 with the name, job title, unused vacation, current base salary or hourly wage, date of hire and assigned location of each Transferred Employee (as that term is defined below). At the Closing, Seller shall provide an updated Schedule 5.9.1 which shall disclose all the information required under the preceding sentence as of the most recent practicable date prior to Closing. 5.9.2 Effective as of the Closing, Buyer shall offer employment to at least the Base Number of those employees included on Schedule 5.9.1. All Employees to whom Buyer offers employment and who accept such employment are herein referred to as the "Transferred Employees." In the event any Employees do not accept Buyer's offer of employment, Buyer shall offer employment to such additional employees (the identity of whom shall be determined by Buyer and Seller) as are necessary to bring the total number of Transferred Employees to the Base Number. Subject to the provisions of this Section 5.9 and Section 5.12, Buyer shall provide each Transferred Employee with base compensation at least equal to that provided by Seller on the Closing Date, and employee benefits which are substantially comparable to those provided by Buyer to its other 41 Pennsylvania similarly situated employees. Buyer agrees (i) to credit the service of each Transferred Employee with Seller and its Affiliates before the Closing, for all purposes under all employee benefit plans and arrangements maintained by Buyer (and/or any of its Affiliates) for the benefit of any Transferred Employee (including without limitation for purposes of attainment of retirement dates and payment of optional forms of benefits), other than for purposes of benefit accrual under any "defined benefit plan", within the meaning of Section 3(35) of ERISA, (ii) to provide accrued vacation to Transferred Employees in the year in which the Closing occurs, equal to the excess, if any, of the accrued vacation to which the Transferred Employee would otherwise be entitled under Seller's vacation plan during that year over the amount of accrued vacation the Transferred Employee had taken during that year, and, thereafter, to provide vacation to Transferred Employees on the same basis as provided to similarly situated employees of Buyer, with service credit as provided in (i) hereof, (iii) to provide severance benefits to Transferred Employees terminated by Buyer that are substantially comparable to those benefits provided by Buyer to similarly situated employees, and (iv) to comply with all applicable legal requirements with respect to Union Employees (including without limitation any applicable duty to bargain with those employees' bargaining representative). Buyer shall be responsible for providing to each Transferred Employee vacation in an amount equal to the Transferred Employee's vacation entitlement for the year of Closing reduced by the number of vacation days such Transferred Employee has taken on or before Closing. Nothing in this Section 5.9 shall limit Buyer's authority to terminate the employment of any Transferred Employee at any time and for whatever reason. Until the second anniversary of the Closing Date, neither Seller nor any of its Affiliates shall directly or indirectly solicit or offer employment to any Transferred Employee then employed by Buyer or its Affiliates. 5.9.3 Except as specifically provided in Sections 5.9 and 5.12, Seller shall be solely responsible for any liability, claim or expense (including reasonable attorneys' fees) related to compensation or employee benefits incurred by Buyer as the result of any claims against Buyer or its Affiliates that are made by any Employees or Former Employees (or the Beneficiary of any Employee or Former Employee) who are not made offers to become employees of Buyer or its Affiliates including, without limitation, claims asserted against Buyer as a result of their termination by Seller or its Affiliates. 5.9.4 Seller shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation claims or the benefits provided under the Benefit Plans, whether paid before or after the Closing) owed to any Transferred Employee or the Beneficiary of any Transferred Employee or any Water Sector Retiree or the Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Seller or any of its Affiliates and such Transferred Employee or Beneficiary or (ii) any benefit claim or expense (including medical expenses) incurred before Closing under any Benefit Plan. For purposes of this Agreement, a medical expense shall be deemed to be incurred when the services giving rise to a claim are rendered, regardless of when billed or paid. Without limiting the foregoing, Seller shall be 42 Pennsylvania responsible for the payment of any employee benefits that become due to any Transferred Employees as a result of their termination by Seller. 5.9.5 Except as otherwise specifically provided in Section 5.9, 5.11 or 5.12, Buyer shall be solely responsible for any liability, claim or expense with respect to compensation or employee benefits of any nature (including, but not limited to, workers compensation, claims or the benefits provided under any employee benefit plan or arrangement of Buyer incurred after Closing) owed to any Transferred Employee or Beneficiary of any Transferred Employee or any Water Sector Retiree or Beneficiary of any Water Sector Retiree that arises out of or relates to (i) the employment relationship between Buyer or any of its Affiliates and any Transferred Employee or (ii) any benefit claim or expense (including medical expense) incurred after Closing under any employee benefit plan sponsored or contributed to by Buyer or an ERISA Affiliate after Closing. Notwithstanding the foregoing, Buyer shall not be responsible for the payment of any employee benefits that become due to any Transferred Employees under any Benefit Plan (other than the Assumed Benefit Liabilities). 5.9.6 Buyer agrees to reimburse Seller for its proportionate share (as defined below) of any amount in excess of $1,000,000 paid by Seller as severance under Citizens' severance plan as in effect on the date hereof to any Employees (when such amount paid by Seller is aggregated with amounts paid by Citizens to other employees as referenced in Section 5.9.6 of the Related Purchase Agreements) provided (i) Buyer does not hire such Employees in accordance with the provisions of Sections 5.9, 5.11 and 5.12 and (ii) Seller provides notice to those Employees on or before the Closing Date to the effect that their employment will be terminated on or shortly after the Closing Date. Buyer will pay such reimbursement to Citizens within 5 days after receipt of a list of the Employees showing which are entitled to severance pay, the amounts of that severance pay and certifying that those amounts have been paid. The Buyer's "proportionate share" means the amount obtained by multiplying the amount in excess of $1,000,000 by a fraction, the numerator of which is the amount of severance paid by Seller to Employees under Section 5.9.6 of this Agreement and the denominator of which is the sum of (i) the amount paid by Seller to Employees under Section 5.9.6 of this Agreement and (ii) the aggregate amount paid by Citizens under Section 5.9.6 of each of the Related Purchase Agreements. 5.9.7 Until the second anniversary of the Closing Date, Buyer shall not directly or indirectly solicit or offer employment to any active employee of Seller, other than the Transferred Employees. 5.10 Employee Pension Plan. 5.10.1 At least fifteen days prior to the Closing Date, Seller shall take any and all actions necessary to cease benefit accruals and fully vest all Transferred Employees in their accrued benefits under the Citizens Pension Plan ("Seller's Pension Plan" or "Citizens Pension 43 Pennsylvania Plan"). Seller shall retain liability and related assets for benefits accrued through the Closing Date by Transferred Employees under Seller's Pension Plan. 5.10.2 As of the Closing Date, Transferred Employees shall be covered under the American Pension Plan, and shall be given credit for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, subsidized benefits, and entitlement to optional forms of payment, but not for accrual of benefits. 5.11 Employee Savings Plan. 5.11.1 Effective upon the date of the transfer described in Section 5.11.2, subject to the terms and conditions of this Agreement, Parent shall cause the Savings Plan for Employees of American Water Works Company, Inc. (the "American Savings Plan") to assume the liability of the Seller's 401(k) Plan for the account balances of those Transferred Employees participating in the Seller's 401(k) Plan on the Closing Date (the "Affected Participants") that are transferred to the American Savings Plan. As of the Closing Date, Affected Participants shall be 100% vested in their account balances under the Seller's 401(k) Plan. Transferred Employees shall be given credit under the American Savings Plan for service with Seller and its Affiliates for eligibility, vesting, attainment of retirement dates, contribution levels and optional forms of benefit payment, to the same extent that credit for such service has been given by Seller and its Affiliates. 5.11.2 Buyer shall deliver to Seller as soon as practicable, but in no event later than ninety (90) days after Closing (i) a certified copy of the American Savings Plan and any amendment necessary to effectuate the transfer of assets and the assumption of account balances in accordance with this Section 5.11, (ii) a certified copy of the trust agreement for the American Savings Plan; (iii) the most recent favorable determination letter from the IRS with respect to the American Savings Plan; and (iv) an opinion from Buyer's legal counsel acceptable to Seller that the American Savings Plan, as so amended, complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of, and the transfer of assets and assumption of benefit liabilities by, the American Savings Plan. Seller shall deliver to Buyer as soon as practicable, but in no event later than ninety (90) days after Closing, an opinion from Seller's legal counsel acceptable to Buyer that the Seller's 401(k) Plan complies or will comply on a timely basis with the applicable provisions of the Code relating to the qualification of the Seller's 401(k) Plan, and the transfer of assets to, and assumptions of benefit limitations by, the American Savings Plan. As soon as practicable, but in any event within 120 days after Closing, Seller shall cause the trustee of the Seller's 401(k) Plan to transfer in cash and promissory notes representing outstanding loans to Affected Participants to the trustee of the American Savings Plan an amount equal to the sum of the account balances of the Transferred Employees (the "Transferred Accounts") calculated as of the most recent valuation date under the Seller's 401(k) Plan (which shall, in any event, be within thirty (30) days of the transfer). Both the Seller Parties and Buyer will file any IRS Form 5310A that is required with respect to the transfer contemplated by this Section 5.11 date at least 30 days prior to the transfer. Upon the transfer described in this Section 5.11, Buyer and the American Savings 44 Pennsylvania Plan shall be responsible for all benefits attributable to the Transferred Accounts to which Transferred Employees were entitled under the Seller's 401(k) Plan as of such date, and Seller and the Seller's 401(k) Plan shall cease to have any liability, contingent or otherwise, for such benefits. 5.12 Welfare Benefits. 5.12.1 Within sixty (60) days after the Closing, Seller agrees to transfer to trusts established by Buyer under Section 501(c)(9) of the Code ("Buyer's VEBAs") the amount held under any trust established by Seller under Section 501(c)(9) of the Code ("Seller's VEBAs") to fund post-retirement health care and life insurance benefits attributable to the Business, including Former Employees identified on Schedule 5.12 (the "Water Sector Retirees") and any "grandfathered" Transferred Employees as set forth on Schedule 5.12. Buyer agrees to provide post-retirement health care and life insurance benefits to the Water Sector Retirees and, as applicable, Transferred Employees who become eligible for such benefits after Closing and further agrees that Buyer's VEBAs will apply an amount at least equal to the sum of the assets (and earnings thereon calculated at the rate of return generated by Buyer's VEBAs) transferred from Seller's VEBAs to provide post-retirement health care and life insurance benefits for such employees. Upon Closing, Buyer shall be responsible for all obligations of the Seller Parties to provide post-retirement health care and life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing and the Seller Parties shall cease to have any liability, contingent or otherwise, for such benefits. In consideration of such transfer, Buyer agrees not to terminate or materially modify those post-retirement health and life benefit provisions applicable to such grandfathered Transferred Employees and Water Sector Retirees as such provisions are in effect immediately prior to the Closing Date. 5.12.2 Buyer shall take all action necessary and appropriate to ensure that, as of the Closing Date, Buyer provides medical, health, dental, flexible spending account, accident, life, short-term disability, long-term disability and other employee welfare benefits (including retiree medical benefits) to Transferred Employees that, in the case of Non-Union Transferred Employees and Union Transferred Employees are substantially similar to those benefits provided by Buyer under its corresponding welfare benefit plans (the "Buyer's Welfare Plans"). For purposes of determining eligibility to participate, and entitlement to benefits, in each Buyer Welfare Plan, each Transferred Employee shall be credited with service, determined under the terms of the corresponding welfare plans maintained by Seller on the Closing Date (hereinafter referred to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for pre-existing conditions, waiting periods, and requirements for evidence of insurability under the Buyer Welfare Plans shall be waived in Buyer's Welfare Plans for Transferred Employees and retirees of the Water Sector and their respective Beneficiaries, and Transferred Employees and retirees of the Water Sector and their respective Beneficiaries shall receive credit under the Buyer Welfare Plans for co-payments, payments under a deductible limit made by them, and for out-of-pocket maximums applicable to them during the plan year of the Seller Welfare Plan in which the Closing Date occurs. As soon as practicable after the Closing Date, Seller shall deliver to Buyer a list of the Transferred Employees and retirees of the Water Sector and their respective Beneficiaries who had credited service under 45 Pennsylvania a Seller Welfare Plan, together with each such individual's service, copayment, deductible and out-of-pocket payment amounts under such plan. 5.12.3 Seller shall transfer to Buyer's flexible benefits plan any balances standing to the credit of Transferred Employees under Seller's flexible benefits plan as of the Closing Date. Seller shall provide to Buyer prior to the Closing Date a list of those Transferred Employees that have participated in the health or dependent care reimbursement accounts of Seller, together with their elections made prior to the Closing Date with respect to such Account, and balances standing to their credit as of the Closing Date. 5.13 Taxes. The Seller Parties, on the one hand, and Parent and Buyer, on the other, shall (a) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any Tax return, any audit or other examination by any taxing authority or any judicial or administrative proceeding with respect to Taxes; (b) each retain and provide the other with any records or other information which may be relevant to such return, audit, examination or proceeding, and (c) each provide the other with any final determination of any such audit or examination, proceeding or determination that affects any amount required to be shown on any Tax return of the other for any period (which shall be maintained confidentially). Without limiting the generality of the foregoing, Parent and Buyer, on the one hand, and the Seller Parties, on the other, shall retain, until the applicable statutes of limitations (including all extensions) have expired, copies of all Tax returns, supporting workpapers, and other books and records or information which may be relevant to such returns for all Tax periods or portions thereof ending before or including the Closing Date, and shall not destroy or dispose of such records or information without first providing the other party with a reasonable opportunity to review and copy the same. 5.14 Intentionally Omitted. 5.15 Citizens' Guarantees and Surety Instruments. Each of Parent and Buyer shall use its reasonable efforts to assist Citizens in obtaining full and complete releases on the guarantees, letters of credit, bonds and other surety instruments listed on Schedule 5.15. For purposes of this Section 5.15 and Section 5.16, reasonable efforts: (a) shall include Parent's or Buyer's assumption of the Assumed Indebtedness, the Contracts and the Permits on the terms set forth in this Agreement; (b) shall include an obligation on the part of Parent or Buyer to provide a guarantee, letter of credit, bond or other required surety instrument at Closing to the extent required by any Contract or Permit and in general to provide an equivalent surety instrument to be substituted for any surety instrument provided by Citizens to any beneficiary in connection with the Business; and (c) shall include the obligation of Buyer and/or Parent to provide a debt obligation (including obtaining a minimum credit rating necessary to prevent any change to the tax-exempt status of any of the Assumed Indebtedness and providing credit enhancements such as bond insurance) to the issuer of any Bonds relating to the Assumed Indebtedness satisfactory to such issuer in replacement of and in substitution for Citizens' obligations to such issuer under the Assumed Indebtedness, all to enable Parent or Buyer to assume the Assumed Indebtedness. 46 Pennsylvania 5.16 Assumption of Seller Debt. 5.16.1 Each of Buyer and Parent shall use its reasonable efforts (as defined in Section 5.15) to assist Seller in obtaining all consents and opinions and taking such other actions as may be required to enable Buyer or Parent, as the case may be, to assume at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 2.3. If, after using such reasonable efforts, the parties reasonably conclude that all such required consents and opinions will not be obtained by the date that the conditions to Closing set forth in the first sentences of Sections 6.1.4 and 6.2.4 are expected to be satisfied, then Citizens, Parent and Buyer will use their reasonable efforts and take such other actions as may be required to enable Citizens to assign at the Closing all of Seller's liabilities and obligations under the Assumed Indebtedness to the extent provided in Section 2.3, including complying with the provisions of Section 5.24 to the extent applicable to such assignment of the Assumed Indebtedness. 5.16.2 Representations Re: Assumed Indebtedness. (a) The Seller Parties represent that each of the Bonds which make up the Assumed Indebtedness is a bond issue which was used to finance sewage facilities within the meaning of Section 103(b)(4)(E) of the Internal Revenue Code of 1954 as amended ("1954 Code") or Section 142(a)(5) of the Code, as the case may be, or facilities for the furnishing of water within the meaning of Section 103(b)(4)(G) of the 1954 Code or Section 142(a)(4) and Section 142(e) of the Code, as the case may be, and that the interest of such Bonds was as of their date of issue, excludable from the gross income of the holders of such Bonds for federal or state (other than Illinois) income tax purposes pursuant to such sections of the IRC or the Code. In the case of the facilities for the furnishing of water (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. (b) The Seller Parties represent that they have complied with all of their duties and obligations under the IDRB Documents, including their obligations relating to the use of the proceeds of the bonds and the ownership, operation, use and maintenance of the Assets financed with the proceeds of the Bonds. Citizens and the other Seller Parties represent that the representations and warranties of "Company" in the IDRB Documents remain true and correct, and that they have not taken nor permitted to be taken any action which would have the effect of subjecting the interest on any of such Bonds to federal or state (other than Illinois) income taxation, except as otherwise contemplated or permitted by the IDRB Documents. (c) The Seller Parties represent that as of Closing all the proceeds of the Bonds will have been spent in accordance with the IDRB Documents, the construction of the 47 Pennsylvania projects to be financed with the Bonds will have been completed, that there are no reserve funds associated with the Trust Indentures for such Bonds, and that all of the proceeds of such Bonds were invested in tax-exempt obligations of state and local governments (except to the extent used to acquire or construct the facilities financed by such Bonds) and, that therefore, the Seller Parties do not have any arbitrage profits subject to the rebate requirements of Section 148 of the Code. (d) The Seller Parties represent that there is and has been no audit or other examination by any taxing authority relating to the Bonds. (e) The Seller Parties further represent the following with respect to the Bonds: (1) The Assets financed by the Bonds are sewage facilities or facilities for the furnishing of water, which means that (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof; (2) They have not caused or permitted to be caused any reissuance of the Bonds under Section 1001 of the Code, without first obtaining a "no adverse effect" opinion of bond counsel; (3) They have not caused an extension of the maturity of such Bonds without first obtaining a "no adverse effect" opinion of bond counsel; (4) They have not taken or caused to be taken any action that would cause the Bonds to be arbitrage bonds under Section 148 of the Code, including, but not limited to, the failure to rebate arbitrage profits, if any, as required by Section 148(f) of the Code; (5) They have not taken any action that would cause the Bonds not to be registered in accordance with Section 149(a) of the Code; and (6) They have not permitted the Bonds to become directly or indirectly "federally guaranteed" under Section 149 of the Code. 5.16.3 Covenants of Parent and Buyer. Parent and Buyer covenant and agree, so long as any Assumed IDRB Indebtedness is outstanding, to cause the Assets that were acquired, 48 Pennsylvania constructed, improved or equipped with the proceeds of such Assumed IDRB Indebtedness to be used as sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code or Section 142(a)(5) of the Code, as the case may be, and facilities for the furnishing of water within the meaning of Section 103(b)(4)(G) of the 1954 Code or 142(a)(4) and Section 142(e) of the Code, as the case may be, which means in the case of the facilities for the furnishing of water that (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. Each of Parent and Buyer further covenants and agrees, so long as any Assumed IDRB Indebtedness is outstanding, the following: (a) It will not cause or permit to be caused any reissuance under Section 1001 of the Code without first obtaining a "no adverse effect" opinion of bond counsel; (b) It will not cause an extension of the maturity of the Bonds without first obtaining a "no adverse effect" opinion of bond counsel; (c) It will not take or cause to be taken any action that would cause the Bonds to be arbitrage bonds under Section 148 of the Code, including, but not limited to, the failure to rebate arbitrage profits, if any, as required by Section 148(f) of the Code; (d) It will not take any action that would cause the Bonds not to be registered in accordance with Section 149(a) of the Code; (e) It will not permit the Bonds to become directly or indirectly "federally guaranteed" under Section 149 of the Code; and (f) It will comply with each representation, warranty, covenant or other agreement or obligation set out by the IDRB Documents as in effect on the date of execution of this Agreement. 5.17 Schedule of Permits. No later than March 13, 2000, Citizens shall deliver to Buyer a schedule, to be identified as Schedule 5.17, which sets forth all material Permits required for the use of the Acquired Assets and the operation of the Business by Buyer substantially in the manner as it was conducted prior to the date hereof. For purposes of this Section 5.17, material Permits shall include those required for the service of all utility customers at substantially the same service levels as provided by Seller on the date of this Agreement. All Permits listed on Schedule 5.17 that are required to be listed on Schedule 3.3 or Schedule 3.9 shall be so designated. Seller has made or will make prior to the Closing Date timely applications for renewals of all such Permits 49 Pennsylvania listed on Schedule 5.17, which under applicable law must be filed prior to the Closing Date to maintain the Permits listed on Schedule 5.17 in full force and effect. 5.18 Title Information. No later than March 13, 2000, Seller shall use its reasonable efforts to deliver to Buyer true, correct and complete copies of all existing title policies, surveys, leases, deeds, instruments and agreements relating to title to the Real Estate in Seller's possession. 5.19 Transaction with Related Parties. Effective as of the Closing Date, except as otherwise provided in Sections 5.9 through 5.12, 5.15, 5.24, 5.26, 5.27 and 2.7.1(j) of this Agreement, Seller shall have terminated and canceled all contracts, commitments and agreements (including employment relationships) relating to the Acquired Assets or the Business, between Seller, any Affiliate of Seller (including Citizens), any officer or director of any Seller Party, or any Affiliate of the foregoing. Seller shall be solely liable for any contractual or other claims, express or implied arising out of the termination and cancellation of any of the foregoing raised by any party thereto. 5.20 Approval by Citizens. Citizens shall, as the sole owner of common stock of each other Seller Party, vote all of such shares of common stock to approve this Agreement and the transactions contemplated hereby. 5.21 Supplemental Information. 5.21.1 Citizens shall provide Buyer, within fifteen (15) days after the execution or the date of receipt thereof, a copy of (a) each Contract (other than with respect to which the Business' total annual liability or expense is less than $100,000 per such Contract) entered into by Seller after the date hereof and prior to the Closing Date; (b) a copy of any written notice for assessments for public improvements against the Real Estate received after the date hereof and prior to the Closing Date; (c) a copy of the filing of any condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of the Real Estate received after the date hereof but prior to the Closing Date; and (d) a copy of any Contract where Seller is a lessee relating to the use or occupancy of the Real Estate and where such Contract involves annual payments in excess of $100,000 entered into by Seller after the date hereof and prior to the Closing Date. 5.21.2 Within fifteen (15) days after the receipt of notice of violation, Citizens shall notify Buyer of any violations of state or federal drinking water standards which, if such violations existed on the date hereof, would be required to be disclosed pursuant to Section 3.8.10 hereof, and shall promptly notify Buyer of the actions proposed to be taken by Seller to correct or otherwise respond to such violations. 5.22 Non-Competition. The Seller Parties agree that for a period of fifteen (15) years after the Closing Date no Seller Party nor any Affiliate of a Seller Party shall directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or 50 Pennsylvania control of or be otherwise connected in any substantial manner with any entity (other than Buyer and its successors and assigns) engaged in the business of storing, supplying and distributing water in the States in which Buyer acquires any Acquired Assets, whether or not such business is subject to regulation by a PUC (it being understood that the individual directors of Seller and Citizens are not Affiliates of a Seller Party). 5.23 Intentionally Omitted. 5.24 IDRB Obligations. (a) Buyer's IDRB Obligations. Each party acknowledges that (x) Citizens is and after the Closing Date shall continue to be and shall remain the primary obligor with respect to the Retained IDRB Indebtedness outstanding immediately after the Closing Date to the same extent as though no sale of the Acquired Assets had been made and that Parent and Buyer shall have no payment obligations with respect to such Retained IDRB Indebtedness and (y) the IDRB Documents require Citizens not to take or permit to be taken any action which would have the effect, directly or indirectly, of subjecting the interest on any of the Bonds to federal or state (other than Illinois) income taxation. Accordingly, Parent and Buyer covenant and agree (i) at Closing to execute and deliver to Citizens an agreement substantially in the form attached hereto as Exhibit D, with respect to each issuer of Bonds relating to Retained IDRB Documents that will be outstanding after the Closing Date, and (ii) so long as any such Bonds are outstanding, to cause the Acquired Assets that were acquired, constructed, improved or equipped with the proceeds of such Bonds to be used as facilities for the furnishing of water (that is, (a) the water is or will be made available to members of the general public (including electric utility, industrial, agricultural, or commercial users) and (b) either the facility is operated by a governmental unit or the rates for the furnishing or sale of the water have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof) or sewage facilities within the meaning of Section 103(b)(4)(E) of the 1954 Code, or Section 142(a)(5) of the Code as the case may be. (b) IDRB Construction Funds. Citizens hereby represents that there will be no construction funds or unspent bond proceeds available after the Closing Date that are held by the trustees of the Bonds relating to the Retained IDRB Indebtedness. (c) Consents and Opinions. The parties shall use their respective best commercially reasonable efforts to obtain all consents and legal opinions as may be required under the Retained IDRB Documents to enable Seller to retain all Retained IDRB Indebtedness and to sell the Acquired Assets to Buyer. 5.25 Cooperation with Respect to Like-Kind Exchange. Buyer agrees that Seller may, at Seller's written election delivered to Buyer no later than five (5) days prior to the Closing 51 Pennsylvania Date, direct that all or a portion of the Initial Cash Payment be delivered to a "qualified intermediary" as defined in Treasury Regulation ss.1.1031(k) - (g)(4) as to enable Seller's relinquishment of the Acquired Assets to qualify as part of a like-kind exchange of property covered by Section 1031 of the Code. If Seller so elects, Buyer shall reasonably cooperate with Seller (but without being required to incur any out-of-pocket costs in the course thereof) in connection with Seller's efforts to effect such like-kind exchange, which cooperation shall include, without limitation, taking such actions as Seller reasonably requests in order to enable Seller to qualify such transfer as part of a like-kind exchange of property covered by Section 1031 of the Code (including any actions reasonably required to facilitate the use of a "qualified intermediary"), and Buyer agrees that Seller may assign all or part of its rights (but no obligations) under this Agreement to a person or entity acting as a qualified intermediary to qualify the transfer of the Assets as part of a like-kind exchange of property covered by Section 1031 of the Code. Buyer and Seller agree in good faith to use reasonable efforts to coordinate the transactions contemplated by this Agreement with any other transactions engaged in by either Buyer or Seller; provided that such efforts shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. Seller shall indemnify and hold Buyer harmless from any cost, expense or liability arising from its cooperating under this Section 5.25. 5.26 Transition Plan. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a transitional services team, which shall include expertise from various functional specialties associated with or involved in providing billing, payroll and other support services provided to Seller by any automated or manual process using facilities or employees that are not included among the Acquired Assets or Transferred Employees. Such team will be responsible for preparing, and timely implementing, a transition plan which will identify and describe substantially all of the various transition activities that the parties will cause to occur before and after Closing and any other transfer of control matters that any party reasonably believes should be addressed in such transition plan. The transition plan will set forth reasonable arrangements providing Buyer, at Buyer's sole expense, with appropriate access to Seller's relevant computer systems to allow for a full conversion of the relevant data and functionality to Buyer's systems on the Closing Date. Buyer and Seller shall use their commercially reasonable efforts to cause their representatives on such transition team to cooperate in good faith and take all reasonable steps necessary to develop a mutually acceptable transition plan no later than 60 days prior to the Closing Date. 5.27 Procedures regarding Refunds of Advances. Within 30 days after the execution date of this Agreement, the parties jointly shall establish a working group of appropriate subject matter experts to determine the appropriate obligations of Parent and Buyer regarding notification and the provision of other accurate and timely data to Citizens to enable Citizens timely and accurately to satisfy the refund obligations described in Section 2.3.3(b). Such working group will be responsible for preparing a comprehensive agreement no later than March 13, 2000, which agreement shall be executed by the parties at Closing. Among other arrangements, the parties would require that the customers and developers owed refunds provide joint notices to Buyer and Citizens. 52 Pennsylvania 5.28 Title Insurance. Prior to Closing, Seller shall cooperate with Buyer and use commercially reasonable efforts to assist Buyer if Buyer desires to obtain ALTA title insurance commitments (collectively, the "Title Commitments," and each a "Title Commitment"), in final form, from one or more title insurance companies (collectively, the "Title Company"), committing the Title Company (subject only to the satisfaction of any industry standard requirements contained in the Title Commitment) to issuing ALTA (or its local equivalent) form of title insurance policies insuring good, valid, indefeasible fee simple title to the Real Estate in Buyer, in all cases, at Buyer's sole expense and in the respective amounts that Buyer requests prior to Closing, subject to no Liens or other exceptions to title other than Permitted Exceptions (collectively the "Title Policies"). On or prior to the Closing Date, Seller shall execute and deliver, or cause to be executed and delivered, to the Title Company, at no cost to Seller, any customary affidavits, standard gap indemnities and similar documents reasonably requested by the Title Company in connection with the issuance of the Title Commitments or the Title Policies; provided that such efforts and Buyers' request for Title Policies or Title Commitments shall, in no event, result in any delay in the consummation of the transactions contemplated by this Agreement. ARTICLE 6 CONDITIONS PRECEDENT; TERMINATION 6.1 Conditions Precedent to Obligations of Buyer and Parent. The obligations of Buyer and Parent to cause the purchase of the Acquired Assets and the assumption of the Assumed Liabilities and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by Buyer and Parent in their sole discretion): 6.1.1 Performance of Agreements; Representations and Warranties. Seller shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Seller shall be true and correct on and as of the Closing Date with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 3.25), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a Material Adverse Effect; provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso); and provided further, that the representation and 53 Pennsylvania warranty set forth in Section 3.5.1 shall be deemed to be true and correct on and as of the Closing Date if any Material Adverse Effect that may have arisen or occurred between the execution date of this Agreement and the Closing Date shall have been cured or remedied such that such Material Adverse Effect is not continuing as of the Closing Date. Buyer shall have been furnished with a certificate of the Chief Financial Officer or other Vice President of Citizens dated the Closing Date, certifying to the foregoing. 6.1.2 Opinion of Counsel. Buyer shall have received from L. Russell Mitten II, Vice President and General Counsel of Seller, an opinion dated the Closing Date, in form and substance satisfactory to Buyer, to the effect set forth in Exhibit E hereto. 6.1.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.1.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby, and such order shall not contain any restrictions or conditions (other than those in effect on the date hereof or requiring that the regulatory treatment with respect to the Business in existence as of the date of this Agreement applicable to Seller be continued following the transactions contemplated hereby) which would have a Material Adverse Effect or a material adverse effect on any other regulated business of Buyer in the state in which the PUC has jurisdiction, and such order shall be final and unappealable; Seller shall have obtained all statutory, regulatory and other consents and approvals which are required in order to consummate the transactions contemplated hereby and to permit Buyer to conduct the Business in the manner contemplated by Section 3.25 hereof other than those the failure of which to obtain would not have a Material Adverse Effect. Seller shall have also obtained (i) all consents and legal opinions required to enable Parent or Buyer to assume (or for Citizens to assign to Parent or Buyer) the Assumed Indebtedness (without any change in the tax-exempt status of such Assumed Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)) and all other consents and legal opinions required to enable Seller to sell the Acquired Assets to Buyer at the Closing (without any change in the tax-exempt status of such Assumed Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture) and (ii) all consents required under Contracts and Permits relating to Seller's water appropriation and flowage rights to the extent reasonably sufficient to enable Buyer to service the customers of the Business and to service future commitments under such Contracts. 6.1.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Buyer's ownership of all or any material portion of the Acquired Assets, nor (ii) shall there be pending or threatened any litigation, 54 Pennsylvania suit, action or proceeding by any party which would reasonably be expected to materially limit or materially adversely affect Buyer's ownership of the Acquired Assets. 6.1.6 Documents. Seller and Citizens shall have delivered all of the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Section 2.7 hereof and shall have made arrangements reasonably satisfactory to Buyer to deliver to Buyer as promptly as practicable after the Closing such records (including customer and employee records) necessary to own and operate the Business. 6.1.7 Related Closings. Buyer shall be reasonably satisfied that the consummation of each of the asset purchase and sale transactions contemplated by those certain purchase agreements described on Schedule 6.1.7 (the "Related Purchase Agreements") will occur concurrently with the Closing. 6.2 Conditions Precedent to Obligations of Seller Parties. The obligations of the Seller Parties to cause the sale of the Acquired Assets and to consummate the other transactions contemplated hereby are subject to the satisfaction, on or prior to the Closing Date, of each of the following conditions (any one or more of which may be waived in writing in whole or in part by the Seller Parties in their sole discretion): 6.2.1 Performance of Agreements; Representations and Warranties. Parent and Buyer shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them at or prior to the Closing; and the representations and warranties set forth in this Agreement made by Buyer and Parent shall be true and correct on and as of the Closing Date, with the same force and effect as though such representations and warranties had been made on and as of the Closing Date, except for representations and warranties that speak as of a specific date or time other than the Closing Date (which need only be true and correct as of such date or time), other than, in all such cases (except Section 4.2), such failures to be true and/or correct as would not in the aggregate reasonably be expected to have a material adverse effect on the respective ability of Buyer and Parent to perform their obligations under this Agreement and the Transaction Documents, provided, however, that if any such representation or warranty is already qualified in any respect by materiality or as to material adverse effect, for purposes of determining whether this condition has been satisfied, such materiality or material adverse effect qualification will be in all respects ignored and such representation or warranty shall be true and correct in all respects without regard to such qualification (but subject to the overall exception as to material adverse effect set forth immediately prior to this proviso). Seller shall have been furnished with a certificate of the President or Vice President of Parent and Buyer, dated the Closing Date, certifying to the foregoing. 6.2.2 Opinion of Counsel. Seller shall have received from Dechert Price & Rhoads, counsel to Parent and Buyer, an opinion dated the Closing Date, in form and substance satisfactory to Seller, to the effect set forth in Exhibit F hereto. 55 Pennsylvania 6.2.3 HSR Act. The applicable waiting period under the HSR Act with respect to the transactions contemplated hereby shall have expired or been terminated. 6.2.4 Required PUC and Other Consents. The PUC shall have issued an order approving the transactions contemplated hereby and such order shall not contain any restrictions or conditions which would have a material adverse effect on Seller's business activities in the State in which the PUC has jurisdiction or any significant adverse effect on Citizens' acquisition and divestiture activities in that State (including divestiture of the Acquired Assets), and such order shall be final and unappealable; Seller shall have obtained all statutory and regulatory consents and approvals which are required in order to consummate the transactions contemplated hereby, other than those the failure of which to obtain would not have a material adverse effect on the Seller after the Closing. Seller shall have obtained (i) all consents and legal opinions required to enable Parent or Buyer to assume (or Citizens to assign to Parent or Buyer) the Assumed Indebtedness without any change in the tax-exempt status thereof and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F), (ii) all consents and legal opinions required under the Retained IDRB Documents to enable Seller to retain the Retained IDRB Indebtedness until maturity and to sell the Acquired Assets to Buyer at the Closing (in each case without any change in the tax-exempt status of the Assumed Indebtedness or the Retained IDRB Indebtedness and without any event of taxability relating to the matters set forth in Sections 7.4.1(a)(D) and 7.4.1(b)(F)), free and clear of all Liens other than Permitted Exceptions (and specifically free and clear of any Lien arising under or pursuant to the Mortgage Indenture), and (iii) all other consents required or advisable in order for Seller to transfer Acquired Assets without incurring material liability under any Contract, Permit or Real Estate instrument. 6.2.5 Injunction; Litigation. (i) No statute, rule, regulation or order of any court or Authority shall be in effect which restrains or prohibits the transactions contemplated by this Agreement or which would limit or materially adversely affect Seller's ownership of all or any material portion of its properties, nor (ii) shall there be pending or threatened any litigation, suit, action or proceeding by any party which could reasonably be expected to materially limit or materially adversely affect Seller's ownership of any of its properties. 6.2.6 Documents. Parent and Buyer shall have delivered all the certificates, instruments, contracts and other documents specified to be delivered by it hereunder, including pursuant to Sections 2.7, 5.24 and 5.27, and shall have taken such actions as Seller may have requested pursuant to Section 5.25 hereof. 6.2.7 Related Closings. Seller shall be reasonably satisfied that the consummation of each of the Related Purchase Agreements will occur concurrently with Closing. 6.3 Termination. This Agreement may be terminated at anytime prior to the Closing Date: 6.3.1 by mutual written consent of the Seller Parties, Buyer and Parent; 56 Pennsylvania 6.3.2 by any of the Seller Parties, Parent or Buyer if: (i) any governmental or regulatory body the consent of which is a condition to the obligations of the Seller Parties, Parent and Buyer to consummate the transactions contemplated hereby shall have determined not to grant its consent and all appeals of such determination shall have been taken and have been unsuccessful; (ii) any court of competent jurisdiction shall have issued an order, judgment or decree (other than a temporary restraining order) restraining, enjoining or otherwise prohibiting the transactions contemplated hereby and such order, judgment or decree shall have become final and nonappealable; or (iii) the Closing shall not have occurred on or before March 31, 2001; provided, however, that the right to terminate this Agreement under this Section 6.3.2(iii) will not be available to any party that is in material breach of its representations, warranties, covenants or agreements contained herein; and provided, further, that if Closing has not occurred by such date because the conditions precedent to Closing set forth in the first sentence of Section 6.1.4 and the first sentence of Section 6.2.4 have not been fulfilled, then such date shall be automatically extended to September 30, 2001; or 6.3.3 If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Section 6.3, this Agreement shall become void and of no further force and effect, except for the provisions of Section 5.6 relating to publicity, Sections 3.24 and 4.6 relating to brokerage and Section 7.1 relating to expenses. Nothing in this Section 6.3 shall be deemed to release either party from any liability for any willful breach by such party of the terms and provisions of this Agreement. ARTICLE 7 CERTAIN ADDITIONAL COVENANTS 7.1 Certain Taxes and Expenses. Citizens shall be solely responsible for all state and local sales, use, transfer, real property transfer and other similar taxes, fees and charges that are calculated based on the value of the Acquired Assets being transferred arising from and with respect to the sale and purchase of the Acquired Assets and Buyer shall be solely responsible for all transfer, registration, documentary stamp, recording and other similar fees and charges arising from and with respect to the transfer and recording of title documentation relating to the Acquired Assets. Parent shall be responsible for all costs and expenses relating to the assumption by or assignment to Parent or Buyer of the Assumed Indebtedness. Except as otherwise provided in this Agreement, each of the parties hereto shall each bear its respective accounting, legal and other expenses incurred in connection with the transactions contemplated by this Agreement. 7.2 Maintenance of Books and Records. The Seller Parties, on the one hand, and Buyer and Parent, on the other hand, shall cooperate fully with each other after the Closing so that (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege) each party has access to the business records, contracts and other information existing at the Closing Date and relating in any manner to the Acquired Assets or the Assumed Liabilities or 57 Pennsylvania the conduct of the Business (whether in the possession of the Seller Parties or Buyer or Parent). No files, books or records existing at the Closing Date and relating in any manner to the Acquired Assets or the conduct of the Business shall be destroyed by any party for a period of six years after the Closing Date without giving the other party at least 30 days prior written notice, during which time such other party shall have the right (subject to the provisions hereof) to examine and to remove any such files, books and records prior to their destruction. The access to files, books and records contemplated by this Section 7.2 shall be during normal business hours and upon not less than two (2) business days prior written request, shall be subject to such reasonable limitations as the party having custody or control thereof may impose to preserve the confidentiality of information contained therein, and shall not extend to material subject to a claim of privilege unless expressly waived by the party entitled to claim the same. 7.3 Survival. 7.3.1 Subject to this Section 7.3, Section 7.4.2(g) and Section 7.4.2(j), all representations, warranties, covenants and agreements contained in this Agreement or the Transaction Documents shall survive (and not be affected in any respect by) the Closing, any investigation conducted by any party hereto and any information which any party may receive. Notwithstanding the foregoing: (a) the covenants contained in Sections 5.1, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (b) the covenants contained in Section 5.2 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; (c) the representations and warranties contained in Sections 3.12 and 3.16 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought following the expiration of the applicable statute of limitations (or extensions or waivers thereof); (d) the representations and warranties contained in Section 3.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (e) the representations and warranties contained in Section 3.10 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; 58 Pennsylvania (f) the representations and warranties contained in Section 3.7 and 3.17 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (g) the representations and warranties contained in Sections 3.3, 3.5, 3.6, 3.8, 3.9 and 3.25 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (h) the representations and warranties contained in Section 3.11 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (i) the representations and warranties contained in Section 4.2 and the related indemnity obligations contained in Section 7.4 shall survive for an unlimited period of time; (j) the representations and warranties contained in Sections 4.3 and 4.4 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the third anniversary of the Closing Date; (k) the representations and warranties contained in Section 4.5 and the related indemnity obligations contained in Section 7.4 shall terminate on, and no action or claim with respect thereto may be brought after, the Closing Date; and (l) all other representations and warranties contained in this Agreement and the related indemnity obligations contained in Section 7.4 shall terminate on and no further action or claim with respect thereto may be brought after, the second anniversary of the Closing Date; (m) such representations and warranties specified in the foregoing clauses (c) through (k), and the covenants contained in Section 5.1, 5.2, 5.3, 5.4, 5.5, 5.8.2 through 5.8.4 and 5.21 and the liability of any party with respect thereto, shall not terminate with respect to any claim, whether or not fixed as to liability or liquidated as to amount, with respect to which such party has been given written notice setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims prior to the relevant anniversary of the Closing Date or the 30th day after the expiration of the applicable statute of limitations (or extensions or waivers thereof), as the case may be. If any claim for indemnification is asserted or could be asserted with respect to a breach or asserted breach of Section 3.17 (Undisclosed Liabilities) and the Buyer or Parent is also entitled to indemnification in respect of that claim for breach or asserted breach of any other representation or warranty in this Agreement for which there is a shorter survival period, such shorter period will apply to such claim except to the 59 Pennsylvania extent that such claim is a product liability, toxic tort or similar claim (as described in Section 2.3.3(a)) brought by a private party litigant. 7.3.2 No claim for indemnity under Section 7.4 shall be brought or made by Buyer or Parent pursuant to Sections 7.4.1(a)(B) or 7.4.1(a)(C): (a) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), for any action or claim with respect to the Pre-Existing Conditions; (b) after the tenth anniversary of the Closing Date (the seventh anniversary of the Closing Date in the event of a Change of Control of Citizens), with respect to the presence of Hazardous Substances at any locations other than the Real Estate; and (c) after the third anniversary of the Closing Date, for any action or claim with respect to any other Retained Liability; Provided, however, that the foregoing time limitations shall not apply to any such claims which have been the subject of a written notice from Parent and/or Buyer to the Seller Parties prior to such period setting forth the facts upon which the claim for indemnification is based and, if possible, a reasonable estimate of the amount of the claims; and, provided, further, that the foregoing time limitations shall also not apply to any such claims: (u) with respect to Taxes; (v) with respect to any liability of the types that appear as "Trade Payables" or "Other Current and Accrued Liabilities" on the financial statements of Seller; (w) not exclusively related to the Acquired Assets or not exclusively related to the Business; and (x) with respect to any of the matters discussed in Section 3.16 hereof. For purposes of Sections 7.3.2(a) and (b), a "Change of Control of Citizens" shall be deemed to have occurred if: (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act of 1934, as amended (the "Exchange Act"), other than an underwriter engaged in a firm commitment underwriting on behalf of Citizens, is or becomes the beneficial owner (as such term is used in Rule 13D-3 and 13D-5 under the Exchange Act, except that for purposes of this clause (i) a person shall be deemed to have beneficial ownership of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total outstanding shares of common stock of the Company; (ii) all or substantially all of Citizens' and its Subsidiaries' assets are sold, leased, exchanged or otherwise transferred to any person or group of persons acting in concert; (iii) Citizens is merged or consolidated with any other person, whether or not Citizens is the surviving corporation in such merger or consolidation; or (iv) Citizens is liquidated or dissolved or adopts a plan of liquidation. 7.4 Indemnification. Seller, Parent and Buyer agree as follows: 60 Pennsylvania 7.4.1 General Indemnification Obligations. (a) Seller shall indemnify Buyer and its directors, officers and other Affiliates (including Parent) and hold Buyer and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by the Seller Parties in this Agreement or in any document or certificate required to be furnished to Buyer by any of the Seller Parties pursuant to this Agreement (including the Transaction Documents); (B) subject to Section 7.3.2, any Excluded Assets or Retained Liabilities; (C) subject to Section 7.3.2, the ownership, operation or use of any of the businesses or assets of the Seller Parties or their Affiliates (other than the Business and the Acquired Assets) whether before, on or after the Closing Date; and (D) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Retained IDRB Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement. (b) Buyer and Parent shall indemnify Seller, and their directors, officers and other Affiliates (including Citizens) and hold Seller and such other parties harmless from and against any and all Damages arising out of or resulting from (A) any breach of any representation, warranty, covenant or agreement made by Parent or Buyer in this Agreement or in any document or certificate required to be furnished to Seller by Parent or Buyer pursuant to this Agreement (including the Transaction Documents), including the Buyer's IDRB Obligations; (B) any Assumed Liabilities after the Closing Date, including the Assumed Indebtedness; (C) the ownership, operation or use of the Business or the Acquired Assets after the Closing Date (except to the extent resulting from Retained Liabilities or to the extent resulting from breaches by the Seller Parties of representations, warranties, covenants or agreements hereunder or in the other Transaction Documents); (D) any claim by a Transferred Employee or a Former Employee referred to on Schedule 5.12 or the Beneficiary of any such employee or former employee for post-retirement health care or life insurance benefits "incurred" (within the meaning of Section 5.9.4) after the Closing; (E) any violation by Parent or Buyer, or any assignee, lessee or successor of Parent or Buyer, of the covenants and agreements as provided by Section 5.16.3 hereof and Section 5 of Exhibit D hereto; and (F) an event of taxability, as such term is customarily used in municipal securities transactions, relating to the Assumed Indebtedness and arising from the sale of the Acquired Assets pursuant to this Agreement and/or the assignment or assumption of the Assumed Indebtedness. (c) For purposes of this Agreement, "Damages" shall mean any and all losses, liabilities, obligations, damages (including any governmental penalty or punitive damages assessed or asserted against the party seeking indemnification and including costs of investigation, clean-up and remediation), deficiencies, interest, costs and expenses and any claims, actions, demands, causes of action, judgments, costs and reasonable expenses (including reasonable attorneys' fees and all other reasonable expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened, incident to the successful enforcement of this Agreement). For purposes of this Section 7.4, the determination of whether any breach of any representation, covenant or agreement has occurred, and the calculation of the amount of Damages 61 Pennsylvania incurred by the Indemnified Party arising out of or resulting from any breach of a representation, covenant or agreement by any party hereto, the references to a "Material Adverse Effect" or materiality (or other correlative terms) shall be disregarded, provided that no such breach shall be found to have occurred due to facts or circumstances arising from an occurrence or condition described in Section 1.1.61(a). Notwithstanding the foregoing, Damages shall not include the loss of profits of the party seeking indemnification, or punitive damages unless the party seeking indemnification has had punitive damages assessed or asserted against it. (d) Notwithstanding any language contained in any Transaction Document (including deeds to Real Estate and instruments delivered by Seller to the Title Company), representations and warranties as to Real Estate set forth in Section 3.10 and 3.11 will not be merged into any Transaction Document and the indemnification obligations of Seller, and the limitations on such obligations, set forth in this Agreement, shall control. No provision set forth in any Transaction Document shall be deemed to enlarge, alter or amend the terms or provisions of this Agreement. 7.4.2 General Indemnification Procedures. (a) A party seeking indemnification pursuant to this Section 7.4 (an "Indemnified Party") shall give prompt written notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, the incurrence of any Damages, or the commencement of any action, suit or proceeding, of which it has knowledge and in respect of which indemnity may be sought hereunder, and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such required notice shall relieve the Indemnifying Party of any liability hereunder only to the extent that the Indemnifying Party has suffered actual prejudice thereby. The Indemnifying Party shall have the right, exercisable by written notice to the Indemnified Party after receipt of notice from the Indemnified Party of the commencement of or assertion of any claim or action, suit or proceeding by a third party in respect of which indemnity may be sought hereunder (a "Third Party Claim"), to assume the defense of such Third Party Claim which involves (and continues to involve) solely monetary damages; provided, that (A) the Indemnifying Party expressly agrees in such notice that, as between the Indemnifying Party and the Indemnified Party, solely the Indemnifying Party shall be obligated to satisfy and discharge the Third Party Claim, (B) such Third Party Claim does not include a request or demand for injunctive or other equitable relief by an Authority and (C) the Indemnifying Party makes reasonably adequate provision to assure the Indemnified Party of the ability of the Indemnifying Party to satisfy the full amount of any adverse monetary judgment that is reasonably likely to result. The Indemnifying Party shall be deemed to have satisfied the condition set forth in clause (C) of the proceeding sentence if it is a regulated utility. (b) Neither the Indemnified Party nor the Indemnifying Party shall settle any Third Party Claim without the prior written consent of the other, which consent shall not be unreasonably withheld or delayed. 62 Pennsylvania (c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other party is defending as provided in this Agreement. (d) Amounts paid in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price. (e) Subject to Section 7.4.2(f) and Section 7.4.2(i), neither Parent nor Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages incurred unless the aggregate amount of Damages incurred by Parent or Buyer (or the other Persons for which they can claim indemnification), together with all other claims for Damages under Section 7.4.2(e) of each of the Related Purchase Agreements, exceeds $6,123,000 in the aggregate (the "Threshold Amount"), in which case Seller shall then be liable for Damages in excess of the Threshold Amount. Subject to Section 7.4.2(f) and Section 7.4.2(i), the cumulative aggregate indemnity obligation of Citizens and its Affiliates under Section 7.4 of this Agreement and the Related Purchase Agreements shall not exceed $60,000,000 (the "Ceiling"). (f) Notwithstanding the foregoing, the parties acknowledge that Parent or Buyer (and the other Persons for which they can claim indemnity hereunder) shall be entitled to indemnification for Damages in respect of intentional and wilful breaches of covenants or agreements in this Agreement or any of the Retained Liabilities other than the Specified Liabilities irrespective of the Threshold Amount or the Ceiling (it being understood that the failure to cure a breach shall not, by itself, be an intentional and wilful breach). As used herein, the "Specified Liabilities" shall mean the Retained Liabilities arising from claims made after the Closing Date which (i) do not relate to matters within the scope of clauses (u), (v), (w) and (x) of Section 7.3.2; (ii) were not known to the Seller Parties on or prior to Closing; and (iii) relate exclusively to the Acquired Assets or the Business prior to the Closing Date. Notwithstanding anything to the contrary in this Section 7.4, Parent or Buyer (or the other Persons for which they can claim indemnification) shall be entitled to indemnification for Damages in respect of a breach of Section 3.2, 3.12 or 3.16 irrespective of the Threshold Amount or the Ceiling. (g) The rights and remedies of Seller, Parent and Buyer under this Section 7.4 are exclusive and in lieu of any and all other rights and remedies which Seller, Parent and Buyer may have under this Agreement or otherwise for monetary relief with respect to (x) the inaccuracy of any representation, warranty, certification or other statement made (or deemed made) by Seller, Parent or Buyer in or pursuant to this Agreement or any of the Transaction Documents or (y) any breach or failure to perform any covenant or agreements set forth in this Agreement or any of the Transaction Documents. (h) Except to the extent provided in Section 7.4.2(j) below, no right to indemnification under this Section 7.4 shall be limited by reason of any investigation or audit conducted before or after the Closing of any party hereto including, without limitation, the 63 Pennsylvania knowledge of such party of any breach of any representation, warranty, agreement or covenant by the other party at any time, or the decision by such party to complete the Closing. (i) No party shall have any liability to another party under this Section 7.4 for Damages (and no cost or expense relating to such Damages shall be included in determining the extent of Damages incurred by such party for purposes of Section 7.4.2(e)) to the extent that: (A) the Indemnified Party recovers insurance proceeds covering the Damages or otherwise recovers payments in respect of such Damages from any other source (whether in a lump sum or stream of payments); or (B) the Indemnified Party's Tax liability is actually reduced as a result of a tax benefit to which the Indemnified Party becomes entitled in respect of the Damages. (j) Seller shall have no liability or obligation under this Section 7.4 for any Damages resulting from the inaccuracy or breach of any representation or warranty if such inaccuracy or breach is disclosed by Seller pursuant to and in accordance with Sections 5.3 and 8.4 hereof; (k) Buyer agrees to use its commercially reasonable efforts to give timely and effective written notice to the appropriate insurance carrier(s) of any occurrence or circumstances which, in the judgment of Buyer consistent with its customary risk management practices, appear likely to give rise to a claim against Buyer that is likely to involve one or more insurance policies of Buyer. Any such notice shall be given in good faith by Buyer without regard to the possibility of indemnification payments by Seller under this Section 7.4, and shall be processed by Buyer in good faith and in a manner consistent with its risk management practices involving claims for which no third party contractual indemnification is available. Buyer agrees that (i) if it is entitled to receive payment from Seller for Damages arising under or pursuant to a breach of the representation and warranty set forth in Section 3.10, and (ii) if Buyer has obtained title insurance which may cover the claim or matter giving rise to such Damages, then (iii) such title insurance shall be primary coverage and Buyer will make a claim under the title insurance if such claim can be made in good faith before enforcing its right to receive payment from Seller. Buyer shall be under no obligation to obtain title insurance or prosecute such claim (other than the initial filing of such claim). (l) If at any time subsequent to the receipt by an Indemnified Party of an indemnity payment hereunder, such Indemnified Party (or any Affiliate thereof) receives any recovery, settlement or other similar payment with respect to the Damages for which it received such indemnity payment (including insurance proceeds and other payments pursuant to Section 7.4.2(i)(A) and a tax benefit pursuant to Section 7.4.2(i)(B)) (the "Recovery"), such Indemnified Party shall promptly pay to the Indemnifying Party an amount equal to the amount of such Recovery, 64 Pennsylvania less any expense incurred by such Indemnified Party (or its Affiliates) in connection with such Recovery, but in no event shall any such payment exceed the amount of such indemnity payment; (m) In the event of any indemnification claim under this Section 7.4 involving the claim of any third party, the Indemnified Party shall cooperate fully (and shall cause its Affiliates to cooperate fully) with the Indemnifying Party in the defense of any such claim under this Section 7.4. Without limiting the generality of the foregoing, the Indemnified Party shall furnish the Indemnifying Party with such documentary or other evidence as is then in its or any of its Affiliates' possession as may reasonably be requested by the Indemnifying Party for the purpose of defending against any such claim. Whether or not the Indemnifying Party chooses to defend or prosecute any claim involving a third party, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith. 7.4.3 Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING THE SCOPE OF THE INDEMNIFICATION OBLIGATIONS SET FORTH IN THIS AGREEMENT, AN INDEMNIFIED PARTY SHALL BE ENTITLED TO INDEMNIFICATION HEREUNDER IN ACCORDANCE WITH THE TERMS HEREOF, REGARDLESS OF WHETHER THE LOSS OR CLAIM GIVING RISE TO SUCH INDEMNIFICATION OBLIGATION IS THE RESULT OF THE SOLE, CONCURRENT OR COMPARATIVE NEGLIGENCE, STRICT LIABILITY, VIOLATION OF ANY LAW OR OTHER LEGAL FAULT OF OR BY SUCH INDEMNIFIED PARTY. THE PARTIES AGREE THAT THIS PARAGRAPH CONSTITUTES A CONSPICUOUS LEGEND. 7.5 UCC Matters. From and after the Closing Date, Seller will promptly refer all inquiries with respect to ownership of the Acquired Assets or the Business to Buyer. In addition, Seller will execute such documents and financing statements as Buyer may reasonably request from time to time to evidence transfer of the Acquired Assets to Buyer in accordance with this Agreement, including any necessary assignment of financing statements. 7.6 Financial Statements. In connection with the preparation and filing of any registration statement or periodic report of Buyer or its Affiliates pursuant to Rule 3-05, Article 11 of Regulation S-X or other rule or regulation promulgated under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, Seller, at Buyer's expense, shall provide Buyer (a) by April 30, 2000 or within 120 days after Buyer's written request therefor if made after January 1, 2000, with the following audited financial statements: (i) a statement of net assets of the Business as of the end of the last fiscal year prior to Closing; and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business for the last fiscal year prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements), including opinions thereon of Seller's Accountants, and (b) within 90 days after Buyer's written request made therefor (provided such request is made after the end of the fiscal quarter described below), the following unaudited 65 Pennsylvania statements: (i) a statement of net assets of the Business as of the end of the last fiscal quarter prior to Closing (but only if such quarter is subsequent to the last fiscal year prior to Closing); and (ii) a statement of income of the Business and a statement of cash flows or its equivalent of the Business, for the period from the end of the last fiscal year through the end of the last fiscal quarter prior to Closing (in each case combined with the businesses being acquired by Buyer or Affiliates of Buyer pursuant to the Related Purchase Agreements). 7.7 Collection of Receivables. Seller agrees that it shall promptly (and in any event no later than five (5) Business Days following receipt) deliver all such payments with respect to accounts receivable from customers of the Business received on and after the Closing Date (including but not limited to negotiable instruments tendered in payment of accounts receivable assigned to Buyer hereunder which shall be duly endorsed by Seller to the order of Buyer) to Buyer. Seller shall cooperate with Buyer in coordinating the transfer of collection agents and customers of the Business who pay their bills through the Automated Clearinghouse (ACH) process to Buyer. ARTICLE 8 MISCELLANEOUS 8.1 Construction. Parent, Buyer and the Seller Parties have participated jointly in the negotiation and drafting of this Agreement and the Transaction Documents. In the event any ambiguity or question of intent or interpretation arises, this Agreement and the Transaction Documents shall be construed as if drafted jointly by Parent, Buyer and the Seller Parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" in this Agreement shall mean including without limitation. Words in the singular shall be held to include the plural and vice versa and words of one gender shall be held to include the other genders as the context requires. The terms "hereof," "herein," and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Schedules and Exhibits hereto) and not to any particular provision of this Agreement, and Article, Section, paragraph, Exhibit and Schedule references are to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified. The word "or" shall not be exclusive. Provisions of this Agreement shall apply, when appropriate, to successive events and transactions. Section references refer to this Agreement unless otherwise specified. 8.2 Notices. Any notice, request, demand, waiver, consent, approval or other communication which is required or permitted to be given to any party hereunder shall be in writing and shall be deemed given only if delivered to the party personally or sent to the party by telecopy, by registered or certified mail (return receipt requested) with postage and registration or certification fees thereon prepaid, or by any nationally recognized overnight courier addressed to the party at its address set forth below: 66 Pennsylvania If to Parent: American Water Works Company 1025 Laurel Oak Road P.O. Box 1770 Voorhees, New Jersey 08043 Fax: (609) 346-8299 Attention: General Counsel with a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Buyer: Pennsylvania-American Water Company 800 West Hersheypark Drive Hershey, PA 17033 Fax: (717) 531-3252 Attention: Corporate Counsel with a copy to Parent and a copy to: Dechert Price & Rhoads 4000 Bell Atlantic Tower 1717 Arch Street Philadelphia, PA 19103-2793 Fax: (215) 994-2222 Attention: Craig Godshall, Esq. If to Seller: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: Robert J. DeSantis Telecopier: (203) 614-4625 67 Pennsylvania with copies to: Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: L. Russell Mitten, II Telecopier: (203) 614-4651 and Citizens Utilities Company High Ridge Park Stamford, CT 06905 Attention: J. Michael Love Telecopier: (203) 614-5201 and Fleischman and Walsh, L.L.P. 1400 Sixteenth Street, N.W. Washington, D.C. 20036 Attention: Jeffry L. Hardin Telecopier: (202) 387-3467 8.3 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other party hereto; provided that Seller may assign its rights or delegate its duties under this Agreement to a qualified intermediary chosen by Seller to structure the transactions contemplated hereby as a like-kind exchange of property covered by Section 1031 of the Code. 8.4 Exhibits and Schedules. All Exhibits and Disclosure Schedules annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Disclosure of any fact or item in any Schedule referenced by a particular paragraph or Section in this Agreement shall, should the existence of the fact or item or its contents be clearly related to any other paragraph or section, be deemed to be disclosed with respect to that other paragraph or section. 8.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws principles thereof. 68 Pennsylvania 8.6 Dispute Resolution. Except as otherwise provided herein, any dispute, controversy or claim between the parties relating to, arising out of or in connection with this Agreement (or any subsequent agreements or amendments thereto), including as to its existence, enforceability, validity, interpretation, performance or breach or as to indemnification or damages, including claims in tort, whether arising before or after the termination of this Agreement (any such dispute, controversy or claim being herein referred to as a "Dispute") shall be settled without litigation and only by use of the following alternative dispute resolution procedure: (a) At the written request of a party, each party shall appoint a knowledgeable, responsible representative to meet and negotiate in good faith to resolve any Dispute. The discussions shall be left to the discretion of the representatives. Upon agreement, the representatives may utilize other alternative dispute resolution procedures such as mediation to assist in the negotiations. Discussions and correspondence among the parties' representatives for purposes of these negotiations shall be treated as confidential information developed for the purposes of settlement, exempt from discovery and production, and without the concurrence of both parties shall not be admissible in the arbitration described below, or in any lawsuit. Documents identified in or provided with such communications, which are not prepared for purposes of the negotiations, are not so exempted and may, if otherwise admissible, be admitted in the arbitration. (b) If negotiations between the representatives of the parties do not resolve the Dispute within 60 days of the initial written request, the Dispute shall be submitted to binding arbitration by a single arbitrator pursuant to the Commercial Arbitration Rules, as then amended and in effect, of the American Arbitration Association (the "Rules"); provided, however, that at the election of either party, the arbitration shall take place before three (3) arbitrators, one arbitrator being selected by Parent, one arbitrator being selected by Citizen, and the third arbitrator, knowledgeable in the general subject matter of the dispute, controversy or claim, being selected by the other two arbitrators. Either party may demand such arbitration in accordance with the procedures set out in the Rules. The parties hereto shall use reasonable efforts to coordinate any arbitration commenced under this Agreement with any arbitration on the same or similar issues commenced under any of the Related Purchase Agreements so that the resolution of the arbitration under this Agreement and the similar issues under the Related Purchase Agreements can be resolved as expeditiously and efficiently as reasonably practicable. Reasonable efforts shall include use of a common arbitrator or panel of arbitrators where practicable. The arbitration shall take place in Newark, New Jersey. The arbitration hearing shall be commenced within 60 days of such party's demand for arbitration. The arbitrator(s) shall have the power to and will instruct each party to produce evidence through discovery (i) that is reasonably requested by the other party to the arbitration in order to prepare and substantiate its case and (ii) the production of which will not materially delay the expeditious resolution of the dispute being arbitrated; each party hereto agrees to be bound by any such discovery order. The arbitrator(s) shall control the scheduling (so as to process the matter expeditiously) and any discovery. The parties may submit written briefs. At the arbitration hearing, each party may make written and oral presentations to the arbitrator(s), present testimony and written evidence and examine witnesses. No party shall be eligible to receive, and the arbitrator(s) shall not have the authority to award, exemplary or punitive damages. The 69 Pennsylvania arbitrator(s) shall rule on the Dispute by issuing a written opinion within 30 days after the close of hearings. The arbitrators' majority decision shall be binding and final. Judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction. (c) Each party will bear its own costs and expenses in submitting and presenting its position with respect to any Dispute to the arbitrator(s); provided, however, that if the arbitrator(s) determines that the position taken in the Dispute by the non-prevailing party taken as a whole is unreasonable, the arbitrator(s) may order the non-prevailing party to bear such fees and expenses, and reimburse the prevailing party for all or such portion of its reasonable costs and expenses in submitting and presenting its position, as the arbitrator(s) shall reasonably determine to be fair under the circumstances. Each party to the arbitration shall pay one-half of the fees and expenses of the arbitrator(s) and the American Arbitration Association. (d) Notwithstanding any other provision of this Agreement, (i) either party may commence an action to compel compliance with this Section 8.6 and (ii) if any party, as party of a Dispute, seeks injunctive relief or any other equitable remedy, including specific enforcement, then such party shall be permitted to seek such injunctive or equitable relief in any federal or state court or competent jurisdiction before, during or after the pendency of a mediation or arbitration proceed under this Section 8.6. 8.7 Severability. The parties agree that (a) the provisions of this Agreement shall be severable in the event that any provision hereof is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, (b) such invalid, void or otherwise unenforceable provision shall be automatically replaced by another provision which is as similar as possible in terms to such invalid, void or otherwise unenforceable provision but which is valid and enforceable and (c) the remaining provisions shall remain enforceable to the fullest extent permitted by law. 8.8 No Third Party Beneficiaries. Nothing herein expressed or implied is intended or should be construed to confer upon or give to any Person other than the parties hereto and their successors and permitted assigns any rights or remedies under or by reason of this Agreement. 8.9 Entire Agreement. This Agreement, the Schedules and Exhibits hereto and the other Transaction Documents, and the Confidentiality Agreement dated August 2, 1999, between Citizens and Parent, (i) together constitute the entire understanding of the parties (and their affiliates) with respect to the subject matter hereof, and any related matter, (ii) supercede all prior agreements or understandings, written or oral, entered into by any of the parties that concern the subject matter hereof and (iii) are not intended to confer upon any Person other than the parties hereto any benefit, right or remedy. 8.10 Amendment and Waiver. The parties may, by mutual agreement, amend this Agreement in any respect, and any party, as to such party, may (i) extend the time for the performance of any of the obligations of the other party; (ii) waive any inaccuracies in 70 Pennsylvania representations and warranties by the other party; (iii) waive compliance by the other party with any of the covenants or agreements contained herein and performance of any obligations by the other party; and (iv) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party providing such waiver or extension, as the case may be. The waiver by any party hereto of any breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach, whether or not similar. 8.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument. 8.12 Headings. The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement nor shall they affect its meaning, construction or effect. 8.13 Definitions. For purposes of this Agreement, references to the knowledge of the Seller Parties (including a reference to "the best of the knowledge of the Seller Parties" and similar references) shall mean the actual knowledge possessed by any of the following officers or employees of Citizens: Chief Financial Officer, Vice President and Treasurer; President, Citizens Public Services; Vice President, Corporate Human Resources; Secretary; Vice President, Water; and the general manager of the Business. 8.14 No Implied Representation. NOTWITHSTANDING ANYTHING CONTAINED IN THIS AGREEMENT, IT IS THE EXPLICIT INTENT OF EACH PARTY HERETO THAT NEITHER OF THE SELLER PARTIES ARE MAKING ANY REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, BEYOND THOSE EXPRESSLY GIVEN IN THIS AGREEMENT, ANY SCHEDULE HERETO, THE TRANSACTION DOCUMENTS, OR ANY DOCUMENT, EXHIBIT, CERTIFICATE, INSTRUMENT OR STATEMENT TO BE DELIVERED HEREUNDER OR THEREUNDER INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO ANY OF THE ACQUIRED ASSETS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, IT IS UNDERSTOOD AND AGREED THAT ANY COST ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE SCHEDULES AND ANY COST ESTIMATES, PROJECTIONS OR PREDICTIONS OR ANY OTHER INFORMATION CONTAINED OR REFERRED TO IN OTHER MATERIALS THAT HAVE BEEN OR SHALL HEREINAFTER BE PROVIDED TO PARENT, BUYER OR ANY OF THEIR AFFILIATES, AGENTS OR REPRESENTATIVES ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF ANY OF THE SELLER PARTIES. 71 Pennsylvania 8.15 Construction of Certain Provisions. It is understood and agreed that neither the specification of any dollar amount in the representations and warranties contained in this Agreement nor the inclusion of any specific item in the Schedules or Exhibits is intended to imply that such amounts or higher or lower amounts, or the items so included or other items, are or are not material, and none of the parties shall use the fact of the setting of such amounts or the fact of any inclusion of any such item in the Schedules or Exhibits in any dispute or controversy between the parties as to whether any obligation, item or matter is or is not material for purposes hereof. 8.16 Bulk Sales. Buyer agrees that it shall not make any filings under any tax bulk sales provisions with respect to the transactions contemplated by this Agreement. [Signatures appear on following page.] 72 Pennsylvania IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on the day and year first written above. CITIZENS UTILITIES COMPANY By:________________________________________________ Robert J. DeSantis, Chief Financial Officer, Vice President and Treasurer CITIZENS BUSINESS SERVICES COMPANY CITIZENS RESOURCES COMPANY CITIZENS UTILITIES WATER COMPANY OF PENNSYLVANIA By:________________________________________________ Robert J. DeSantis, Vice President AMERICAN WATER WORKS COMPANY, INC. By:_________________________________________________ Joseph F. Hartnett, Jr., Treasurer PENNSYLVANIA-AMERICAN WATER COMPANY By:_________________________________________________ R. M. Ross, President EX-12 9 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12 CITIZENS UTILITIES COMPANY AND SUBSIDIARIES Statement Showing Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges for the year ended December 31, 1999 (DOLLARS IN THOUSANDS)
Ratio of Ratio of Earnings to Earnings to Combined Fixed Fixed Charges Charges ------------------------------- Pre-tax income before dividends on convertible preferred securities and discontinued operations $ 187,924 $ 187,924 Income or loss from equity investees (2,019) (2,019) Minority interest (23,227) (23,227) ------------------------------- Pre-tax income from continuing operations before adjustment for minority interest in consolidated subsidiaries or income or loss from equity investees 162,678 162,678 Fixed charges 108,268 118,331 Amortization of capitalized interest - - Distributed income of equity investees 600 600 Interest capitalized (8,681) (8,681) Preference security dividend requirements of consolidated subsidiaries (10,063) (10,063) Minority interest in pre-tax income of subsidiaries that have not incurred fixed charges - - ------------------------------- Total earnings $ 252,803 $ 262,865 ------------------------------- Ratio of earnings to fixed charges 2.33 ============== Ratio of earnings to combined fixed charges 2.22 =================
EX-21 10 CITIZENS UTILITIES COMPANY SUBSIDIARY LISTING EXHIBIT NO. 21 21. SUBSIDIARIES (all wholly-owned, except where otherwise indicated)
State of Name Incorporation Citizen Solutions Company Arizona Citizens Business Services Company Illinois Citizens Cable Company Delaware Subsidiary of Citizens Cable Company NCC Systems, Inc. Texas Citizens Capital Ventures Company Delaware Citizens Consumers Services, Inc. California Citizens Directory Services Company L.L.C. Delaware Citizens Directory Services Company, Inc. Delaware Citizens International Management Services Company Delaware Citizens Lake Water Company Illinois Citizens Mohave Cellular Company Delaware Citizens Mountain State Telephone Company West Virginia Citizens NEWCOM Company Delaware Citizens NEWTEL Company Delaware Citizens Public Works Service Company of Arizona Minnesota Citizens Resources Company Delaware Citizens Telecom Services Company L.L.C. Delaware Citizens Telecommunications Company Delaware Citizens Telecommunications Company of California, Inc. California Citizens Telecommunications Company of Colorado Delaware Citizens Telecommunications Company of Idaho Delaware Citizens Telecommunications Company of Iowa Delaware Citizens Telecommunications Company of Minnesota, Inc. Delaware Citizens Telecommunications Company of Montana Delaware Citizens Telecommunications Company of Nebraska Delaware Citizens Telecommunications Company of Nevada Nevada Citizens Telecommunications Company of New York, Inc. New York Citizens Telecommunications Company of North Dakota Delaware Citizens Telecommunications Company of Oregon Delaware Citizens Telecommunications Company of Tennessee L.L.C. Delaware Citizens Telecommunications Company of the Golden State California Citizens Telecommunications Company of the Volunteer State L.L.C. Delaware Citizens Telecommunications Company of the White Mountains, Inc. Delaware Citizens Telecommunications Company of Tuolumne California Citizens Telecommunications Company of Utah Delaware Citizens Telecommunications Company of West Virginia Delaware Citizens Telecommunications Company of Wyoming Delaware Citizens Utilities Company of California California Citizens Utilities Company of Illinois Illinois Citizens Utilities Company of Ohio Ohio Citizens Utilities Rural Company, Inc. Delaware Citizens Utilities Water Company of Pennsylvania Pennsylvania Citizens Water Resources Company of Arizona Arizona Citizens Water Resources Company Delaware Citizens Water Resources Management Services Company Delaware Citizens Water Services Company of Arizona Arizona Conference-Call USA, Inc. Delaware Subsidiary of Conference-Call USA, Inc.: Dial Services, Ltd., Inc. Delaware CU CapitalCorp Delaware Subsidiary of CU CapitalCorp: Electric Lightwave, Inc. * Delaware CU Wireless Management L.L.C. Delaware Flowing Wells, Inc. Indiana Havasu Water Company, Inc. Arizona LGS Natural Gas Company Louisiana Navajo Communications Company, Inc. New Mexico Ogden Telephone Company New York Subsidiaries of Ogden Telephone Company: NewOp Communications Corporation New York Phone Trends, Inc. New York Rhinelander Telecommunications, Inc. Wisconsin Subsidiary of Rhinelander Telecommunications, Inc. Crandon Telephone Company Wisconsin Headwaters Telephone Company Wisconsin New North Telecommunications, Inc. Wisconsin Rhinelander Telephone Company Wisconsin Rib Lake Telephone Company Wisconsin Subsidiary of Rib Lake Telephone Company Rib Lake Cellular for Wisconsin RSA #3 Wisconsin Rib Lake Telecom, Inc. Wisconsin Southwestern Capital Corporation Delaware Southwestern Investments, Inc. Nevada Sun City Sewer Company Arizona Sun City Water Company Arizona Sun City West Utilities Company Arizona Tubac Valley Water Company, Inc. Arizona
* Economic interest 82.11%, voting interest 97.87%.
EX-23 11 AUDITORS CONSENT Exhibit 23 ---------- Independent Auditors' Consent ----------------------------- The Board of Directors Citizens Utilities Company: We consent to the incorporation by reference in the Registration Statement (No. 333-35527) on Form S-1, in the Registration Statement (No. 33-1880) on Form S-3, in the Registration Statement (No. 33-44068) on Form S-3, in the Registration Statement (No. 33-44069) on Form S-3, in the Registration Statement (No. 33-41379) on Form S-3, in the Registration Statement (No. 33-51529) on Form S-3, in the Registration Statement (No. 33-52873) on Form S-3, in the Registration Statement (No. 33-55075) on Form S-3, in the Registration Statement (No. 33-60729) on Form S-3, in the Registration Statement (No. 33-63615) on Form S-3, in the Registration Statement (No. 333-7047) on Form S-3, in the Registration Statement (No. 333-18049) on Form S-3, in the Registration Statement (No. 33-40069) on Form S-4, in the Registration Statement (No. 333-71821) on Form S-8, in the Registration Statement (No. 333-71597) on Form S-8, in the Registration Statement (No. 333-71029) on Form S-8, in the Registration Statement (No. 33-7177) on Form S-8, in the Registration Statement (No. 33-37602) on Form S-8, in the Registration Statement (No. 33-42972) on Form S-8, in the Registration Statement (No. 33-41682) on Form S-8, in the Registration Statement (No. 33-39455) on Form S-8, in the Registration Statement (No. 33-39566) on Form S-8, in the Registration Statement (No. 33-48683) on Form S-8, in the Registration Statement (No. 33-54376) on Form S-8 of Citizens Utilities Company of our report dated March 14, 2000, relating to the consolidated balance sheets of Citizens Utilities Company and subsidiaries as of December 31, 1999, 1998, and 1997 and the related consolidated statements of income and comprehensive income, shareholders' equity, and cash flows for the years then ended, which report apears in the December 31, 1999 annual report on Form 10-K of Citizens Utilities Company. New York, New York March 14, 2000 EX-24 12 POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Norman I. Botwinik _____________________ Norman I. Botwinik January 24, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Aaron I. Fleischman ___________________ Aaron I. Fleischman January 31, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Stanley Harfenist __________________ Stanley Harfenist January 18, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Andrew N. Heine ___________________ Andrew N. Heine January 24, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ John L. Schroeder _____________________ John L. Schroeder February 7, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Robert D. Siff __________________ Robert D. Siff January 25, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Robert A. Stanger _____________________ Robert A. Stanger January 24, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Charles H. Symington, Jr. _________________________ Charles H. Symington, Jr. January 25, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Edwin Tornberg __________________ Edwin Tornberg February 7, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Claire Tow _____________ Claire Tow March 13, 2000 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of CITIZENS UTILITIES COMPANY constitutes and appoints Robert J. DeSantis and Livingston E. Ross, jointly and severally, for him in any and all capacities to sign on Form 10-K for the fiscal year 1999 for CITIZENS UTILITIES COMPANY, and any and all amendments to said Form 10-K, and to file the same with the Securities and Exchange Commission, hereby ratifying and conforming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. /s/ Leonard Tow _____________ Leonard Tow January 24, 2000 EX-27 13 12/31/99 FDS & RESTATED 12/31/98 AND 12/31/97 FDS
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. IN ADDITION, CITIZENS UTILITIES COMPANY AND SUBSIDIARIES' CONSOLIDATED FINANCIAL INFORMATION HAS BEEN RESTATED FOR 1998 AND 1997 AS A RESULT OF THE DECISION TO DIVEST ITS PUBLIC UTILITY OPERATIONS. 0000020520 CITIZENS UTILITIES COMPANY 1,000 YEAR YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1997 DEC-31-1999 DEC-31-1998 DEC-31-1997 PER-BOOK PER-BOOK PER-BOOK 2,888,718 2,705,087 2,394,787 591,386 464,146 447,695 308,624 306,562 281,869 184,942 189,866 194,257 141,661 113,223 115,038 5,771,745 5,292,932 4,872,852 65,519 64,787 62,749 1,577,903 1,554,188 1,480,425 261,590 117,104 132,217 1,919,935 1,792,771 1,679,211 201,250 201,250 201,250 0 0 0 2,107,460 1,775,338 1,583,902 0 110,000 0 0 0 0 0 0 0 31,156 7,672 5,089 0 0 0 0 0 0 0 0 0 1,511,944 1,405,901 1,403,400 5,771,745 5,292,932 4,872,852 1,087,428 932,858 860,332 64,587 3,948 1,928 111,419 105,003 110,057 1,079,360 851,214 911,113 8,068 81,644 (50,781) 266,828 19,324 120,775 274,896 100,968 69,994 86,972 67,944 65,779 144,486 57,060 10,100 6,210 6,210 6,210 144,486 57,060 10,100 0 0 0 0 0 0 347,509 156,098 139,856 .55 .22 .04 .55 .22 .04 REPRESENTS INVESTMENT FUNDS. REPRESENTS REGULATORY ASSETS. DEFERRED DEBITS AND OTHER ASSETS. TOTAL ASSETS INCLUDES $1,656,414, 1,514,048 AND 1,439,206 FOR 1999, 1998 AND 1997, RESPECTIVELY, OF ASSETS OF DISCONTINUED OPERATIONS. COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF A SUBSIDIARY TRUST, THE SOLE ASSETS OF WHICH ARE SECURITIES OF A SUBSIDIARY PARTNERSHIP, SUBSTANTIALLY ALL THE ASSETS OF WHICH ARE CONVERTIBLE DEBENTURES OF THE COMPANY. INCLUDES $310,269, 268,286 AND 261,225 FOR 1999, 1998 AND 1997, RESPECTIVELY, OF LIABILITIES OF DISCONTINUED OPERATIONS. REPRESENTS NETWORK ACCESS EXPENSES. NET INCOME INCLUDES $27,359, 36,528 AND 14,023 FOR 1999, 1998 AND 1997, RESPECTIVELY, OF INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX. IN ADDITION, 1998 NET INCOME INCLUDES $2,334 RELATED TO THE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT AND RELATED MINORITY INTEREST. EPS BASIC AND DILUTED INCLUDES $.10, .14 AND .05 FOR 1999, 1998 AND 1997, RESPECTIVELY, OF INCOME FROM DISCONTINUED OPERATIONS PER COMMON SHARE. IN ADDITION, 1998 EPS BASIC AND DILUTED INCLUDES A REDUCTION OF $.01 DUE TO THE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF INCOME TAX BENEFIT AND RELATED MINORITY INTEREST.
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