-----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, IZRYV1vb2lpMSw0kZbhYOlQ0HriUtaze/9FicgCe4EiKhm7Kby/JNiBVCfPCesq5 1/Y22dnavHRWUJJa0gyXsQ== 0000020520-04-000049.txt : 20041104 0000020520-04-000049.hdr.sgml : 20041104 20041104141600 ACCESSION NUMBER: 0000020520-04-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041104 DATE AS OF CHANGE: 20041104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS COMMUNICATIONS CO CENTRAL INDEX KEY: 0000020520 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 060619596 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11001 FILM NUMBER: 041119148 BUSINESS ADDRESS: STREET 1: HIGH RIDGE PK BLDG 3 CITY: STAMFORD STATE: CT ZIP: 06905 BUSINESS PHONE: 2036145600 MAIL ADDRESS: STREET 1: THREE HIGH RIDGE PARK CITY: STAMFORD STATE: CT ZIP: 06905 FORMER COMPANY: FORMER CONFORMED NAME: CITIZENS UTILITIES CO DATE OF NAME CHANGE: 19920703 10-Q 1 form10q3qtr2004.txt 3RD QUARTER 2004 FORM 10-Q CITIZENS COMMUNICATIONS COMPANY FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 ------------------ or -- |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to__________ Commission file number: 001-11001 --------- CITIZENS COMMUNICATIONS 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 Stamford, Connecticut 06905 - --------------------------------------- -------- (Address of principal executive offices) (Zip Code) (203) 614-5600 -------------------------------------------------- (Registrant's telephone number, including area code) N/A --------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- The number of shares outstanding of the registrant's Common Stock as of October 29, 2004 was 335,451,474.
CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Index Page No. -------- Part I. Financial Information (Unaudited) Financial Statements Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 2 Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003 3 Consolidated Statements of Operations for the nine months ended September 30, 2004 and 2003 4 Consolidated Statements of Shareholders' Equity for the year ended December 31, 2003 and the nine months ended September 30, 2004 5 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2004 and 2003 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Quantitative and Qualitative Disclosures about Market Risk 38 Controls and Procedures 39 Part II. Other Information Legal Proceedings 39 Other Information 39 Exhibits and Reports on Form 8-K 40 Signature 42
1
PART I. FINANCIAL INFORMATION Item 1. Financial Statements -------------------- CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ in thousands) (Unaudited) September 30, 2004 December 31, 2003 ------------------ ----------------- ASSETS - ------ Current assets: Cash and cash equivalents $ 199,027 $ 583,671 Accounts receivable, less allowances of $35,558 and $47,332, respectively 230,348 253,652 Other current assets 35,752 40,984 Assets held for sale - 23,130 ------------- ------------- Total current assets 465,127 901,437 Property, plant and equipment, net 3,375,980 3,525,640 Goodwill, net 1,940,318 1,940,318 Other intangibles, net 716,706 812,407 Investments 21,738 57,103 Other assets 477,661 457,384 ------------- ------------- Total assets $ 6,997,530 $ 7,694,289 ============= ============= LIABILITIES AND EQUITY - ---------------------- Current liabilities: Long-term debt due within one year $ 6,366 $ 88,002 Accounts payable 145,311 166,819 Other current liabilities 296,262 322,805 Liabilities related to assets held for sale - 11,128 ------------- ------------- Total current liabilities 447,939 588,754 Deferred income taxes 446,182 447,056 Customer advances for construction and contributions in aid of construction 94,598 122,035 Other liabilities 300,250 264,382 Equity units - 460,000 Long-term debt 4,324,817 4,195,629 Company Obligated Mandatorily Redeemable Convertible Preferred Securities* - 201,250 Shareholders' equity: Common stock, $0.25 par value (600,000,000 authorized shares; 334,811,000 and 284,709,000 outstanding and 334,816,000 and 295,434,000 issued at September 30, 2004 and December 31, 2003, respectively) 83,704 73,858 Additional paid-in capital 1,693,979 1,953,317 Accumulated deficit (304,499) (365,181) Accumulated other comprehensive loss, net of tax (89,368) (71,676) Treasury stock (72) (175,135) ------------- ------------- Total shareholders' equity 1,383,744 1,415,183 ------------- ------------- Total liabilities and equity $ 6,997,530 $ 7,694,289 ============= =============
* 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 consolidation of this item changed effective January 1, 2004 as a result of the application of a newly mandated accounting standard "FIN 46R." Please see footnote 14 for a complete discussion. The accompanying Notes are an integral part of these Consolidated Financial Statements. 2
PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 ($ in thousands, except per-share amounts) (Unaudited) 2004 2003 -------------- -------------- Revenue $ 545,393 $595,037 Operating expenses: Cost of services (exclusive of depreciation and amortization) 51,273 85,869 Other operating expenses 204,928 220,134 Depreciation and amortization 141,380 151,878 Loss on impairment - 4,000 Management succession and strategic alternatives expenses (see Note 12) 75,858 - -------------- -------------- Total operating expenses 473,439 461,881 -------------- -------------- Operating income 71,954 133,156 Investment and other income (loss), net (13,651) (24,277) Interest expense 90,864 103,124 -------------- -------------- Income (loss) before income taxes, dividends on convertible preferred securities (32,561) 5,755 Income tax benefit (21,271) (7,210) -------------- -------------- Income (loss) before dividends on convertible preferred securities (11,290) 12,965 Dividends on convertible preferred securities, net of tax benefit of $0 and $(963), respectively* - 1,553 -------------- -------------- Net income (loss) available to common shareholders $ (11,290) $ 11,412 ============== ============== Basic and diluted income (loss) available to common shareholders $ (0.04) $ 0.04 ============== ==============
* The consolidation of this item changed effective January 1, 2004 as a result of the application of a newly mandated accounting standard "FIN 46R." Please see footnote 14 for a complete discussion. The accompanying Notes are an integral part of these Consolidated Financial Statements. 3
PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 ($ in thousands, except per-share amounts) (Unaudited) 2004 2003 -------------- -------------- Revenue $1,647,952 $1,890,853 - Operating expenses: Cost of services (exclusive of depreciation and amortization) 156,632 312,625 Other operating expenses 631,103 688,590 Depreciation and amortization 429,650 440,785 Reserve for telecommunications bankruptcies - 2,260 Restructuring and other expenses - 9,950 Loss on impairment - 4,000 Management succession and strategic alternatives expenses (see Note 12) 90,632 - -------------- -------------- Total operating expenses 1,308,017 1,458,210 -------------- -------------- Operating income 339,935 432,643 Investment and other income, net 16,856 55,132 Interest expense 286,298 318,836 -------------- -------------- Income before income taxes, dividends on convertible preferred securities, and cumulative effect of change in accounting principle 70,493 168,939 Income tax expense 15,123 57,150 -------------- -------------- Income before dividends on convertible preferred securities and cumulative effect of change in accounting principle 55,370 111,789 Dividends on convertible preferred securities, net of tax benefit of $0 and $(2,889), respectively* - 4,658 -------------- -------------- Income before cumulative effect of change in accounting principle 55,370 107,131 Cumulative effect of change in accounting principle, net of tax of $0 and $41,591, respectively - 65,769 -------------- -------------- Net income available to common shareholders $ 55,370 $ 172,900 ============== ============== Basic income available to common shareholders: Income before cumulative effect of change in accounting principle $ 0.19 $ 0.38 Cumulative effect of change in accounting principle - 0.23 -------------- -------------- Net income available to common shareholders $ 0.19 $ 0.61 ============== ============== Diluted income available to common shareholders: Income before cumulative effect of change in accounting principle $ 0.18 $ 0.37 Cumulative effect of change in accounting principle - 0.22 -------------- -------------- Net income available to common shareholders $ 0.18 $ 0.59 ============== ==============
* The consolidation of this item changed effective January 1, 2004 as a result of the application of a newly mandated accounting standard "FIN 46R." Please see footnote 14 for a complete discussion. The accompanying Notes are an integral part of these Consolidated Financial Statements. 4
PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2003 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2004 ($ in thousands) (Unaudited) Accumulated Common Stock Additional Other Treasury Stock Total ------------------ Paid-In Accumulated Comprehensive ------------------- Shareholders' Shares Amount Capital Deficit Loss Shares Amount Equity -------- --------- ------------ ----------- ------------ -------- ----------- ----------- Balances January 1, 2003 294,080 $73,520 $ 1,943,406 $ (553,033) $(102,169) (11,598) $(189,585) $1,172,139 Stock plans 1,354 338 9,911 - - 873 14,450 24,699 Net income - - - 187,852 - - - 187,852 Other comprehensive income, net of tax and reclassifications adjustments - - - - 30,493 - - 30,493 -------- --------- ------------ ----------- ------------ -------- ----------- ----------- Balances December 31, 2003 295,434 73,858 1,953,317 (365,181) (71,676) (10,725) (175,135) 1,415,183 Stock plans 3,195 799 (5,428) - - 6,404 106,759 102,130 Conversion of EPPICS 7,704 1,926 97,806 - - 725 11,646 111,378 Conversion of Equity Units 28,483 7,121 396,221 - - 3,591 56,658 460,000 Dividends on common stock of $2.25 per share - - (747,937) - - - - (747,937) Net income - - - 55,370 - - - 55,370 Tax benefit on equity forward contracts - - - 5,312 - - - 5,312 Other comprehensive loss, net of tax and reclassifications adjustments - - - - (17,692) - - (17,692) -------- --------- ------------ ----------- ------------ -------- ----------- ----------- Balances September 30, 2004 334,816 $83,704 $ 1,693,979 $ (304,499) $ (89,368) (5) $ (72) $1,383,744 ======== ========= ============ =========== ============ ======== =========== =========== The accompanying Notes are an integral part of these Consolidated Financial Statements. CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 ($ in thousands) (Unaudited) For the three months ended September 30, For the nine months ended September 30, --------------------------------------- ---------------------------------------- 2004 2003 2004 2003 ------------------ ------------------ -------------------- ----------------- Net income (loss) $ (11,290) $ 11,412 $ 55,370 $ 172,900 Other comprehensive income (loss), net of tax and reclassifications adjustments* (16,652) 2,520 (17,692) 7,318 ------------------ ------------------ -------------------- ----------------- Total comprehensive income (loss) $ (27,942) $ 13,932 $ 37,678 $ 180,218 ================== ================== ==================== =================
* Consists of unrealized holding gains/(losses) of marketable securities and/or the transfer of previously unrealized gains to the current period income statement as a result of the sale of securities. The accompanying Notes are an integral part of these Consolidated Financial Statements. 5
PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 ($ in thousands) (Unaudited) 2004 2003 ---------------- ---------------- Income before cumulative effect of change in accounting principle $ 55,370 $ 107,131 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 429,650 440,785 Gain on expiration/settlement of customer advances (25,345) (6,165) Gain on capital lease termination/restructuring - (65,724) Stock based compensation expense 43,631 5,720 Loss on extinguishment of debt 20,368 10,704 Loss on impairment - 4,000 (Gain)/loss on sale of assets (9,365) 11,792 Other non-cash adjustments 8,449 (130) Deferred taxes, net 15,123 91,488 Change in accounts receivable 17,895 57,091 Change in accounts payable and other liabilities (22,674) (88,062) Change in other current assets 5,232 6,547 ---------------- ---------------- Net cash provided by operating activities 538,334 575,177 Cash flows from (used by) investing activities: Proceeds from sale of assets, net of selling expenses 59,045 380,735 Capital expenditures (201,310) (191,658) Other assets purchased (26,715) (770) ---------------- ---------------- Net cash from (used by) investing activities (168,980) 188,307 Cash flows from (used by) financing activities: Dividends paid (747,937) - Long-term debt payments (513,798) (551,425) Premiums paid to retire debt (20,368) (10,704) Issuance of common stock 530,197 10,357 Repayment of customer advances for construction and contributions in aid of construction (2,092) (7,765) ---------------- ---------------- Net cash used by financing activities (753,998) (559,537) Increase (decrease) in cash and cash equivalents (384,644) 203,947 Cash and cash equivalents at January 1, 583,671 393,177 ---------------- ---------------- Cash and cash equivalents at September 30, $ 199,027 $ 597,124 ================ ================ Cash paid during the period for: Interest $ 264,174 $ 303,913 Income taxes $ 2,196 $ 2,425 Non-cash investing and financing activities: Change in fair value of interest rate swaps $ 973 $ (1,238) Conversion of EPPICS $ 111,379 $ - Investment writedowns $ 5,286 $ 201
The accompanying Notes are an integral part of these Consolidated Financial Statements. 6 PART I. FINANCIAL INFORMATION (Continued) CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES (1) Summary of Significant Accounting Policies: ------------------------------------------ (a) Basis of Presentation and Use of Estimates: Citizens Communications Company and its subsidiaries are referred to as "we," "us" "our" or the "Company" in this report. Our unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and should be read in conjunction with the consolidated financial statements and notes included in our 2003 Annual Report on Form 10-K. Certain reclassifications of balances previously reported have been made to conform to current presentation. All significant intercompany balances and transactions have been eliminated in consolidation. These unaudited consolidated financial statements include all adjustments, which consist of normal recurring accruals necessary to present fairly the results for the interim periods shown. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which affect the amounts of assets, liabilities, revenue and expenses we have reported and our disclosure of contingent assets and liabilities at the date of the financial statements. Actual results may differ from those estimates. We believe that our critical estimates are depreciation rates, pension assumptions, calculations of impairment amounts, reserves established for receivables, income taxes and contingencies. Certain information and footnote disclosures have been excluded and/or condensed pursuant to Securities and Exchange Commission rules and regulations. The results of the interim periods are not necessarily indicative of the results for the full year. (b) Cash Equivalents: We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. (c) Revenue Recognition: Incumbent Local Exchange Carrier (ILEC) - Revenue is recognized when services are provided or when products are delivered to customers. Revenue that is billed in advance includes: monthly recurring network access services, special access services and monthly recurring local line charges. The unearned portion of this revenue is initially deferred as a component of other liabilities on our consolidated balance sheet and recognized in revenue over the period that the services are provided. Revenue that is billed in arrears includes: non-recurring network access services, switched access services, non-recurring local services and long-distance services. The earned but unbilled portion of this revenue is recognized in revenue in our statement of operations and accrued in accounts receivable in the period that the services are provided. Excise taxes are recognized as a liability when billed. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue. Electric Lightwave, LLC. (ELI) - Revenue is recognized when the services are provided. Revenue from long-term prepaid network services agreements including Indefeasible Rights to Use (IRU), are deferred and recognized on a straight-line basis over the terms of the related agreements. Installation fees and their related direct and incremental costs are initially deferred and recognized as revenue and expense over the average term of a customer relationship. We recognize as current period expense the portion of installation costs that exceeds installation fee revenue. (d) Goodwill and Other Intangibles: Intangibles represent the excess of purchase price over the fair value of identifiable tangible assets acquired. We undertake studies to determine the fair values of assets and liabilities acquired and allocate purchase prices to assets and liabilities, including property, plant and equipment, goodwill and other identifiable intangibles. On January 1, 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which applies to all goodwill and other intangible assets recognized in the statement of financial position at that date, regardless of when the assets were initially recognized. This Statement requires that goodwill and other intangibles with indefinite useful lives no longer be amortized to earnings, but instead be tested for impairment, at least annually. In performing this test, the 7 Company first compares the carrying amount of its reporting units to their respective fair values. If the carrying amount of any reporting unit exceeds its fair value, the Company is required to perform step two of the impairment test by comparing the implied fair value of the reporting unit's goodwill with its carrying amount. The amortization of goodwill and other intangibles with indefinite useful lives ceased upon adoption of the Statement on January 1, 2002. We annually (during the fourth quarter) examine the carrying value of our goodwill and trade name to determine whether there are any impairment losses. SFAS No. 142 also requires that intangible assets with estimated useful lives be amortized over those lives and be reviewed for impairment in accordance with SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" to determine whether any changes to these lives are required. We periodically reassess the useful life of our intangible assets with estimated useful lives to determine whether any changes to those lives are required. (e) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed of: We adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" as of January 1, 2002. In accordance with SFAS No. 144, we review long-lived assets to be held and used and long-lived assets to be disposed of, including intangible assets with estimated useful lives, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of the asset to the future undiscounted net cash flows expected to be generated by the asset. If any assets are considered to be impaired, the impairment is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value. (f) Derivative Instruments and Hedging Activities: We account for derivative instruments and hedging activities in accordance with SFAS No. 149, "Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS No. 149, as amended, requires that all derivative instruments, such as interest rate swaps, be recognized in the financial statements and measured at fair value regardless of the purpose or intent of holding them. We have interest rate swap arrangements related to a portion of our fixed rate debt. These hedge strategies satisfy the fair value hedging requirements of SFAS No. 133. As a result, the fair value of the hedges is carried on the balance sheet in other assets and the related underlying liabilities are also adjusted to fair value by the same amount. (g) Employee Stock Plans: We have various employee stock-based compensation plans. Awards under these plans are granted to eligible officers, management employees and non-management 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. As permitted by current accounting rules, we apply Accounting Principles Board Opinions (APB) No. 25 and related interpretations in accounting for the employee stock plans resulting in the use of the intrinsic value to value the stock. SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-valued-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended. We provide pro forma net income and pro forma net income per common share disclosures for employee stock option grants on the fair value of the options at the date of grant. For purposes of presenting pro forma information, the fair value of options granted is computed using the Black Scholes option-pricing model. 8 Had we determined compensation cost based on the fair value at the grant date for the Management Equity Incentive Plan (MEIP), Equity Incentive Plan (EIP), Employee Stock Purchase Plan (ESPP) and Directors' Deferred Fee Equity Plan, our pro forma net income (loss) and net income (loss) per common share available for common shareholders would have been as follows:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2004 2003 2004 2003 --------------- ------------- ------------- -------------- ($ in thousands) Net income (loss) available for common shareholders As reported $(11,290) $ 11,412 $ 55,370 $ 172,900 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 23,590 527 27,407 4,275 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (27,339) (3,472) (35,024) (12,421) -------- --------- --------- ----------- Pro forma $(15,039) $ 8,467 $ 47,753 $ 164,754 ======== ======== ======== ========= Net income (loss) per common share available for common shareholders As reported: Basic $ (0.04) $ 0.04 $ 0.19 $ 0.61 Diluted $ (0.04) $ 0.04 $ 0.18 $ 0.59 Pro forma: Basic $ (0.05) $ 0.03 $ 0.16 $ 0.58 Diluted $ (0.05) $ 0.03 $ 0.16 $ 0.56
In connection with the payment of the special dividend of $2 per common share on September 2, 2004, the exercise price and number of all outstanding options was adjusted such that each option had the same value to the holder after the dividend as it had before the dividend. In accordance with FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation" and EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB No. 25 and FIN 44", there is no accounting consequence for changes made to the exercise price, the number of shares, or both, of a fixed stock option or award as a direct result of the special dividend. (h) Net Income Per Common Share Available for Common Shareholders: Basic net income per common share is computed using the weighted average number of common shares outstanding during the period being reported on. Except when the effect would be antidilutive, diluted net income per common share reflects the dilutive effect of the assumed exercise of stock options using the treasury stock method at the beginning of the period being reported on as well as common shares that would result from the conversion of convertible preferred stock. In addition, the related interest on preferred stock dividends (net of tax) is added back to income since it would not be paid if the preferred stock was converted to common stock. 9 (2) Recent Accounting Literature and Changes in Accounting Principles: ----------------------------------------------------------------- Accounting for Asset Retirement Obligations ------------------------------------------- In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations." We adopted SFAS No. 143 effective January 1, 2003. As a result of our adoption of SFAS No. 143, we recognized an after tax non-cash gain of approximately $65,769,000. This gain resulted from the elimination of the cumulative cost of removal included in accumulated depreciation as a cumulative effect of a change in accounting principle in our statement of operations in the first quarter of 2003 as the Company has no legal obligation to remove certain of its long-lived assets. Exit or Disposal Activities --------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullified Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than on the date of commitment to an exit plan. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have any material impact on our financial position or results of operations. Guarantees ---------- In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor be required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation assumed under the guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with the guarantee. The provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002, whereas the disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN 45 on January 1, 2003 did not have any material impact on our financial position or results of operations (see Note 16). Variable Interest Entities -------------------------- In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) ("FIN 46R"), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," which was issued in January 2003. We are required to apply FIN 46R to variable interests in variable interest entities or VIEs created after December 31, 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We reviewed all of our investments and determined that the Trust Convertible Preferred Securities (EPPICS), issued by our consolidated wholly-owned subsidiary, Citizens Utilities Trust and the related Citizens Utilities Capital L.P., were our only VIEs. The adoption of FIN 46R on January 1, 2004 did not have any material impact on our financial position or results of operations. Derivative Instruments and Hedging ---------------------------------- In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging," which clarifies financial accounting and reporting for derivative instruments including derivative instruments embedded in other contracts. This Statement is effective for contracts entered into or modified after June 30, 2003. We adopted SFAS No. 149 on July 1, 2003. The adoption of SFAS No. 149 did not have any material impact on our financial position or results of operations. 10 Financial Instruments with Characteristics of Both Liabilities and Equity ------------------------------------------------------------------------- In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We adopted the provisions of the Statement on July 1, 2003. The adoption of SFAS No. 150 did not have any material impact on our financial position or results of operations. Pension and Other Postretirement Benefits ----------------------------------------- In December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement retains and revises the disclosure requirements contained in the original Statement. It requires additional disclosures including information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized in interim periods. This Statement is effective for fiscal years ending after December 15, 2003. We have adopted the expanded disclosure requirements of SFAS No. 132 (revised). The FASB has issued an Exposure Draft that would require stock-based employee compensation to be recorded as a charge to earnings for interim or annual periods beginning after June 15, 2005. We will continue to monitor the progress on the issuance of this standard. (3) Accounts Receivable: ------------------- The components of accounts receivable, net at September 30, 2004 and December 31, 2003 are as follows:
($ in thousands) September 30, 2004 December 31, 2003 --------------------- -------------------- Customers $ 227,248 $ 250,515 Other 38,658 50,469 Less: Allowance for doubtful accounts (35,558) (47,332) --------------------- -------------------- Accounts receivable, net $ 230,348 $ 253,652 ===================== ====================
The Company maintains an allowance for estimated bad debts based on its estimate of collectibility of its accounts receivables. Bad debt expense, which is recorded as a reduction of revenue, was $7,196,000 and $4,355,000 for the three months ended September 30, 2004 and 2003, respectively and $13,754,000 and $15,153,000 for the nine months ended September 30, 2004 and 2003, respectively. Additional reserves are provided for known or impending telecommunications bankruptcies, disputes or other significant collection issues. (4) Property, Plant and Equipment, Net: ---------------------------------- Property, plant and equipment, net at September 30, 2004 and December 31, 2003 is as follows:
($ in thousands) September 30, 2004 December 31, 2003 --------------------- -------------------- Property, plant and equipment $ 6,398,721 $ 6,221,307 Less: Accumulated depreciation (3,022,741) (2,695,667) --------------------- -------------------- Property, plant and equipment, net $ 3,375,980 $ 3,525,640 ===================== ====================
Depreciation expense is principally based on the composite group method. Depreciation expense was $109,750,000 and $120,012,000 for the three months ended September 30, 2004 and 2003, respectively and $334,760,000 and $345,577,000 for the nine months ended September 30, 2004 and 2003, respectively. Effective January 1, 2003, as a result of the adoption of SFAS No. 143, "Accounting for Asset Retirement Obligations," we ceased recognition of the cost of removal provision in depreciation expense and eliminated the cumulative cost of removal included in accumulated depreciation. In addition, we increased the average depreciable lives for certain of our equipment in our ILEC segment. As part of the preparation and adoption of SFAS No. 143, we analyzed depreciation rates for the ILEC segment and compared them to industry averages and historical expense data. Based on this review, the Company shortened the depreciable lives of certain assets. 11 (5) Dispositions: ------------ In October 2004, we sold cable assets in California, Arizona, Indiana, and Wisconsin, and we have signed a definitive agreement to sell cable assets in New Mexico. The $1,286,000 pre-tax loss on these sales was recognized during the third quarter of 2004. During the third quarter of 2004, we sold our corporate aircraft for approximately $15,298,000 in cash. On April 1, 2003, we completed the sale of approximately 11,000 access lines in North Dakota for approximately $25,700,000 in cash. The pre-tax gain on the sale was $2,274,000. On April 4, 2003, we completed the sale of our wireless partnership interest in Wisconsin for approximately $7,500,000 in cash. The pre-tax gain on the sale was $2,173,000. (6) Net Assets Held for Sale: ------------------------ On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services businesses, which included our water, gas and electric businesses. All of these properties have been sold. Electric and Gas ---------------- On August 8, 2003, we completed the sale of The Gas Company in Hawaii division for $119,290,000 in cash and assumed liabilities. The pre-tax loss on the sale recognized in 2003 was $19,180,000. On August 11, 2003, we completed the sale of our Arizona gas and electric divisions for $224,100,000 in cash. The pre-tax loss on the sale recognized in 2003 was $18,491,000. On December 2, 2003, we completed the sale of substantially all of our Vermont electric division's transmission assets for $7,344,000 in cash (less $1,837,000 in refunds to customers as ordered by the Vermont Public Service Board). On April 1, 2004, we completed the sale of our Vermont electric distribution operations for approximately $13,992,000 in cash, net of selling expenses. Losses on the sales of our Vermont properties were included in the impairment charges recorded during 2003. Summarized balance sheet information for the electric operations (assets held for sale) is set forth below (no data for September 30, 2004 because all of the properties had been sold as of that date). ($ in thousands) December 31, 2003 -------------------- Current assets $ 4,688 Net property, plant and equipment 7,225 Other assets 11,217 -------------------- Total assets held for sale $ 23,130 ==================== Current liabilities $ 3,651 Other liabilities 7,477 -------------------- Total liabilities related to assets held for sale $ 11,128 ==================== 12
(7) Intangibles: ----------- Intangibles at September 30, 2004 and December 31, 2003 are as follows: ($ in thousands) September 30, 2004 December 31, 2003 ------------------------ --------------------- Customer base - amortizable over 96 months $ 994,590 $ 995,853 Trade name - non-amortizable 122,058 122,058 ------------------------ --------------------- Other intangibles 1,116,648 1,117,911 Accumulated amortization (399,942) (305,504) ------------------------ --------------------- Total other intangibles, net $ 716,706 $ 812,407 ======================== =====================
Amortization expense was $31,630,000 and $31,866,000 for the three months ended September 30, 2004 and 2003, respectively and $94,890,000 and $95,208,000 for the nine months ended September 30, 2004 and 2003, respectively. The decline in customer base at September 30, 2004 is due to the sale of cable assets. Amortization expense for each of the next five years, based on our estimate of useful lives, is estimated to be $126,520,000 per year. (8) Long-Term Debt: -------------- The activity in our long-term debt from December 31, 2003 to September 30, 2004 is as follows:
Nine Months Ended September 30, 2004 ----------------------------------------- Interest Rate* at December 31, Interest September 30, September 30, ($ in thousands) 2003 Payments Rate Swap Reclassification 2004 2004 ------------ -------- --------- ---------------- ------------- -------------- Rural Utilities Service Loan Contracts $ 30,010 $ (685) $ $ - $ 29,325 6.120% Senior Unsecured Debt 4,167,123 (80,955) 973 51,770 4,138,911 8.161% EPPICS** (reclassified as a result of adopting FIN 46R) - - - 100,377 100,377 5.000% Equity Units 460,000 (408,230) - (51,770) - - ELI Notes 5,975 (5,975) - - - - ELI Capital Leases 10,061 (5,640) - - 4,421 10.363% Industrial Development Revenue Bonds 70,440 (12,300) - - 58,140 5.559% Other 22 (13) - 9 12.990% ------------ -------- -------- ---------- ----------- TOTAL LONG TERM DEBT $ 4,743,631 $(513,798) $ 973 $ 100,377 $4,331,183 ------------ ========= ======== ========== ----------- Less: Current Portion (88,002) (6,366) Less: Equity Units (460,000) - ------------ ----------- $ 4,195,629 $4,324,817 ============ ===========
* Interest rate includes amortization of debt issuance expenses, debt premiums or discounts. The interest rate for Rural Utilities Service Loan Contracts, Senior Unsecured Debt, and Industrial Development Revenue Bonds represent a weighted average of multiple issuances. ** In accordance with FIN 46R, the Trust holding the EPPICS and the related Citizens Utilities Capital L.P. are now deconsolidated (see Note 14). On January 15, 2004 we repaid at maturity the remaining outstanding $80,955,000 of our 7.45% Debentures. On January 15, 2004, we redeemed at 101% the remaining outstanding $12,300,000 of our Hawaii Special Purpose Revenue Bonds, Series 1993A and Series 1993B. On May 17, 2004, we repaid at maturity the remaining outstanding $5,975,000 of Electric Lightwave, LLC's 6.05% Notes. These Notes had been guaranteed by Citizens. 13 On July 15, 2004, we renegotiated and prepaid with $4,954,000 of cash the entire remaining $5,524,000 Electric Lightwave capital lease obligation to a third party. On July 30, 2004, we purchased $300,000,000 of the 6.75% notes that were a component of our equity units at 105.075% of par, plus accrued interest, at a premium of approximately $15,225,000 recorded in investment and other income (loss), net. During August and September 2004, we repurchased through a series of transactions an additional $108,230,000 of the 6.75% notes due 2006 at a weighted average price of 104.486% of par, plus accrued interest, at a premium of approximately $4,855,000 recorded in investment and other income (loss), net. As of September 30, 2004, EPPICS representing a total principal amount of $111,379,000 were converted into 8,429,020 shares of Citizens common stock. Total future minimum cash payment commitments over the next 20 years under ELI's long-term capital leases amounted to $10,017,000 as of September 30, 2004. (9) Net Income (Loss) Per Common Share: ---------------------------------- The reconciliation of the income (loss) per common share calculation for the three and nine months ended September 30, 2004 and 2003, respectively, is as follows:
For the three months ended For the nine months ended ($ in thousands, except per-share amounts) September 30, September 30, ------------------------------------ ---------------------------------- 2004 2003 2004 2003 ----------------- ----------------- --------------- ----------------- Net income (loss) used for basic and diluted earnings (loss) - ------------------------------------------------------------ available to common shareholders: --------------------------------- Income (loss) before cumulative effect of change in accounting principle $ (11,290) $ 11,412 $ 55,370 $ 107,131 Cumulative effect of change in accounting principle - - - 65,769 ----------------- ----------------- --------------- ----------------- Total basic net income (loss) available to common shareholders $ (11,290) $ 11,412 $ 55,370 $ 172,900 ================= ================= =============== ================= Effect of conversion of preferred securities - - - 4,658 ----------------- ----------------- --------------- ----------------- Total diluted net income (loss) available to common shareholders $ (11,290) $ 11,412 $ 55,370 $ 177,558 ================= ================= =============== ================= Basic earnings (loss) available to common shareholders: - ------------------------------------------------------- Weighted-average shares outstanding - basic 309,732 282,838 294,455 282,217 ================= ================= =============== ================= Income (loss) before cumulative effect of change in accounting principle $ (0.04) $ 0.04 $ 0.19 $ 0.38 Cumulative effect of change in accounting principle - - - 0.23 ----------------- ----------------- --------------- ----------------- Net income (loss) available to common shareholders $ (0.04) $ 0.04 $ 0.19 $ 0.61 ================= ================= =============== ================= Diluted earnings (loss) available to common shareholders: - --------------------------------------------------------- Weighted-average shares outstanding 309,732 282,838 294,455 282,217 Effect of dilutive shares 4,480 5,264 5,783 4,900 Effect of conversion of preferred securities - - - 15,134 ----------------- ----------------- --------------- ----------------- Weighted-average shares outstanding - diluted 314,212 288,102 300,238 302,251 ================= ================= =============== ================= Income (loss) before cumulative effect of change in accounting principle $ (0.04) $ 0.04 $ 0.18 $ 0.37 Cumulative effect of change in accounting principle - - - 0.22 ----------------- ----------------- --------------- ----------------- Net income (loss) available to common shareholders $ (0.04) $ 0.04 $ 0.18 $ 0.59 ================= ================= =============== =================
For the three and nine months ended September 30, 2004, options of 1,913,135 and 2,494,634, respectively, at exercise prices ranging from $13.30 to $18.46 issuable under employee compensation plans were excluded from the computation of diluted EPS for those periods because the exercise prices were greater than the average market price of common shares and, therefore, the effect would be antidilutive. 14 For the three and nine months ended September 30, 2003, options of 10,420,894 and 10,770,894, respectively, at exercise prices ranging from $11.41 to $21.47 issuable under employee compensation plans were excluded from the computation of diluted EPS for those periods because the exercise prices were greater than the average market price of common shares and, therefore, the effect would be antidilutive. In connection with the payment of the special dividend of $2 per common share on September 2, 2004, the exercise price and number of all outstanding options was adjusted such that each option had the same value to the holder after the dividend as it had before the dividend. In accordance with FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions involving Stock Compensation" and EITF 00-23, "Issues Related to the Accounting for Stock Compensation under APB No. 25 and FIN 44", there is no accounting consequence for changes made to the exercise price, the number of shares, or both, of a fixed stock option or award as a direct result of the special dividend, For the three and nine months ended September 30, 2004 and 2003, restricted stock awards of 1,543,000 and 1,453,000 shares, respectively, are excluded from our basic weighted average shares outstanding and included in our dilutive shares until the shares are no longer contingent upon the satisfaction of all specified conditions. On August 17, 2004 we issued 32,073,633 shares of common stock, including 3,591,000 treasury shares, to our equity unit holders in settlement of the equity purchase contract component of the equity units. With respect to the $460,000,000 Senior Note component of the equity units, we repurchased $300,000,000 principal amount of these Notes in July 2004. The remaining $160,000,000 of the Senior Notes were repriced and a portion was remarketed on August 12, 2004 as the 6.75% Notes due August 17, 2006. During August and September, 2004, we repurchased an additional $108,230,000 of the 6.75% Notes which, in addition to the $300,000,000 purchased in July, resulted in a pre-tax charge of approximately $20,080,000 during the third quarter of 2004, but will result in an annual reduction in interest expense of about $27,555,000 per year. As a result of our July dividend announcement with respect to our common shares, our 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 (EPPICS) began to convert to Citizens common shares. As of September 30, 2004, approximately 55% of the EPPICS outstanding, or about $111,379,000 aggregate principal amount of units, have converted to 8,429,020 Citizens common shares, including 725,000 treasury shares. At September 30, 2004, we had 1,797,428 shares of potentially dilutive EPPICS, which were convertible into common stock at a 4.36 to 1 ratio at an exercise price of $11.46 per share. As a result of the September 2004 special dividend, the EPPICS exercise price for conversion into common stock was reduced from $13.30 to $11.46. These securities have not been included in the diluted income per share calculation for the three and nine months ended September 30, 2004 because their inclusion would have had an antidilutive effect. At September 30, 2003, we had 4,025,000 shares of potentially dilutive EPPICS which were convertible into common stock at a 3.76 to 1 ratio at an exercise price of $13.30 per share that have been included in the diluted income per common share calculation for the nine months ended September 30, 2003. These securities have not been included in the diluted income per share calculation for the three months ended September 30, 2003 because their inclusion would have had an antidilutive effect. (10) Segment Information: ------------------- As of April 1, 2004, we operate in two segments, ILEC and ELI (a competitive local exchange carrier (CLEC)). The ILEC segment provides both regulated and unregulated communications services to residential, business and wholesale customers and is typically the incumbent provider in its service areas. As an ILEC, we compete with CLECs that may operate in our markets. As a CLEC, we provide telecommunications services, principally to businesses, in competition with the ILEC. As a CLEC, we frequently obtain the "last mile" access to customers through arrangements with the applicable ILEC. ILECs and CLECs are subject to different regulatory frameworks of the Federal Communications Commission (FCC) and state regulatory agencies. Our ILEC operations and ELI do not compete with each other. 15 As permitted by SFAS No. 131, we have utilized the aggregation criteria in combining our markets because all of the Company's ILEC properties share similar economic characteristics: they provide the same products and services to similar customers using comparable technologies in all the states in which we operate. The regulatory structure is generally similar. Differences in the regulatory regime of a particular state do not materially impact the economic characteristics or operating results of a particular property.
($ in thousands) For the three months ended September 30, 2004 ------------------------------------------------------------ Total ILEC ELI Electric (1) Segments -------------- -------------- --------------- ------------- Revenue $ 506,183 $ 39,210 $ - $ 545,393 Depreciation and amortization 135,259 6,121 - 141,380 Management succession and strategic alternatives expenses 73,051 2,807 - 75,858 Operating income (loss) 71,191 774 (11) 71,954 Capital expenditures 65,960 1,907 - 67,867 ($ in thousands) For the three months ended September 30, 2003 --------------------------------------------------------------------------- Total ILEC ELI Gas Electric Segments -------------- -------------- --------------- ------------- -------------- Revenue $ 511,574 $ 40,416 $ 18,005 $ 25,042 $ 595,037 Depreciation and amortization 146,261 5,617 - - 151,878 Loss on impairment - - - 4,000 4,000 Operating income (loss) 133,807 3,773 (2,806) (1,618) 133,156 Capital expenditures 66,968 3,113 2,412 3,515 76,008 (1) Consists principally of post-sale activities associated with the completion of our utility divestiture program. These costs could not be accrued as a selling cost at the time of sale. The Company believes it has an adequate provision for its remaining post-divestiture liabilities. We do not anticipate any material future costs associated with these activities. ($ in thousands) For the nine months ended September 30, 2004 ------------------------------------------------------------ Total ILEC ELI Electric Segments -------------- -------------- --------------- ------------- Revenue $ 1,520,940 $ 117,277 $ 9,735 $ 1,647,952 Depreciation and amortization 411,749 17,901 - 429,650 Management succession and strategic alternatives expenses 87,279 3,353 - 90,632 Operating income (loss) 337,146 5,121 (2,332) 339,935 Capital expenditures 192,491 8,066 573 201,130 ($ in thousands) For the nine months ended September 30, 2003 --------------------------------------------------------------------------- Total ILEC ELI Gas Electric Segments -------------- -------------- --------------- ------------- -------------- Revenue $ 1,535,336 $ 125,228 $ 137,686 $ 92,603 $ 1,890,853 Depreciation and amortization 422,990 17,795 - - 440,785 Reserve for telecommunications bankruptcies 1,113 1,147 - - 2,260 Restructuring and other expenses 9,482 468 - - 9,950 Loss on impairment - - - 4,000 4,000 Operating income 402,536 6,658 15,204 8,245 432,643 Capital expenditures 161,260 6,514 9,877 13,487 191,138
16
The following table reconciles sector capital expenditures to total consolidated capital expenditures. ($ in thousands) For the three months ended For the nine months ended September 30, September 30, ------------------------------ ----------------------------- 2004 2003 2004 2003 -------------- -------------- --------------- ------------- Total segment capital expenditures $ 67,867 $ 76,008 $ 201,130 $ 191,138 General capital expenditures 9 48 180 520 -------------- -------------- --------------- ------------- Consolidated reported capital expenditures $ 67,876 $ 76,056 $ 201,310 $ 191,658 ============== ============== =============== =============
(11) Derivative Instruments and Hedging Activities: --------------------------------------------- Interest rate swap agreements are used to hedge a portion of our debt that is subject to fixed interest rates. Under our interest rate swap agreements, we agree to pay an amount equal to a specified variable rate of interest times a notional principal amount, and to receive in return an amount equal to a specified fixed rate of interest times the same notional principal amount. The notional amounts of the contracts are not exchanged. No other cash payments are made unless the agreement is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination and represents the market value, at the then current rate of interest, of the remaining obligations to exchange payments under the terms of the contracts. The interest rate swap contracts are reflected at fair value in our consolidated balance sheet and the related portion of fixed-rate debt being hedged is reflected at an amount equal to the sum of its book value and an amount representing the change in fair value of the debt obligations attributable to the interest rate risk being hedged. Changes in the fair value of interest rate swap contracts, and the offsetting changes in the adjusted carrying value of the related portion of the fixed-rate debt being hedged, are recognized in the consolidated statements of operations in interest expense. The notional amounts of fixed-rate indebtedness hedged as of September 30, 2004 and December 31, 2003 were $550,000,000 and $400,000,000, respectively. Such contracts require us to pay variable rates of interest (estimated average pay rates of approximately 6.31% as of September 30, 2004 and approximately 5.46% as of December 31, 2003) and receive fixed rates of interest (average receive rates of 8.47% and 8.38% as of September 30, 2004 and December 31, 2003, respectively). The fair value of these derivatives is reflected in other assets as of September 30, 2004, in the amount of $11,574,000 and the related underlying debt has been increased by a like amount. The net amounts received during the three and nine months ended September 30, 2004 as a result of these contracts amounted to $1,577,000 and $7,093,000, respectively, and are included as a reduction of interest expense. We do not anticipate any nonperformance by counterparties to our derivative contracts as all counterparties have investment grade credit ratings. (12) Management Succession and Strategic Alternatives Expenses: --------------------------------------------------------- On July 11, 2004, our Board of Directors announced that it had completed its review of the Company's financial and strategic alternatives and on September 2, 2004 the Company paid a special dividend of $2 per common share and a quarterly dividend of $0.25 per common share to shareholders of record on August 18, 2004. Concurrently, Leonard Tow decided to step down from his position as chief executive officer, effective immediately, and resigned his position as Chairman of the board on September 27, 2004. The Board of Directors named Mary A. Wilderotter president and chief executive officer (effective November 1, 2004) on September 21, 2004 and Rudy J. Graf was elected Chairman of the board on September 30, 2004. Through the first nine months of 2004, we expensed approximately $90,632,000 of costs related to management succession and our exploration of financial and strategic alternatives. Included are $36,618,000 of non-cash expenses for the acceleration of stock benefits, cash expenses of $19,229,000 for advisory fees, $19,339,000 for severance and retention arrangements and $15,446,000 primarily for tax reimbursements. We do not anticipate any significant future costs for these items. 17 (13) Investment and Other Income, Net: -------------------------------- The components of investment and other income, net are as follows:
Three Months Ended September 30, Nine Months Ended September 30, ----------------------------------- ----------------------------------- ($ in thousands) 2004 2003 2004 2003 ----------------- ---------------- ----------------- ----------------- Investment income (loss) $ (2,742) $ 1,809 $ 2,869 $ 7,113 Gain on capital lease termination/restructuring - - - 65,724 Gain on expiration/settlement of customer advances - - 25,345 6,165 Premium on debt repurchases (20,368) (7,250) (20,368) (10,704) Gain (loss) on sale of assets 10,735 (16,813) 9,365 (11,792) Other, net (1,276) (2,023) (355) (1,374) ----------------- ---------------- ----------------- ----------------- Total investment and other income, net $ (13,651) $ (24,277) $ 16,856 $ 55,132 ================= ================ ================= =================
During 2003 and 2004, we recognized income in connection with certain retained liabilities associated with customer advances for construction from our disposed water properties, as a result of some of these liabilities terminating. During 2003, we recognized gains in connection with the termination/restructuring of capital leases at ELI. Gain (loss) on sale of assets in 2004 represents various gains (losses) recognized including the gain on sales of non strategic investments during the third quarter. In 2003, the amount is attributable to the sales of The Gas Company in Hawaii and our Arizona gas and electric divisions during the third quarter, and the sale of access lines in North Dakota and our wireless partnership interest in Wisconsin during the second quarter, and the sale of our Plano, Texas office building in March 2003. (14) Company Obligated Mandatorily Redeemable Convertible Preferred Securities: ------------------------------------------------------------------------- In 1996, our consolidated wholly-owned subsidiary, 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 (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 subsidiary, Citizens Utilities Capital L.P. (the Partnership). These securities have an adjusted conversion price of $11.46 per Citizens common share. The conversion price was reduced from $13.30 to $11.46 during the third quarter of 2004 as a result of the $2.00 per share special dividend. The proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital contribution were used to purchase from us $211,756,000 aggregate principal amount of 5% Convertible Subordinated Debentures due 2036. The sole assets of the Trust are the Partnership Convertible Preferred Securities, and our Convertible Subordinated Debentures are substantially all the assets of the Partnership. Our obligations under the agreements related to the issuances of such securities, taken together, constitute a full and unconditional guarantee by us of the Trust's obligations relating to the Trust Convertible Preferred Securities and the Partnership's obligations relating to the Partnership Convertible Preferred Securities. In accordance with the terms of the issuances, we paid the annual 5% interest in quarterly installments on the Convertible Subordinated Debentures in the first, second and third quarters of 2004 and the four quarters of 2003. Only cash was paid (net of investment returns) to the Partnership in payment of the interest on the Convertible Subordinated Debentures. The cash was then distributed by the Partnership to the Trust and then by the Trust to the holders of the EPPICS. As of September 30, 2004, EPPICS representing a total principal amount of $111,379,000 had been converted into 8,429,020 shares of Citizens common stock. We have adopted the provisions of FIN 46R (revised December 2003) ("FIN 46R"), "Consolidation of Variable Interest Entities," effective January 1, 2004. We have not restated prior periods. 18 We have included the following description to provide readers a comparative analysis of the accounting impact of this standard. Both the Trust and the Partnership have been consolidated from the date of their creation through December 31, 2003. As a result of the new consolidation standards established by FIN 46R, the Company, effective January 1, 2004, deconsolidated the activities of the Trust and the Partnership. We have highlighted the comparative effect of this change in the following table:
Balance Sheet As of ------------------------------------------------------------- ($ in thousands) December 31, 2003 September 30, 2004 Change --------------------- -------------------- -------------- Assets: Cash $ 2,103 $ - $ (2,103) (1) Investments - 12,645 12,645 (2) Liabilities: Long-term debt - 100,377 (3) (100,873(3) EPPICS 201,250 - (3) Statement of Operations As reported for the nine months ended ------------------------------------------------------------- ($ in thousands) September 30, 2003 September 30, 2004 Change --------------------- -------------------- -------------- Investment income $ - $ 474 $ 474 (4) Interest expense - 7,044 7,044 (5) Dividends on EPPICS (before tax) 7,548 - (7,548) (6) --------------------- -------------------- -------------- Net $ 7,548 $ 6,570 $ (978) ===================== ==================== ==============
(1) Represents a cash balance on the books of the Partnership that is removed as a result of the deconsolidation. (2) Represents Citizens' investments in the Partnership and the Trust. At December 31, 2003, these investments were eliminated in consolidation against the equity of the Partnership and the Trust. (3) As a result of the deconsolidation, the Trust and the Partnership balance sheets were removed, leaving debt issued by Citizens to the Partnership in the amount of $211,756,000. The nominal effect of an increase in debt of $10,506,000 is debt that is "intercompany." FIN 46R does not impact the economics of the EPPICS structure. As of September 2004, Citizens has $100,377,000 (approximately $111,378,600 converted during third quarter) of debt outstanding to third parties and will continue to pay interest on that amount at 5%. (4) Represents interest income to be paid by the Partnership and the Trust to Citizens for its investments noted in (2) above. The Partnership and the Trust have no source of cash except as provided by Citizens. Interest is payable at the rate of 5% per annum. (5) Represents interest expense on the convertible debentures issued by Citizens to the Partnership. Interest is payable at the rate of 5% per annum. (6) As a result of the deconsolidation of the Trust, previously reported dividends on the convertible preferred securities issued to the public by the Trust are removed and replaced by the interest accruing on the debt issued by Citizens to the Partnership. Citizens remains the guarantor of the EPPICS debt and continues to be the sole source of cash for the Trust to pay dividends. 19 (15) Retirement Plans: ---------------- The following tables provides the components of net periodic benefit cost for the three and nine months ended September 30, 2004 and 2003:
Pension Benefits -------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, ---------------------------- ------------------------- ($ in thousands) 2004 2003 2004 2003 ------------- ------------- ------------ ------------ Components of net periodic benefit cost - --------------------------------------- Service cost $ 1,133 $ 1,763 $ 4,311 $ 5,607 Interest cost on projected benefit obligation 11,859 13,364 34,851 42,502 Return on plan assets (14,286) (14,697) (42,902) (46,739) Amortization of prior service cost and unrecognized net obligation (61) (47) (183) (149) Amortization of unrecognized loss 2,911 3,002 6,619 9,544 ------------- ------------- ------------ ------------ Net periodic benefit cost 1,556 3,385 2,696 10,765 Curtailment/settlement charge - 6,585 - 6,585 ------------- ------------- ------------ ------------ Total periodic benefit cost $ 1,556 $ 9,970 $ 2,696 $ 17,350 ============= ============= ============ ============ Other Postretirement Benefits -------------------------------------------------------- For the three months ended For the nine months ended September 30, September 30, ---------------------------- ------------------------- ($ in thousands) 2004 2003 2004 2003 ------------- ------------- ------------ ------------ Components of net periodic benefit cost - --------------------------------------- Service cost $ 48 $ 292 $ 846 $ 876 Interest cost on projected benefit obligation 3,203 2,863 9,517 8,591 Return on plan assets (641) (449) (1,701) (1,347) Amortization of prior service cost and unrecognized net obligation (162) 5 (150) 15 Amortization of unrecognized loss 809 838 3,927 2,515 ------------- ------------- ------------ ------------ Net periodic benefit cost $ 3,257 $ 3,549 $ 12,439 $ 10,650 ============= ============= ============ ============
We expect that our pension expense for 2004 will be $3,000,000 - $4,000,000 (it was $12,400,000 in 2003) and no contribution will be required to be made by us to the pension plan in 2004. No contribution was made, or required, for 2003. In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. The amount of the federal subsidy will be based on 28 percent of an individual beneficiary's annual eligible prescription drug costs ranging between $250 and $5,000. Currently, the Company has not yet been able to conclude whether the benefits provided by its postretirement medical plan are actuarially equivalent to Medicare Part D under the Act. Therefore, the Company cannot quantify the effects, if any, that the Act will have on its future benefit costs or accumulated postretirement benefit obligation and accordingly, the effects of the Act have not been reflected in the accompanying unaudited consolidated financial statements. (16) Income Taxes: ------------ The effective tax rate for the nine months ended September 30, 2004 and 2003 was 21.5% and 33.8%, respectively. Our effective tax rate has declined as a result of the completion of audits with federal and state taxing authorities in the third quarter 2004 and changes in the structure of certain of our subsidiaries. 20 (17) Commitments and Contingencies: ----------------------------- The City of Bangor, Maine, filed suit against us on November 22, 2002, in the U.S. District Court for the District of Maine (City of Bangor v. Citizens Communications Company, Civ. Action No. 02-183-B-S). We intend to defend ourselves vigorously against the City's lawsuit. The City has alleged, among other things, that we are responsible for the costs of cleaning up environmental contamination alleged to have resulted from the operation of a manufactured gas plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the existence of extensive contamination of the Penobscot River and has asserted that money damages and other relief at issue in the lawsuit could exceed $50,000,000. The City also requested that punitive damages be assessed against us. We have filed an answer denying liability to the City, and have asserted a number of counterclaims against the City. In addition, we have identified a number of other potentially responsible parties that may be liable for the damages alleged by the City and have joined them as parties to the lawsuit. These additional parties include Honeywell Corporation, the Army Corps of Engineers, Guilford Transportation (formerly Maine Central Railroad), UGI Utilities, Inc., and Centerpoint Energy Resources Corporation. On March 11, 2004, the Magistrate in charge of the case granted our motion for partial summary judgment with respect to the City's CERCLA claims, and that decision was affirmed by the District Court on May 5, 2004. In an order issued on July 6, 2004, the Magistrate dismissed the City's claim for punitive damages. The case could be set for trial as early as the first quarter of 2005. We have demanded that various of our insurance carriers defend and indemnify us with respect to the City's lawsuit, and on December 26, 2002, we filed a declaratory judgment action against those insurance carriers in the Superior Court of Penobscot County, Maine, for the purpose of establishing their obligations to us with respect to the City's lawsuit. We intend to vigorously pursue this lawsuit to obtain from our insurance carriers indemnification for any damages that may be assessed against us in the City's lawsuit as well as to recover the costs of our defense of that lawsuit. On June 7, 2004, representatives of Robert A. Katz Technology Licensing, LP, contacted us regarding possible infringement of several patents held by that firm. The patents cover a wide range of operations in which telephony is supported by computers, including obtaining information from databases via telephone, interactive telephone transactions, and customer and technical support applications. We are cooperating with the patent holder to determine if we are currently using any of the processes that are protected by its patents. If we determine that we are utilizing the patent holder's intellectual property, we expect to commence negotiations on a license agreement. On June 24, 2004, one of our subsidiaries, Frontier Subsidiary Telco Inc., received a "Notice of Indemnity Claim" from Citibank, N.A., that is related to a complaint pending against Citibank and others in the U.S. Bankruptcy Court for the Southern District of New York as a part of the Global Crossing Bankruptcy proceeding. Citibank bases its claim for indemnity on the provisions of a credit agreement that was entered into in October 2000 between Citibank and our subsidiary. We purchased Frontier Subsidiary Telco, Inc., in June 2001 as part of our acquisition of the Frontier telephone companies. The complaint against Citibank, for which it seeks indemnification, alleges that the seller improperly used a portion of the proceeds from the Frontier transaction to pay off the Citibank credit agreement, thereby defrauding certain debt holders of Global Crossing North America Inc. Although the credit agreement was paid off at the closing of the Frontier transaction, Citibank claims the indemnification obligation survives. Damages sought against Citibank and its co-defendants could exceed $1,000,000,000. We have advised Citibank that we believe its demand for indemnification is unfounded. If Citibank elects to pursue its claims for indemnification in a legal proceeding, we will vigorously contest those claims. We are party to other legal proceedings arising in the normal course of our business. The outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage, will not have a material adverse effect on our financial position, results of operations, or our cash flows. We have budgeted capital expenditures in 2004 of approximately $276,000,000, including $265,000,000 for ILEC (approximately $10,300,000 of which relates to our billing system conversion) and $11,000,000 for ELI. Capitalized costs during 2004 associated with our billing system conversion amounted to $7,755,000. 21 The Company sold all of its utility businesses as of April 1, 2004. However, we have retained a potential payment obligation associated with our previous electric utility activities in the state of Vermont. The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including us, entered into a purchase power agreement with Hydro-Quebec in 1987. 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. Our pro-rata share of the purchase power obligation was 10%. If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, the remaining members of the VJO, including us, may be required to pay for a substantially larger share of the VJO's total power purchase obligation for the remainder of the agreement (which runs through 2015). Paragraph 13 of FIN 45 requires that we disclose "the maximum potential amount of future payments (undiscounted) the guarantor could be required to make under the guarantee." Paragraph 13 also states that we must make such disclosure "... even if the likelihood of the guarantor's having to make any payments under the guarantee is remote..." As noted above, our obligation only arises as a result of default by another VJO member such as upon bankruptcy. Therefore, to satisfy the "maximum potential amount" disclosure requirement we must assume that all members of the VJO simultaneously default, a highly unlikely scenario given that the two members of the VJO that have the largest potential payment obligations are publicly traded with investment grade credit ratings, and that all VJO members are regulated utility providers with regulated cost recovery. Regardless, despite the remote chance that such an event could occur, or that the State of Vermont could or would allow such an event, assuming that all the members of the VJO defaulted by January 1, 2005 and remained in default for the duration of the contract (another 10 years), we estimate that our undiscounted purchase obligation for 2005 through 2015 would be approximately $1,600,000,000. In such a scenario the Company would then own the power and could seek to recover its costs. We would do this by seeking to recover our costs from the defaulting members and/or reselling the power to other utility providers or the northeast power grid. There is an active market for the sale of power. We believe that we would receive full recovery of our costs through sales to others. If pricing became more favorable we could potentially sell the power on the open market at a profit. We could potentially lose money if we were unable to sell the power at cost. We caution that all of the above-described scenarios are unlikely to occur and we cannot predict with any degree of certainty any potential outcome. (18) Subsequent Event: ---------------- On October 29, 2004, Citizens Communications Company entered into a $250,000,000 credit agreement with a maturity date of October 29, 2009. The $805,000,000 lines of credit, which would have matured on October 24, 2006, were canceled as of the same date. During the term of the $250,000,000 credit agreement, Citizens may borrow, repay and re-borrow funds. The new credit facility contains a maximum leverage ratio covenant, which requires that we maintain a ratio of no greater than 4.50 to 1. Although the new credit facility is unsecured, it will be equally and ratably secured by certain liens and equally and ratably guaranteed by certain of our subsidiaries if we issue debt that is secured or guaranteed. The new credit agreement is available for general corporate purposes but may not be used to fund dividend payments. 22 Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- This quarterly report on Form 10-Q 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. Forward-looking statements (including oral representations) are only predictions or statements of current plans, which we review continuously. Forward-looking statements may differ from actual future results due to, but not limited to, and our future results may be materially affected by, any of the following possibilities: * Changes in the number of our access lines; * The effects of competition from wireless, other wireline carriers (through Unbundled Network Elements (UNE), Unbundled Network Elements Platform (UNEP), voice over internet protocol (VOIP) or otherwise), high speed cable modems and cable telephony; * The effects of general and local economic and employment conditions on our revenues; * Our ability to effectively manage and otherwise monitor our operations, costs, regulatory compliance and service quality; * Our ability to successfully introduce new product offerings including our ability to offer bundled service packages on terms that are both profitable to us and attractive to our customers, and our ability to sell enhanced and data services in order to offset declines in highly profitable revenue from local services, access services and subsidies; * Our ability to comply with Section 404 of the Sarbanes-Oxley Act, which requires management to assess its internal control systems and disclose whether the internal control systems are effective and the identification of any material weaknesses in the Company's internal control over financial reporting; * The effects of changes in regulation in the telecommunications industry as a result of the Telecommunications Act of 1996 and other federal and state legislation and regulation, including potential changes in access charges and subsidy payments, regulatory network upgrade and reliability requirements, and portability requirements; * Our ability to successfully renegotiate certain ILEC state regulatory plans as they expire or come up for renewal from time to time; * Our ability to manage our operating expenses, capital expenditures, pay dividends and reduce or refinance our debt; * The effects of greater than anticipated competition requiring new pricing, marketing strategies or new product offerings and the risk that we will not respond on a timely or profitable basis; * The effects of bankruptcies in the telecommunications industry which could result in more price competition and potential bad debts; * The effects of technological changes on our capital expenditures and product and service offerings, including the lack of assurance that our ongoing network improvements will be sufficient to meet or exceed the capabilities and quality of competing networks; * The effects of increased medical expenses and related funding requirements; * The effect of changes in the telecommunications market, including the likelihood of significantly increased price and service competition; * Our ability to successfully convert the billing system for approximately 770,000 of our access lines on a timely basis and within our expected amount for 2004 of $18.0 - $20.0 million (a portion of which is expected to be capitalized and amortized) and, beginning in 2005, to achieve our expected cost savings from conversion; 23 * The effects of state regulatory cash management policies on our ability to transfer cash among our subsidiaries and to the parent company; * Our ability to successfully renegotiate expiring union contracts covering approximately 140 employees that are scheduled to expire during the remainder of 2004; * Our ability to pay a $1.00 per common share dividend annually may be affected by our cash flow from operations, amount of capital expenditures, debt service requirements and cash taxes and our liquidity; * The effects of any future liabilities or compliance costs in connection with environmental and worker health and safety matters; * The effects of any unfavorable outcome with respect to any of our current or future legal, governmental, or regulatory proceedings, audits or disputes; and * The effects of more general factors, including changes in economic conditions; changes in the capital markets; changes in industry conditions; changes in our credit ratings; and changes in accounting policies or practices adopted voluntarily or as required by generally accepted accounting principles or regulators. You should consider these important factors in evaluating any statement in this Form 10-Q or otherwise made by us or on our behalf. The following information is unaudited and should be read in conjunction with the consolidated financial statements and related notes included in this report and as presented in our 2003 Annual Report on Form 10-K. We have no obligation to update or revise these forward-looking statements. Overview - -------- We are a telecommunications company providing wireline communications services to rural areas and small and medium-sized towns and cities as an incumbent local exchange carrier, or ILEC. We offer our ILEC services under the "Frontier" name. In addition, we provide competitive local exchange carrier, or CLEC, services to business customers and to other communications carriers in certain metropolitan areas in the western United States through Electric Lightwave, LLC, or ELI, our wholly-owned subsidiary. We also provided (through March 31, 2004), electric distribution services to primarily rural customers in Vermont. Competition in the telecommunications industry is increasing. We experience competition from other wireline local carriers through Unbundled Network Elements (UNE), VOIP and potentially in the future through Unbundled Network Elements Platform (UNEP), from other long distance carriers (including Regional Bell Operating Companies), from cable companies and internet service providers with respect to internet access and cable telephony, and from wireless carriers. Most of the wireline competition we face is in our Rochester, New York market, with competition also present in a few other areas. Time Warner Cable is selling VOIP service in our Rochester market and other portions of our New York markets. Competition from cable companies and other internet service providers with respect to internet access is intense. Competition from wireless companies and other long distance companies is increasing in all of our markets. The telecommunications industry is undergoing significant changes and difficulties. The market for internet access, long distance, long-haul and related services in the United States is extremely competitive, with substantial overcapacity in the market. Demand and pricing for certain CLEC services (such as long-haul services) have decreased substantially. There is also increasing price pressure on certain of our ILEC services such as special access, business services, long distance and internet access. These trends are likely to continue and result in a challenging revenue environment. These factors could also result in more bankruptcies in the sector and therefore affect our ability to collect money owed to us by carriers. Several long distance and Interexchange Carriers (IXCs) have filed for bankruptcy protection, which will allow them to substantially reduce their cost structure and debt. This could enable such companies to further reduce prices and increase competition. 24 Our ILEC business has been experiencing declining access lines, switched minutes of use and revenues because of economic conditions, unemployment levels, increasing competition (as described above), changing consumer behavior (such as wireless displacement of wireline use, email use, instant messaging and increasing use of VOIP) and regulatory constraints. During the nine months ended September 30, 2004, our access lines declined 2.4%, our switched minutes of use declined 1.6% and our ILEC revenues declined 0.9%, in each case as compared to the first nine months of 2003. These factors are likely to cause our local network service, switched network access, long distance and subsidy revenues to continue to decline during the remainder of 2004 and 2005. During the nine months ended September 30, 2004, our switched network access revenue declined 6.9%, our long distance revenue declined 8.4%, our subsidy revenue declined 9.2% and our local service revenue declined 2.2%, in each case as compared to 2003. One of the ways we are responding to competition is by bundling services and products and offering them for a single price, which results in lower pricing than purchasing the services separately. During the nine months ended September 30, 2004, approximately 58,300 customers started buying one of our bundled packages and we increased our revenue from enhanced services by 7.2%. In addition, we added approximately 67,000 DSL subscribers during the nine months ended September 30, 2004 and increased our data revenue by 28.7%. Our average ILEC revenue per month per average number of ILEC access lines during the nine months ended September 30, 2004 was $71.43 compared to $70.38 during the nine months ended September 30, 2003. Revenues from data services such as DSL continue to increase as a percentage of our total revenues and revenues from high margin services such as local line and access charges and subsidies are decreasing as a percentage of our revenues. These factors, along with increasing operating and employee costs may cause our profitability to decrease. In addition, costs we will incur during the remainder of 2004 to convert the billing system for some of our access lines, to enable our systems to be capable of local number portability (LNP) and to retain certain employees will affect our profitability and capital expenditures during the remainder of 2004. (a) Liquidity and Capital Resources ------------------------------- For the nine months ended September 30, 2004, we used cash flow from operations, proceeds from the sale of equity and non-strategic investments, cash and cash equivalents to fund capital expenditures, interest payments, dividend payments and debt repayments. As of September 30, 2004, we had cash and cash equivalents aggregating $199.0 million. We have budgeted approximately $276.0 million for our 2004 capital projects, including $265.0 million for the ILEC segment (approximately $10.3 million of which relates to our billing system conversion) and $11.0 million for the ELI segment. Capitalized costs during 2004 associated with our billing system conversion amount to $7.8 million through September 30. For the nine months ended September 30, 2004, our capital expenditures were $201.3 million, including $192.5 million for the ILEC segment, $8.0 million for the ELI segment, $0.6 million for the public utilities segment and $0.2 million for general capital expenditures. Our capital spending has been trending lower over the last several years as we continue to closely scrutinize all of our capital projects, emphasize return on investment and focus our capital expenditures on areas and services that have the greatest opportunities with respect to revenue growth and cost reduction. We will continue to focus on managing our costs while increasing our investment in certain new product areas such as DSL, VOIP and other Broadband services. We have an available shelf registration for $719.9 million. As of September 30, 2004 we had available lines of credit with financial institutions in the aggregate amount of $805.0 million. Associated facility fees varied depending on our credit ratings and were 0.40% per annum as of September 30, 2004. The expiration date for these facilities was October 24, 2006. No amounts were ever borrowed under these facilities. On October 29, 2004, the $805.0 million lines of credit were cancelled and replaced with a new $250.0 million line of credit with a maturity date of October 29, 2009. Associated facility fees for the new credit facility vary depending on our leverage ratio and were 0.375% as of October 29, 2004. During the term of the new credit facility we may borrow, repay and re-borrow funds. The new credit facility is available for general corporate purposes but may not be used to fund dividend payments. There are no outstanding borrowings under the new facility. In July 2004, our Board of Directors concluded a review of financial and strategic alternatives. After analysis of alternatives by the Board of Directors and its financial and legal advisors, the Board determined to pay a special dividend of $2 per common share and institute a regular annual dividend of $1 per common share which will be paid quarterly. The special dividend and first quarterly dividend were paid on September 2, 2004 to shareholders of record on August 18, 2004, utilizing the Company's available cash on hand. The next quarterly dividend of $0.25 per common share will be paid on December 31, 2004 to shareholders of record on December 10, 2004. 25 The dividends paid on September 2, 2004 totaled $747.9 million and significantly reduced our cash balances and liquidity. In addition, our ongoing annual dividends of approximately $335.0 million will reduce our operating and financial flexibility and our ability to significantly increase capital expenditures. While we believe that the amount of our dividends will allow for adequate amounts of cash flow for other purposes, any reduction in cash generated by operations and any increases in capital expenditures, interest expense or cash taxes would reduce the amount of cash generated in excess of dividends. Losses of access lines, increases in competition, lower subsidy and access revenues and the other factors described above may reduce our cash generated by operations and require us to increase capital expenditures. The downgrades in our credit ratings in July, 2004 to below investment grade may make it more difficult and expensive to refinance our maturing debt. We have in recent years paid relatively low amounts of cash taxes. We expect that over time our cash taxes will increase. As a result of our dividend policy, Standard and Poor's lowered its ratings on Citizens debt from "BBB" to "BB-plus", Moody's Investors Service lowered its ratings from "Baa3" to "Ba3" and Fitch Ratings lowered its ratings from "BBB" to "BB". We believe our operating cash flows, existing cash balances, and credit facilities will be adequate to finance our working capital requirements, make required debt payments through 2005, pay dividends to our shareholders in accordance with our dividend policy, and support our short-term and long-term operating strategies. We have approximately $927.8 million of debt that matures in 2006. We will refinance most of this debt. Based on current market conditions, any refinancing of such debt is likely to result in ongoing lower interest expense but in the period during which the refinancing occurs we will expense repayment premiums and the write off of unamortized deferred financing costs as a result of retiring debt prior to its maturity. Issuance of Common Stock - ------------------------ On August 17, 2004 we issued 32,073,633 shares of common stock, including 3,591,000 treasury shares, to our equity unit holders in settlement of the equity purchase contract component of the equity units. With respect to the $460.0 million Senior Note component of their equity units, we repurchased $300.0 million principal amount of these Notes in July 2004. The remaining $160.0 million of the Senior Notes were repriced and a portion was remarketed on August 12, 2004 as the 6.75% Notes due August 17, 2006. During August and September, 2004, we repurchased an additional $108.2 million of the 6.75% Notes which, in addition to the $300.0 million purchased in July, resulted in a pre-tax charge of approximately $20.1 million during the third quarter of 2004, but will result in an annual reduction in interest expense of about $27.6 million per year. As a result of our July dividend announcement with respect to our common shares, our 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 (EPPICS) began to convert to Citizens common shares. As of September 30, 2004, approximately 55% of the EPPICS outstanding, or about $111.4 million aggregate principal amount of units, have converted to 8,429,020 Citizens common shares, including 725,000 treasury shares. Debt Reduction - -------------- On January 15, 2004, we repaid at maturity the remaining outstanding $81.0 million of our 7.45% Debentures. On January 15, 2004, we redeemed at 101% the remaining outstanding $12.3 million of our Hawaii Special Purpose Revenue Bonds, Series 1993A and Series 1993B. On May 17, 2004, we repaid at maturity the remaining outstanding $6.0 million of Electric Lightwave, LLC's 6.05% Notes. These Notes had been guaranteed by Citizens. On July 15, 2004, we renegotiated and prepaid with $5.0 million of cash the entire remaining $5.5 million Electric Lightwave capital lease obligation to a third party. On July 30, 2004, we purchased $300.0 million of the 6.75% notes that were a component of our equity units at 105.075% of par, plus accrued interest, at a premium of approximately $15.2 million. During August and September 2004, we repurchased through a series of transactions an additional $108.2 million of the 6.75% notes due 2006 at a weighted average price of 104.486% of par, plus accrued interest, at a premium of approximately $4.9 million. We may from time to time repurchase our debt in the open market, through tender offers or privately negotiated transactions. 26 Interest Rate Management - ------------------------ In order to manage our interest expense, we have entered into interest swap agreements. Under the terms of these agreements, we make semi-annual, floating rate interest payments based on six month LIBOR and receive a fixed rate on the notional amount. The underlying variable rate on these swaps is set either in advance, in arrears or, based on each period's daily average six-month LIBOR. The notional amounts of fixed-rate indebtedness hedged as of September 30, 2004 and December 31, 2003 was $550.0 million and $400.0 million, respectively. Such contracts require us to pay variable rates of interest (estimated average pay rates of approximately 6.31% as of September 30, 2004 and approximately 5.46% as of December 31, 2003) and receive fixed rates of interest (average receive rates of 8.47% and 8.38% as of September 30, 2004 and December 31, 2003, respectively). All swaps are accounted for under SFAS No. 133 as fair value hedges. For the three and nine months ended September 30, 2004, the cash interest savings resulting from these interest rate swaps was approximately $1.6 million and $7.1 million, respectively, and is reflected as a reduction of interest expense in the accompanying statements of operations. Sale of Non-Strategic Investments - --------------------------------- On August 13, 2004, we sold our entire 1,333,500 shares of D & E Communications, Inc. (D & E) for approximately $13.3 million in cash. On September 3, 2004, we sold our entire holdings of 2,605,908 common share equivalents in Hungarian Telephone and Cable Corp. for approximately $13.2 million in cash. During the third quarter of 2004, we sold our corporate aircraft for approximately $15.3 million in cash. Off-Balance Sheet Arrangements - ------------------------------ We do not maintain any off-balance sheet arrangements, transactions, obligations or other relationships with unconsolidated entities that would be expected to have a material current or future effect upon our financial statements. Management Succession and Strategic Alternatives Expenses - --------------------------------------------------------- On July 11, 2004, our Board of Directors announced that it completed its review of the Company's financial and strategic alternatives. Through the first nine months of 2004, we expensed approximately $90.6 million of costs related to management succession and our exploration of financial and strategic alternatives. Included are $36.6 million of non-cash expenses for the acceleration of stock benefits, cash expenses of $19.2 million for advisory fees, $19.3 million for severance and retention arrangements and $15.5 million primarily for tax reimbursements. We do not anticipate any significant future costs for these items. EPPICS - ------ In 1996, our consolidated wholly-owned subsidiary, 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 $201.3 million). The proceeds from the issuance of the Trust Convertible Preferred Securities and a Company capital contribution were used to purchase $207.5 million aggregate liquidation amount of 5% Partnership Convertible Preferred Securities due 2036 from another wholly owned consolidated subsidiary, Citizens Utilities Capital L.P. (the Partnership). These securities have an adjusted conversion price of $11.46 per Citizens common share. The conversion price was reduced from $13.30 to $11.46 during the third quarter of 2004 as a result of the $2.00 per share special dividend. The proceeds from the issuance of the Partnership Convertible Preferred Securities and a Company capital contribution were used to purchase from us $211.8 million aggregate principal amount of 5% Convertible Subordinated Debentures due 2036. The sole assets of the Trust are the Partnership Convertible Preferred Securities, and our Convertible Subordinated Debentures are substantially all the assets of the Partnership. Our obligations under the agreements related to the issuances of such securities, taken together, constitute a full and unconditional guarantee by us of the Trust's obligations relating to the Trust Convertible Preferred Securities and the Partnership's obligations relating to the Partnership Convertible Preferred Securities. In accordance with the terms of the issuances, we paid the annual 5% interest in quarterly installments on the Convertible Subordinated Debentures in the first, second and third quarters of 2004 and the four quarters of 2003. Only cash was paid (net of investment returns) to the Partnership in payment of the interest on the Convertible Subordinated Debentures. The cash was then distributed by the Partnership to the Trust and then by the Trust to the holders of the EPPICS. As of September 30, 2004, EPPICS representing a total principal amount of $111.4 million had been converted into 8,429,020 shares of Citizens common stock. 27 We have adopted the provisions of FASB Interpretation No. 46R (revised December 2003) ("FIN 46R"), "Consolidation of Variable Interest Entities," effective January 1, 2004. We have not restated prior periods. We have included the following description to provide readers a comparative analysis of the accounting impact of this standard. Both the Trust and the Partnership have been consolidated from the date of their creation through December 31, 2003. As a result of the new consolidation standards established by FIN 46R, the Company, effective January 1, 2004, deconsolidated the activities of the Trust and the Partnership. We have highlighted the comparative effect of this change in the following table:
Balance Sheet As of ------------------------------------------------------------- ($ in thousands) December 31, 2003 September 30, 2004 Change --------------------- -------------------- -------------- Assets: Cash $ 2,103 $ - $ (2,103) (1) Investments - 12,645 12,645 (2) Liabilities: Long-term debt - 100,377 (3) (100,873) (3) EPPICS 201,250 - (3) Statement of Operations As reported for the nine months ended ------------------------------------------------------------- ($ in thousands) September 30, 2003 September 30, 2004 Change --------------------- -------------------- -------------- Investment income $ - $ 474 $ 474 (4) Interest expense - 7,044 7,044 (5) Dividends on EPPICS (before tax) 7,548 - (7,548) (6) --------------------- -------------------- -------------- Net $ 7,548 $ 6,570 $ (978) ===================== ==================== ==============
(1) Represents a cash balance on the books of the Partnership that is removed as a result of the deconsolidation. (2) Represents Citizens' investments in the Partnership and the Trust. At December 31, 2003, these investments were eliminated in consolidation against the equity of the Partnership and the Trust. (3) As a result of the deconsolidation, the Trust and the Partnership balance sheets were removed, leaving debt issued by Citizens to the Partnership in the amount of $211.8 million. The nominal effect of an increase in debt of $10.5 million is debt that is "intercompany." FIN 46R does not impact the economics of the EPPICS structure. As of September 2004, Citizens has $100.4 million (approximately $111.4 million converted during the third quarter) of debt outstanding to third parties and will continue to pay interest on that amount at 5%. (4) Represents interest income to be paid by the Partnership and the Trust to Citizens for its investments noted in (2) above. The Partnership and the Trust have no source of cash except as provided by Citizens. Interest is payable at the rate of 5% per annum. (5) Represents interest expense on the convertible debentures issued by Citizens to the partnership. Interest is payable at the rate of 5% per annum. (6) As a result of the deconsolidation of the Trust, previously reported dividends on the convertible preferred securities issued to the public by the Trust are removed and replaced by the interest accruing on the debt issued by Citizens to the Partnership. Citizens remains the guarantor of the EPPICS debt and continues to be the sole source of cash for the Trust to pay dividends. Covenants - --------- The terms and conditions contained in our indentures and credit facilities agreements include the timely and punctual payment of principal and interest when due, the maintenance of our corporate existence, keeping proper books and records in accordance with GAAP, restrictions on the allowance of liens on our assets, and restrictions on asset sales and transfers, mergers and other changes in corporate control. We currently have no restrictions on the payment of dividends by us either by contract, rule or regulation. Our $200.0 million term loan facility with the Rural Telephone Finance Cooperative (RTFC) contain a maximum leverage ratio covenant. Under the leverage ratio covenant, we are required to maintain a ratio of (i) total indebtedness minus cash and cash equivalents in excess of $50.0 million to (ii) consolidated adjusted EBITDA (as defined in the agreements) over the last four quarters no greater than 4.25 to 1 through December 30, 2004, and 4.00 to 1 thereafter. 28 Our new $250 million credit facility contains a maximum leverage ratio covenant. Under the leverage ratio covenant, we are required to maintain a ratio of (i) total indebtedness minus cash and cash equivalents in excess of $50.0 million to (ii) consolidated adjusted EBITDA (as defined in the agreement) over the last four quarters no greater than 4.50 to 1. Although the new credit facility is unsecured, it will be equally and ratably secured by certain liens and equally and ratably guaranteed by certain of our subsidiaries if we issue debt that is secured or guaranteed. We are in compliance with all of our debt and credit facility covenants. Divestitures - ------------ On August 24, 1999, our Board of Directors approved a plan of divestiture for our public utilities services businesses, which included gas, electric and water and wastewater businesses. As of April 1, 2004, we have sold all of these properties. All of the agreements relating to the sales provide that we will indemnify the buyer against certain liabilities (typically liabilities relating to events that occurred prior to sale), including environmental liabilities, for claims made by specified dates and that exceed threshold amounts specified in each agreement. On January 15, 2002, we sold our water and wastewater services operations for $859.1 million in cash and $122.5 million in assumed debt and other liabilities. On October 31, 2002, we completed the sale of approximately 4,000 access lines in North Dakota for approximately $9.7 million in cash. On November 1, 2002, we completed the sale of our Kauai electric division for $215.0 million in cash. On April 1, 2003, we completed the sale of approximately 11,000 access lines in North Dakota for approximately $25.7 million in cash. On April 4, 2003, we completed the sale of our wireless partnership interest in Wisconsin for approximately $7.5 million in cash. On August 8, 2003, we completed the sale of The Gas Company in Hawaii division for $119.3 million in cash and assumed liabilities. On August 11, 2003, we completed the sale of our Arizona gas and electric divisions for $224.1 million in cash. On December 2, 2003, we completed the sale of our electric transmission facilities in Vermont for $7.3 million in cash. On April 1, 2004, we completed the sale of our electric distribution facilities in Vermont for $14.0 million in cash, net of selling expenses. In October 2004, we sold cable assets in California, Arizona, Indiana, and Wisconsin, and we have signed a definitive agreement to sell cable assets in New Mexico. The $1.3 million pre-tax loss on these sales was recognized during the third quarter of 2004. Critical Accounting Policies and Estimates - ------------------------------------------ We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effect of any necessary adjustment prior to their publication. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of financial statements; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and judgments are used when accounting for allowance for doubtful accounts, impairment of long-lived assets, intangible assets, depreciation and amortization, employee benefit plans, income taxes, contingencies, and pension and postretirement benefits expenses among others. 29 Accounting standards require that we record an additional minimum pension liability when the plan's "accumulated benefit obligation" exceeds the fair market value of plan assets at the pension plan measurement (balance sheet) date. In the fourth quarter of 2002, due to weak performance in the equity markets during 2002 as well as a decrease in the year-end discount rate, we recorded an additional minimum pension liability in the amount of $181.0 million with a corresponding charge to shareholders' equity of $112.0 million, net of taxes of $69.0 million. In the fourth quarter of 2003, due to strong performance in the equity markets during 2003, partially offset by a decrease in the year-end discount rate, the Company recorded a reduction to its minimum pension liability in the amount of $35.0 million with a corresponding credit to shareholders' equity of $22.0 million, net of taxes of $13.0 million. These adjustments did not impact our earnings or cash flows. Based upon market conditions existing at the end of October 2004, an additional charge to equity of approximately $25.0 million - $30.0 million on a pre-tax basis would be required at the end of 2004 should market conditions remain unchanged. Management has discussed the development and selection of these critical accounting estimates with the audit committee of our board of directors and our audit committee has reviewed our disclosures relating to them. There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2003 Annual Report on Form 10-K. New Accounting Pronouncements - ----------------------------- Accounting for Asset Retirement Obligations In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations." We adopted SFAS No. 143 effective January 1, 2003. As a result of our adoption of SFAS No. 143, we recognized an after tax non-cash gain of approximately $65.8 million. This gain resulted from the elimination of the cumulative cost of removal included in accumulated depreciation as a cumulative effect of a change in accounting principle in our statement of operations in the first quarter of 2003 as the Company has no legal obligation to remove certain of its long-lived assets. Exit or Disposal Activities In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullified Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than on the date of commitment to an exit plan. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. We adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have any material impact on our financial position or results of operations. Guarantees In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor be required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation assumed under the guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with the guarantee. The provisions of FIN 45 are effective for guarantees issued or modified after December 31, 2002, whereas the disclosure requirements were effective for financial statements for period ending after December 15, 2002. The adoption of FIN 45 on January 1, 2003 did not have any material impact on our financial position or results of operations. 30 The Company has sold all of its utility businesses as of April 1, 2004. However, we have retained a potential payment obligation associated with our previous electric utility activities in the state of Vermont. The Vermont Joint Owners (VJO), a consortium of 14 Vermont utilities, including us, entered into a purchase power agreement with Hydro-Quebec in 1987. 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. Our pro-rata share of the purchase power obligation was 10%. If any member of the VJO defaults on its obligations under the Hydro-Quebec agreement, the remaining members of the VJO, including us, may be required to pay for a substantially larger share of the VJO's total power purchase obligation for the remainder of the agreement (which runs through 2015). Paragraph 13 of FIN 45 requires that we disclose, "the maximum potential amount of future payments (undiscounted) the guarantor could be required to make under the guarantee." Paragraph 13 also states that we must make such disclosure "... even if the likelihood of the guarantor's having to make any payments under the guarantee is remote..." As noted above, our obligation only arises as a result of default by another VJO member such as upon bankruptcy. Therefore, to satisfy the "maximum potential amount" disclosure requirement we must assume that all members of the VJO simultaneously default, a highly unlikely scenario given that the two members of the VJO that have the largest potential payment obligations are publicly traded with investment grade credit ratings, and that all VJO members are regulated utility providers with regulated cost recovery. Regardless, despite the remote chance that such an event could occur, or that the State of Vermont could or would allow such an event, assuming that all the members of the VJO defaulted by January 1, 2005 and remained in default for the duration of the contract (another 10 years), we estimate that our undiscounted purchase obligation for 2005 through 2015 would be approximately $1.6 billion. In such a scenario the Company would then own the power and could seek to recover its costs. We would do this by seeking to recover our costs from the defaulting members and/or reselling the power to other utility providers or the northeast power grid. There is an active market for the sale of power. We believe that we would receive full recovery of our costs through sales to others. If pricing became more favorable we could potentially sell the power on the open market at a profit. We could potentially lose money if we were unable to sell the power at cost. We caution that all of the above-described scenarios are unlikely to occur and we cannot predict with any degree of certainty any potential outcome. Variable Interest Entities In December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003) ("FIN 46R"), "Consolidation of Variable Interest Entities," which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights and accordingly should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," which was issued in January 2003. We are required to apply FIN 46R to variable interests in variable interest entities or VIEs created after December 31, 2003. For any VIEs that must be consolidated under FIN 46R that were created before January 1, 2004, the assets, liabilities and noncontrolling interests of the VIE initially would be measured at their carrying amounts with any difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and noncontrolling interest of the VIE. We reviewed all of our investments and determined that the EPPICS, issued by our consolidated wholly-owned subsidiary, Citizens Utilities Trust, was our only VIE. The adoption of FIN 46R on January 1, 2004 did not have any material impact on our financial position or results of operations. Derivative Instruments and Hedging In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging," which clarifies financial accounting and reporting for derivative instruments including derivative instruments embedded in other contracts. This Statement is effective for contracts entered into or modified after June 30, 2003. We adopted SFAS No. 149 on July 1, 2003. The adoption of SFAS No. 149 did not have any material impact on our financial position or results of operations. Financial Instruments with Characteristics of Both Liabilities and Equity In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." The Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. Generally, the Statement is effective for financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. We adopted the provisions of the Statement on July 1, 2003. The adoption of SFAS No. 150 did not have any material impact on our financial position or results of operations. 31 Pension and Other Postretirement Benefits In December 2003, the FASB issued SFAS No. 132 (revised), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This Statement retains and revises the disclosure requirements contained in the original Statement. It requires additional disclosures including information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized in interim periods. This Statement is effective for fiscal years ending after December 15, 2003. We have adopted the expanded disclosure requirements of SFAS No. 132 (revised). The FASB has issued an Exposure Draft that would require stock-based employee compensation to be recorded as a charge to earnings for interim or annual periods beginning after June 15, 2005. We will continue to monitor the progress on the issuance of this standard. (b) Results of Operations --------------------- REVENUE ILEC revenue is generated primarily through the provision of local, network access, long distance and data services. Such services are provided under either a monthly recurring fee or based on usage at a tariffed rate and is not dependent upon significant judgments by management, with the exception of a determination of a provision for uncollectible amounts. CLEC revenue is generated through local, long distance, data and long-haul services. These services are primarily provided under a monthly recurring fee or based on usage at agreed upon rates and are not dependent upon significant judgments by management with the exception of the determination of a provision for uncollectible amounts and realizability of reciprocal compensation. CLEC usage based revenue includes amounts determined under reciprocal compensation agreements. While this revenue is governed by specific contracts with the counterparty, management defers recognition of disputed portions of such revenue until realizability is assured. Revenue earned from long-haul contracts is recognized over the term of the related agreement. Consolidated revenue for the three and nine months ended September 30, 2004 decreased $49.6 million, or 8% and $242.9 million, or 13%, as compared with the prior year periods. The decrease for the three months ended September 30, 2004 is due to a $5.4 million decrease in ILEC revenue, a $1.2 million decrease in ELI revenue and a $43.0 million decrease in gas and electric revenue. The decrease for the nine months ended September 30, 2004 is due to a $14.4 million decrease in ILEC revenue, a $7.9 million decrease in ELI revenue and a $220.6 million decrease in gas and electric revenue. On April 1, 2003, we sold approximately 11,000 access lines in North Dakota. The revenues related to these access lines totaled $1.9 million for the nine months ended September 30, 2003.
TELECOMMUNICATIONS REVENUE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ----------- ----------- ----------- -------- ----------- ----------- ------------ ---------- Access services $ 157,692 $ 167,321 $ (9,629) -6% $ 474,399 $ 503,517 $ (29,118) -6% Local services 214,299 216,349 (2,050) -1% 640,458 644,511 (4,053) -1% Long distance and data services 82,002 76,145 5,857 8% 240,177 230,315 9,862 4% Directory services 27,312 26,817 495 2% 82,987 80,596 2,391 3% Other 24,878 24,942 (64) 0% 82,919 76,397 6,522 9% ----------- ----------- ----------- ----------- ----------- ------------ ILEC revenue 506,183 511,574 (5,391) -1% 1,520,940 1,535,336 (14,396) -1% ELI 39,210 40,416 (1,206) -3% 117,277 125,228 (7,951) -6% ----------- ----------- ----------- ----------- ----------- ------------ $ 545,393 $ 551,990 $ (6,597) -1% $1,638,217 $1,660,564 $(22,347) -1% =========== =========== =========== =========== =========== ============
Change in the number of our access lines is the most fundamental driver of changes in our telecommunications revenue. Many rural local telephone companies (including us) have been experiencing a loss of access lines primarily because of difficult economic conditions, increased competition from competitive wireline providers, from wireless providers and from cable companies (with respect to broadband and cable telephony), and by some customers disconnecting second lines when they add high speed data service. We lost approximately 40,400 access lines during the nine months ended September 30, 2004 but added approximately 67,000 DSL subscribers during this period. The loss of lines during the first nine months of 2004 was primarily residential customers. The non-residential line losses were principally in Rochester, New York, while the residential losses were throughout our markets. We expect to continue to lose access lines during the fourth quarter of 2004. A continued decrease in access lines, combined with increased competition and the other factors discussed in this MD&A, may cause our revenues to decrease during the remainder of 2004. 32 Access Services Access services revenue for the three months ended September 30, 2004 decreased $9.6 million or 6%, as compared with the prior year period. Switched access revenue decreased $3.1 million, as compared with the prior year period, primarily due to $2.7 million attributable to a decline in minutes of use. Subsidies revenue decreased $7.0 million, as compared with the prior year period, primarily due to a $2.4 million decline in federal universal service fund support because of increases in the national average cost per loop, a $3.5 million accrual recorded during the third quarter of 2004 for mistakes made during 2002 and 2003 by the agency that calculates subsidy payments and true ups related to 2002. Access services revenue for the nine months ended September 30, 2004 decreased $29.1 million or 6%, as compared with the prior year period. Switched access revenue decreased $16.1 million, as compared with the prior year period, primarily due to the $7.4 million effect of federally mandated access rate reductions effective as of July 1, 2003, $2.7 million associated with state intrastate access rate reductions, $3.6 million attributable to a decline in minutes of use and a $2.0 million decrease related to carrier disputes. Subsidies revenue decreased $12.7 million, as compared with the prior year period, primarily due to a $5.2 million decline in federal universal service fund support because of increases in the national average cost per loop, a $3.5 million accrual recorded during the third quarter of 2004 for mistakes made during 2002 and 2003 by the agency that calculates subsidy payments and true ups related to 2002. We expect our subsidy revenue to be approximately $10.0 million lower in 2004 than in 2003 primarily because of increases in the ceiling on national average loop costs that is compared to our costs to determine the amount of subsidy payments we receive. Our switched access revenues are impacted by the program, known as the Coalition for Affordable Local and Long Distance Services, or CALLS plan, which establishes a price floor for interstate-switched access services. We have been able to offset some of the reduction in interstate access rates through end-user charges. There are no material increases in end-user charges scheduled to take effect during the remainder of 2004 or 2005. We believe the net effect of reductions in interstate access rates and increases in end-user charges will reduce our revenues by approximately $8.0 million in 2004 compared to 2003 assuming constant interstate switched access minutes of use (which have been declining). Annual reductions in interstate switched access rates will continue through 2005. Our switched access revenues have also been adversely affected by declining switched access minutes of use, which we expect to continue. We currently expect that our subsidy revenue in 2005 will be at least $19.0 million lower than 2004 because of the improvement in prior years in the profitability of our operations and lower expenses and capital expenditures in prior years than previously anticipated, and because of a recently announced increase in the national average cost per loop (NACPL) from $286.18 to $298.45, effective January 1, 2005. Increases in the number of competitive communications companies (including wireless companies) receiving federal subsidies may lead to further increases in the NACPL, thereby resulting in further decreases in our subsidy revenue in the future. Increases in the NACPL during 2004 are expected to decrease our subsidy revenue by $6.3 million in 2004 compared to 2003. The FCC and state regulators are currently considering a number of proposals for changing the manner in which eligibility for federal subsidies is determined as well as the amounts of such subsidies. The FCC is also reviewing the mechanism by which subsidies are funded. We cannot predict when or how these matters will be decided nor the effect on our subsidy revenues. Our subsidy and switched access revenues are very profitable so any reductions in those revenues will reduce our profitability. Local Services Local services revenue for the three months ended September 30, 2004 decreased $2.1 million or 1% as compared with the prior year period. Local revenue decreased $4.7 million primarily due to $3.1 million related to continued losses of access lines. Enhanced services revenue increased $2.6 million, as compared with the prior year period, primarily due to sales of additional feature packages. Local services revenue for the nine months ended September 30, 2004 decreased $4.1 million or 1% as compared with the prior year period. Local revenue decreased $11.8 million primarily due to $5.0 million related to continued losses of access lines, the termination of an operator services contract of $3.2 million and $2.0 million in decreased local measured service revenue. Enhanced services revenue increased $7.8 million, as compared with the prior year period, primarily due to sales of additional feature packages. Economic conditions or increasing competition could make it more difficult to sell our packages and bundles and cause us to lower our prices for those products and services, which would adversely affect our revenues. 33 Long Distance and Data Services Long distance and data services revenue for the three months ended September 30, 2004 increased $5.9 million or 8%, as compared with the prior year period primarily due to growth of $8.4 million related to data services (data includes DSL) partially offset by decreased long distance revenue of $2.6 million because of a 22% decline in the average rate per minute. Long distance minutes of use, however, grew 15% as a result of new long distance products we started offering earlier this year that drove both market penetration and minutes of use. Long distance and data services revenue for the nine months ended September 30, 2004 increased $9.9 million or 4%, as compared with the prior year period primarily due to growth of $22.6 million related to data services (data includes DSL) partially offset by decreased long distance revenue of $12.7 million primarily attributable to a 20% decline in the average rate per minute. Our long distance revenues could decrease in the future due to lower long distance minutes of use because consumers are increasingly using their wireless phones or calling cards to make long distance calls and lower average rates per minute because of unlimited and packages of minutes for long distance plans. We expect these factors will continue to adversely affect our long distance revenues during the remainder of 2004. Directory Services Directory revenue for the nine months ended September 30, 2004 increased $2.4 million or 3%, as compared with the prior year period due to growth in yellow pages advertising. Other Other revenue for the nine months ended September 30, 2004 increased $6.5 million or 9%, as compared with the prior year period primarily due to a $4.4 million carrier dispute settlement, $3.0 million in increased conferencing revenue and a decline in bad debt expense of $2.6 million, partially offset by a decrease of $3.2 million in sales of customer premise equipment. ELI revenue for the three and nine months ended September 30, 2004 decreased $1.2 million, or 3%, and $8.0 million, or 6%, respectively, as compared to the prior year period primarily due to lower demand and prices for long-haul services.
GAS AND ELECTRIC REVENUE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ---------- ----------- ----------- -------- ----------- ----------- ------------ ---------- Gas revenue $ - $ 18,005 $ (18,005) -100% $ - $ 137,686 $ (137,686) -100% Electric revenue $ - $ 25,042 $ (25,042) -100% $ 9,735 $ 92,603 $ (82,868) -89%
We did not have any gas or electric operations in the quarter ended June 30, 2004 due to the sales of our Vermont Electric division, The Gas Company in Hawaii, and our Arizona gas and electric divisions. Electric revenue for the nine months ended September 30, 2004 decreased $82.9 million, or 89%, as compared with the prior year period. We completed the sale of our remaining electric utility property on April 1, 2004. We have sold all of our electric operations and as a result will have no operating results in future periods for these businesses.
COST OF SERVICES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ----------- ----------- ----------- -------- ------------ ----------- ----------- ---------- Network access $ 51,273 $ 57,133 $ (5,860) -10% $ 151,109 $ 171,816 $ (20,707) -12% Gas purchased - 12,324 (12,324) -100% - 82,311 (82,311) -100% Electric energy and fuel oil purchased - 16,412 (16,412) -100% 5,523 58,498 (52,975) -91% ----------- ----------- ----------- ----------- ----------- ------------ $ 51,273 $ 85,869 $ (34,596) -40% $ 156,632 $ 312,625 $ (155,993) -50% =========== =========== =========== =========== =========== ============
34 Network access expenses for the three months ended September 30, 2004 decreased $5.9 million, or 10%, as compared with the prior year period primarily due to decreased costs in long distance access expense related to rate changes partially offset by increased long distance usage and greater demand for data products in the ILEC sector. Network access expenses for the nine months ended September 30, 2004 decreased $20.7 million, or 12%, as compared with the prior year period primarily due to decreased costs in long distance access expense related to rate changes partially offset by increased circuit expense associated with additional data product sales in the ILEC sector. ELI costs have declined due to a drop in demand coupled with improved network cost efficiencies. If we continue to increase our sales of data products such as DSL or expand the availability of our unlimited calling plans, our network access expense could increase. We did not have any gas or electric operations in the quarter ended September 30, 2004 due to the sales of our Vermont Electric division, The Gas Company in Hawaii, and our Arizona gas and electric divisions. Electric energy and fuel oil purchased for the nine months ended September, 2004 decreased $53.0 million, or 91%, as compared with the prior year period. We completed the sale of our remaining electric utility property on April 1, 2004. We have sold all of our electric operations and as a result will have no operating results in future periods for these businesses.
OTHER OPERATING EXPENSES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ----------- ----------- ----------- -------- ----------- ----------- ------------ ---------- Operating expenses $ 156,571 $ 165,356 $ (8,785) -5% $ 473,445 $ 521,116 $ (47,671) -9% Taxes other than income taxes 20,000 26,095 (6,095) -23% 72,015 84,982 (12,967) -15% Sales and marketing 28,357 28,683 (326) -1% 85,643 82,492 3,151 4% ----------- ----------- ----------- ----------- ----------- ------------ $ 204,928 $ 220,134 $ (15,206) -7% $ 631,103 $ 688,590 $ (57,487) -8% =========== =========== =========== =========== =========== ============
Operating expenses for the three months ended September 30, 2004 decreased $8.8 million, or 5%, as compared with the prior year period primarily due to decreased operating expenses in the public services sector due to the sales of our Vermont Electric division, The Gas Company in Hawaii, and our Arizona gas and electric divisions and increased operating efficiencies and a reduction of personnel in the ELI sector partially offset by higher payroll and employee benefits expenses in the ILEC sector. Operating expenses for the nine months ended September 30, 2004 decreased $47.7 million, or 9%, as compared with the prior year period primarily due to decreased operating expenses in the public services sector due to the sales of our Vermont Electric division, The Gas Company in Hawaii, and our Arizona gas and electric divisions and increased operating efficiencies and a reduction of personnel in the ELI sector. We routinely review our operations, personnel and facilities to achieve greater efficiencies. These reviews may result in reductions in personnel and an increase in severance costs. Included in operating expenses is stock compensation expense. Compensation arrangements entered into in connection with management succession and strategic alternatives will result in stock compensation expense of approximately $5.2 million in 2005, $5.1 million in 2006 and $1.0 million in 2007. Included in operating expenses is pension expense. In future periods, if the value of our pension assets decline and/or projected benefit costs increase, we may have increased pension expenses. Based on current assumptions and plan asset values, we estimate that our pension expense will decrease from $12.4 million in 2003 to approximately $3.0 million - $4.0 million in 2004 and that no contribution to our pension plans will be required to be made by us to the pension plan in 2004. In addition, as medical costs increase the costs of our postretirement benefit costs also increase. Our retiree medical costs for 2003 were $16.9 million and our current estimate for 2004 is $17.0 - $19.0 million. Taxes other than income taxes for the three months ended September 30, 2004 decreased $6.1 million, or 23%, as compared with the prior year period primarily due to decreased property taxes in the public services sector due to the sales of our Vermont Electric division, The Gas Company in Hawaii, and our Arizona gas and electric divisions of $2.2 million and lower gross receipts taxes of $4.9 million in the ILEC sector partially offset by higher payroll and franchise taxes of $2.4 million. Taxes other than income taxes for the nine months ended September 30, 2004 decreased $13.0 million, or 15%, as compared with the prior year period primarily due to decreased property taxes in the public services sector due to the sales of our Vermont Electric division, The Gas Company in Hawaii, and our Arizona gas and electric divisions of $11.6 million. 35 Sales and marketing expenses for the nine months ended September 30, 2004 increased $3.2 million, or 4%, as compared with the prior year period primarily due to increased costs in the ILEC sector.
DEPRECIATION AND AMORTIZATION EXPENSE ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ----------- ----------- ----------- -------- ----------- ----------- ------------ ---------- Depreciation expense $ 109,750 $ 120,012 $ (10,262) -9% $ 334,760 $ 345,577 $ (10,817) -3% Amortization expense 31,630 31,866 (236) -1% 94,890 95,208 (318) 0% ----------- ----------- ----------- ----------- ----------- ------------ $ 141,380 $ 151,878 $ (10,498) -7% $ 429,650 $ 440,785 $ (11,135) -3% =========== =========== =========== =========== =========== ============
Depreciation expense for the three and nine months ended September 30, 2004 decreased $10.3 million, or 9%, and $10.8 million, or 3%, respectively, as compared to the prior year because the net asset base is declining.
RESERVE FOR TELECOMMUNICATIONS BANKRUPTCIES / RESTRUCTURING AND OTHER EXPENSES / MANAGEMENT SUCCESSION AND STRATEGIC ALTERNATIVES EXPENSES ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ----------- ----------- ----------- -------- ----------- ----------- ------------ ---------- Reserve for telecommunications bankruptcies $ - $ - $ - - $ - $ 2,260 $ (2,260) -100% Restructuring and other expenses $ - $ - $ - - $ - $ 9,950 $ (9,950) -100% Management succession and strategic alternatives expenses $ 75,858 $ - $ 75,858 100% $ 90,632 $ - $ 90,632 100%
During the second quarter 2003, we reserved approximately $2.3 million of trade receivables with Touch America as a result of Touch America's filing for bankruptcy. These receivables were generated as a result of providing ordinary course telecommunication services. If other telecommunications companies file for bankruptcy we may have additional significant reserves in future periods. Restructuring and other expenses for 2003 primarily consist of expenses related to reductions in personnel at our telecommunications operations and the write off of software no longer useful. Management succession and strategic alternatives expenses in 2004 include a mix of cash retention payments, equity awards and severance agreements (see Note 12 for a complete discussion).
INVESTMENT AND OTHER INCOME (LOSS), NET / INTEREST EXPENSE / INCOME TAX EXPENSE (BENEFIT) ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change ----------- ----------- ----------- -------- ----------- ----------- ------------ ---------- Investment and other income (loss), net $ (13,651) $ (24,277) $ 10,626 44% $ 16,856 $ 55,132 $ (38,276) -69% Interest expense $ 90,864 $ 103,124 $ (12,260) -12% $ 286,298 $ 318,836 $ (32,538) -10% Income tax expense (benefit) $ (21,271) $ (7,210) $ (14,061) 195% $ 15,123 $ 57,150 $ (42,027) -74%
Investment and other income (loss), net for the three months ended September 30, 2004 increased $10.6 million, or 44%, as compared with the prior year period primarily due to gains on sales of assets in 2004 of $10.7 million compared to losses on sales of assets of $16.8 million in 2003, partially offset by an increase in premiums paid on debt repurchases of $12.8 million due to the 2004 repurchase of our debt. Investment and other income (loss), net for the nine months ended September 30, 2004 decreased $38.3 million, or 69%, as compared with the prior year period. The decrease is primarily due to gains on sales of assets in 2004 of $9.4 million compared to losses on sales of assets of $11.8 million in 2003, an increase of $19.2 million in income from the expiration of certain retained liabilities at less than face value, which are associated with customer advances for construction from our disposed water properties, partially offset by an increase in premiums paid on debt repurchases of $9.4 million due to the 2004 repurchase of our debt, and the recognition in 2003 of $65.7 million in non-cash pre-tax gains related to a capital lease termination and a capital lease restructuring at ELI. 36 Interest expense for the three months ended September 30, 2004 decreased $12.3 million, or 12%, as compared with the prior year period primarily due to the retirement of debt. During the three months ended September 30, 2004, we had average long-term debt (excluding equity units and convertible preferred stock) outstanding of $4.2 billion compared to $4.4 billion during the three months ended September 30, 2003. Our composite average borrowing rate for the three months ended September 30, 2004 as compared with the prior year period was 8 basis points lower, decreasing from 8.08% to 8.0%. Interest expense for the nine months ended September 30, 2004 decreased $32.5 million, or 10%, as compared with the prior year period primarily due to the retirement of debt. During the nine months ended September 30, 2004, we had average long-term debt (excluding equity units and convertible preferred stock) outstanding of $4.2 billion compared to $4.6 billion during the nine months ended September 30, 2003. Our composite average borrowing rate for the nine months ended September 30, 2004 as compared with the prior year period was 3 basis points lower, decreasing from 8.09% to 8.06%. Income taxes decreased $14.1 million for the third quarter of 2004 and $42.0 million, or 74%, for the nine months ended September 30, 2004 as compared with the prior year periods primarily due to changes in taxable income. The effective tax rate for the first nine months of 2004 was 21.5% as compared with 33.8% for the first nine months of 2003. Our effective tax rate has declined as a result of the completion of audits with federal and state taxing authorities in the third quarter 2004 and changes in the structure of certain of our subsidiaries. Our income tax expense is computed utilizing an estimated annual effective income tax rate in accordance with Accounting Principles Board Opinions (APB) No. 28, "Interim Financial Reporting." The tax rate is computed using estimates as to the Company's net income before income taxes for the entire year and the impact of estimated permanent book tax differences relative to that forecast.
LOSS ON IMPAIRMENT ($ in thousands) For the three months ended September 30, For the nine months ended September 30, -------------------------------------------- ----------------------------------------------- 2004 2003 $ Change % Change 2004 2003 $ Change % Change --------- ------------- ----------- -------- ----------- ----------- ------------ ---------- Loss on impairment $ - $ 4,000 $ (4,000) -100% $ - $ 4,000 $ (4,000) -100%
During the third quarter of 2003, we recognized an additional non-cash pre-tax impairment loss of $4.0 million related to our Vermont property, such that the net assets were written down to our best estimate of the net realizable value upon sale. As of April 1, 2004, we sold all of these properties. 37 Item 3. Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- Disclosure of primary market risks and how they are managed We are exposed to market risk in the normal course of our business operations due to ongoing investing and funding activities. Market risk refers to the potential change in fair value of a financial instrument as a result of fluctuations in interest rates and equity and commodity prices. We do not hold or issue derivative instruments, derivative commodity instruments or other financial instruments for trading purposes. As a result, we do not undertake any specific actions to cover our exposure to market risks and we are not party to any market risk management agreements other than in the normal course of business or to hedge long-term interest rate risk. Our primary market risk exposures are interest rate risk and equity and commodity price risk as follows: Interest Rate Exposure Our exposure to market risk for changes in interest rates relates primarily to interest on our long-term debt and capital lease obligations. The long term debt and capital lease obligations include various instruments with various maturities and weighted average interest rates. Our objectives in managing our interest rate risk are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve these objectives, a majority of our borrowings have fixed interest rates. Consequently, we have limited material future earnings or cash flow exposures from changes in interest rates on our long-term debt and capital lease obligations. A hypothetical 10% adverse change in interest rates would increase the amount that we pay on our variable obligations and could result in fluctuations in the fair value of our fixed rate obligations. Based upon our overall interest rate exposure at September 30, 2004, a near-term change in interest rates would not materially affect our consolidated financial position, results of operations or cash flows. In order to manage our interest rate risk exposure, we have entered into interest rate swap agreements. Under the terms of the agreements, we make semi-annual, floating interest rate interest payments based on six month LIBOR and receive a fixed rate on the notional amount. Sensitivity analysis of interest rate exposure At September 30, 2004, the fair value of our long-term debt and capital lease obligations was estimated to be approximately $4.4 billion, based on our overall weighted average rate of 8.04% and our overall weighted maturity of 12 years. There has been no material change in the weighted average maturity applicable to our obligations since December 31, 2003. The overall weighted average interest rate decreased approximately 5 basis points during the first nine months of 2004. A hypothetical increase of 80 basis points (10% of our overall weighted average borrowing rate) would result in an approximate $209.1 million decrease in the fair value of our fixed rate obligations. Equity Price Exposure Our exposure to market risks for changes in equity prices is minimal and, as of September 30, 2004, is limited to our investment in Adelphia. As of September 30, 2004 and December 31, 2003, we owned 3,059,000 shares of Adelphia common stock. The stock price of Adelphia was $0.38 and $0.55 at September 30, 2004 and December 31, 2003, respectively. On August 13, 2004, we sold our entire 1,333,500 shares of D & E Communications, Inc. (D & E) for approximately $13.3 million in cash. On September 3, 2004, we sold our entire holdings of 2,605,908 common share equivalents in Hungarian Telephone and Cable Corp. (HTCC) for approximately $13.2 million in cash. Sensitivity analysis of equity price exposure At September 30, 2004, the fair value of the equity portion of our investment portfolio was estimated to be $1.2 million. A hypothetical 10% decrease in quoted market prices would result in an approximate $120,000 decrease in the fair value of the equity portion of our investment portfolio. Disclosure of limitations of sensitivity analysis Certain shortcomings are inherent in the method of analysis presented in the computation of fair value of financial instruments. Actual values may differ from those presented should market conditions vary from assumptions used in the calculation of the fair value. This analysis incorporates only those exposures that exist as of September 30, 2004. It does not consider those exposures or positions, which could arise after that date. As a result, our ultimate exposure with respect to our market risks will depend on the exposures that arise during the period and the fluctuation of interest rates and quoted market prices. 38 Item 4. Controls and Procedures ----------------------- (a) Evaluation of disclosure controls and procedures We carried out an evaluation, under the supervision and with the participation of our management, regarding the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our principal executive officer and principal financial officer concluded, as of the end of the period covered by this report, September 30, 2004, that our disclosure controls and procedures are effective. (b) Changes in internal control over financial reporting We reviewed our internal control over financial reporting at September 30, 2004. There have been no changes in our internal control over financial reporting identified in an evaluation thereof that occurred during the third fiscal quarter of 2004, that materially affected or is reasonably likely to materially affect our internal control over financial reporting. PART II. OTHER INFORMATION CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES Item 1. Legal Proceedings ----------------- There have been no material changes to our legal proceedings from the information provided in Item 1. Legal Proceedings included in our Quarterly Report on Form 10-Q for the period ended June 30, 2004. We are party to other legal proceedings arising in the normal course of our business. The outcome of individual matters is not predictable. However, we believe that the ultimate resolution of all such matters, after considering insurance coverage, will not have a material adverse effect on our financial position, results of operations, or our cash flows. Item 5. Other Information ----------------- On October 29, 2004, we entered into a new $250.0 million line of credit pursuant to a Competitive Advance Revolving Credit Facility Agreement among us, the lenders party to the agreement, Bank of America, N.A., as administrative agent and issuing bank, JPMorgan Chase Bank, as Syndication Agent and Morgan Stanley Bank, Deutsche Bank Trust Company Americas, the Royal Bank of Scotland PLC, and UBS Loan Finance LLC, as co-documentation agents. The maturity date of the new facility is October 29, 2009. The new facility permits borrowings at interest rates equal to (i) the eurodollar base rate, plus an applicable rate or a margin, or (ii) an alternate base rate. Associated facility fees for the new credit facility vary depending on our leverage ratio and were 0.375% as of October 29, 2004. During the term of the new credit facility we may borrow, repay and re-borrow funds. The new credit facility is available for general corporate purposes but may not be used to fund dividend payments. There are no outstanding borrowings under the new facility as of the date of this report. The new facility contains, among other things, conditions precedent to borrowing (including absence of a material adverse change), covenants, representations and warranties and events of default customary for facilities of this type. Such covenants include certain restrictions on incurrence of secured indebtedness, mergers and sales of assets. The new credit facility also contains a maximum leverage ratio covenant. Under the leverage ratio covenant, we are required to maintain a ratio of (i) total indebtedness minus cash and cash equivalents in excess of $50.0 million to (ii) consolidated adjusted EBITDA (as defined in the agreement) over the last four quarters no greater than 4.50 to 1.00 through the term of the credit facility. Although the new credit facility is unsecured, it will be equally and ratable secured by certain liens and equally and ratable guaranteed by certain of our subsidiaries if we issue debt that is secured or guaranteed. Under certain conditions the lending commitments under the new facility may be terminated by the lenders and amounts outstanding under the new facility may be accelerated. Bankruptcy and insolvency events with respect to us or certain of our subsidiaries will result in an automatic termination of lending commitments and acceleration of the indebtedness under the new facility. Subject to notice and cure periods in certain cases, other events of default under the new facility will result in termination of lending commitments and acceleration of indebtedness under the new facility at the option of the lenders. Such other events of default include failure to pay any principal when due, failure to comply with covenants, breach of representations or warranties in any material respect, non-payment or acceleration of our and our subsidiaries' other material debt or a change of control of our company. A complete copy of the new credit facility agreement has been filed as an exhibit to this Form 10-Q. The new credit facility replaces the $805.0 million lines of credit under Competitive Advance and Revolving Credit Facility Agreements dated October 24, 2001. As of the time of the cancellation, there were no outstanding borrowings under the lines of credit. 39 Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits: 3.200.5 By-laws of Citizens Communications Company, as amended through July 10, 2004. 10.16 Employment Agreement between Citizens Communications Company and Mary A. Wilderotter, effective November 1, 2004. 10.17 Employment Agreement between Citizens Communications Company and Jerry Elliott, effective September 1, 2004. 10.18 Employment Agreement between Citizens Communications Company and Robert Larson, effective September 1, 2004. 10.19 Competitive Advance and Revolving Credit Facility Agreement for $250,000,000 dated October 29, 2004. 31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 31.2 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.1 Disclaimed Employment and Retention Agreement between Michael G. Harris and Citizens Communications Company, effective June 1, 2004. b) Reports on Form 8-K: We filed a Form 8-K on July 8, 2004 under Item 11 "Temporary Suspension of Trading Under Registrant's Employee Benefit Plan", announcing the blackout period associated with the Company's election to change the record keeper for the Citizens 401(k) Savings Plan. We filed on Form 8-K on July 12, 2004 under Item 5 "Other Events", a press release announcing the completion of our review of financial and strategic alternatives. We furnished on Form 8-K on August 3, 2004 under Item 12 "Disclosure of Results of Operations and Financial Condition", a press release announcing our earnings for the quarter and six months ended June 30, 2004. We filed on Form 8-K on August 5, 2004 under Item 5 "Other Events", a press release announcing the expected reset interest rate on our 6.75% Senior Notes. 40 We filed on Form 8-K on September 21, 2004 under Item 1.01 "Entry into Material Definitive Agreements", Item 5.02 "Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers" and Item 8.01 "Other Events", information concerning the entry by the Company into employment agreements and the appointment of Mary A. Wilderotter as President and Chief Executive Officer of the Company, including a press release announcing Ms. Wilderotter's appointment. We filed on Form 8-K on September 27, 2004 under Item 5.02 "Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers" and Item 8.01 "Other Events" and Item 9.01 "Financial Statements and Exhibits", information concerning the resignation of Leonard Tow as Director and Chairman of the Company's Board of Directors, and the resignation of Claire Tow, Mr. Tow's wife, as a Director of the Company, including a press release announcing these events. We filed on Form 8-K on September 30, 2004 under Item 5.02 "Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers" and Item 8.01 "Other Events" and Item 9.01 "Financial Statements and Exhibits", information concerning the appointment of Rudy J. Graf Chairman of the Company's Board of Directors, and the election of Mary A. Wilderotter, who became President and Chief Executive Officer of the Company on November 1, 2004, and Jerry Elliott, Executive Vice President and Chief Financial Officer of the Company to the Board of Directors, including a press release announcing these events. 41 CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES SIGNATURE Pursuant to the requirements 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 COMMUNICATIONS COMPANY ------------------------------- (Registrant) By: /s/ Robert J. Larson -------------------------------- Robert J. Larson Senior Vice President and Chief Accounting Officer Date: November 4, 2004 42 EX-3.200.5 2 bylaws.txt BY-LAWS Exhibit 3.200.5 BYLAWS* OF CITIZENS COMMUNICATIONS COMPANY * As amended March 9, 1937; May 12, 1942; June 15, 1946; October 1, 1946; May 23, 1947; January 7, 1948; April 1, 1948; March 31, 1949; January 26, 1951; April 11, 1952; July 28, 1954; February 24, 1960; November 18, 1963; May 10, 1966; February 3, 1967; April 10, 1968; April 17, 1970; June 11, 1970; June 7, 1974; August 8, 1975; November 7, 1980; January 16, 1981; March 3, 1981; February 20, 1986; June 5, 1987; August 8, 1988; May 5, 1989; May 31, 1989; June 23, 1989; September 11, 1989 (clerical correction); May 1, 1990; April 14, 1992; February 17, 1993, February 8, 1994 (clerical correction); October 24, 1995; August 8, 1996 (clerical correction); December 17,1996; January 20, 1998; May 20, 1999; July 18, 2000; March 6,2002; May 16, 2002; July 30, 2002; April 1, 2003; and July 10, 2004. BYLAWS OF CITIZENS COMMUNICATIONS COMPANY TITLE 1. The title of this corporation is CITIZENS COMMUNICATIONS COMPANY. LOCATION OF OFFICES 2. The principal office of the corporation in Delaware shall be in Wilmington and the resident agent in charge thereof shall be THE CORPORATION TRUST COMPANY, The Corporation Trust Center, 1209 Orange Street. The corporation may also have an office or offices at such other places within or without the State of Delaware as the Board of Directors may from time to time designate. CORPORATE SEAL 3. The corporate seal shall be circular in form and have inscribed thereon the name of the corporation, the year of its incorporation (1935) and the words "Incorporated Delaware". MEETINGS OF STOCKHOLDERS 4. All meetings of stockholders shall be held at the offices of the corporation or such other place as shall be designated by the Board of Directors of the corporation. Annual Meetings of Stockholders shall be held on a date and at a time designated by the Board of Directors of the corporation. At each annual meeting the stockholders shall elect a Board of Directors, such election to be by majority of the stock present or represented by proxy, and entitled to vote at the meeting. Each stockholder shall, at every meeting of the stockholders, be entitled to one vote in person or by written proxy signed by him, for each share of stock held by him, but no proxy shall be voted on after one year from its date. Such right to vote shall be subject to the right of the Board of Directors to close the transfer books or to fix a record date for voting stockholders as hereinafter provided. Special meetings of the stockholders may be called by the Chief Executive Officer and shall be called on the request in writing or by vote of a majority of the Board of Directors or on request in writing of stockholders of record owning fifty percent (50%) in amount of the capital stock of the corporation outstanding and entitled to vote. Any such request by stockholders shall set forth a brief description of the business desired to be brought before the special meeting and the reasons for conducting such business at the special meeting. The record date for determining the stockholders of record entitled to vote at a special meeting called on the written request of stockholders shall be fixed by resolution of the Board of Directors. Written notice of such record date shall be sent promptly to stockholders and the meeting shall be held on such date as shall be determined by the Board of Directors which shall be not less than sixty (60) nor more than one hundred and twenty (120) days after the date on which a proper demand for a stockholders meeting has been made by stockholders. The Board of Directors may determine rules and procedures for the conduct of the special meeting. No business may be transacted at a special meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the special meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the special meeting by any stockholder of the corporation who complies with the procedures set forth in this Bylaw. Notice of each meeting of stockholders, whether annual or special, shall be mailed by the secretary to each stockholder of record, at his or her post office address as shown by the stock books of the Company, at least ten days and not more than sixty days prior to the date of the meeting. If the transfer books are closed or a record date is fixed in connection with an annual meeting, as permitted by By-Law 17, the notice of the meeting shall be given to the stockholders of record as of the time said books are closed or record date is fixed, but if the transfer books are not closed or a record date is not fixed, said notice shall be given to the stockholders of record at the time the notice is mailed. The holders of a majority of the stock outstanding and entitled to vote shall constitute a quorum, but the holders of a smaller amount may adjourn any meeting from time to time without further notice until a quorum is secured. No business may be transacted at an annual meeting of stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any duly authorized committee thereof), (b) otherwise properly brought before the annual meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (c) otherwise properly brought before the annual meeting by any stockholder of the corporation (i) who is a stockholder of record on the date of the giving of the notice of the annual meeting provided for in this Bylaw and on the record date for the determination of stockholders entitled to vote at such annual meeting and (ii) who complies with the notice procedures set forth in this Bylaw. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the corporation. To be timely, a stockholder's notice to the Secretary of the corporation must be delivered to or mailed and received at the principal executive offices of the corporation not less than ninety (90) days nor more than one hundred-twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within twenty-five (25) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary of the corporation must set forth, as to each matter such stockholder proposes to bring before the annual meeting, (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such stockholder, (iii) the class and series and number of shares of each class and series of capital stock of the corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business, (v) a representation that such stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting, and (vi) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies pursuant to Section 14 of the Securities Exchange Act of 1934 (the "Exchange Act") (or in any law or statute replacing such section), and the rules and regulations promulgated thereunder. No business shall be conducted at any annual meeting of stockholders except business brought before the meeting in accordance with the procedures set forth in this Bylaw; provided, however, that, once business has been properly brought before the meeting in accordance with such procedures, nothing in this Bylaw shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of a meeting determines that business was not properly brought before the meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted. In addition, notwithstanding anything in this Bylaw to the contrary, a stockholder intending to nominate one or more persons for election as a director at an annual or special meeting of stockholders must comply with Bylaw 5 for such nominations to be properly brought before such meeting. DIRECTORS 5. The property and business of the corporation shall be managed and controlled by its Board of Directors, which shall consist of not less than seven nor more than fifteen members. The number of Directors shall be fixed from time to time, within the limits prescribed, by resolution of the Board of Directors. As of July 10, 2004, the Board of Directors shall consist of up to twelve members, unless a different number shall thereafter be fixed by resolution of the Board of Directors. Vacancies in the Board of Directors (except vacancies resulting from the removal of directors by stockholders), including vacancies in the Board of Directors resulting from any increase in the number of Directors, may be filled by a majority of the Directors then in office. Directors shall otherwise be elected by the stockholders at the annual meeting and shall hold office until the next annual election and until their successors are elected and qualified. At all elections of Directors of this corporation each stockholder shall be entitled to one vote in person or by written proxy signed by him, for each share of stock owned by him, and election shall be by majority vote of the 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. A Director may be designated a "Director Emeritus" of the Company by the vote of the Board of Directors. A Director Emeritus shall be invited to attend all meetings of the Board of Directors but shall not have the right to vote. A Director Emeritus shall receive such compensation as the Board shall determine. A Director Emeritus shall be designated by the Board of Directors for a one-year term (and may be reappointed) at the Annual Meeting of the Board of Directors following the Company's Annual Meeting of Stockholders. The Board of Directors shall have an Executive Committee. The Executive Committee of the Board shall consist of four (4) members, to be appointed by and to serve at the pleasure of the Board. The Chief Executive Officer shall be the Chairman of the Executive Committee. During intervals between meetings of the Board, the Committee shall have the power and authority of the Board of Directors of the management of the business affairs and property of the Company. A majority of the Directors in office shall be independent directors as hereinafter defined. At the time that the nominees for the Board of Directors are selected for proposal for election at the Annual Meeting of Stockholders, the Board of Directors will review the circumstances of each nominee and determine whether he or she is an independent director. If it should be determined that a majority of the nominees are not independent directors, the Nominating and Corporate Governance Committee shall take steps to select and recommend the nomination of a sufficient number of individuals who are independent directors so that a majority of members of the Board of Directors shall be independent directors. The Board of Directors shall have a Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee shall consist of not less than two directors and not more than four directors, to be appointed by and to serve at the pleasure of the Board. Each member of the Nominating and Corporate Governance Committee shall be an independent director as hereinafter defined. The Nominating and Corporate Governance Committee shall consider recommendations of individuals who may be expected to make contributions to the Company or members of the Board of Directors. The Nominating and Corporate Governance Committee shall establish procedures for the nominating process and make recommendations to the Board of Directors annually for the slate of nominees for the Board of Directors to be proposed at the Annual Meeting of Stockholders. In addition, the Nominating and Corporate Governance Committee shall take a leadership role in shaping the corporate governance of the Company, including making recommendations on matters relating to the make-up of the Board and its various committees and corporate governance principles applicable to the Company. The Board of Directors shall have a Compensation Committee. The Compensation Committee shall consist of not less than two directors and not more than five directors, to be appointed by and to serve at the pleasure of the Board. Each member of the Compensation Committee shall be an independent director as hereafter defined. The Compensation Committee shall consider matters related to compensation of officers, directors and employees of the Company and to make recommendations with respect thereto to the Board of Directors. The Compensation Committee shall have the authority to retain independent legal counsel and compensation advisors. The Board of Directors shall have an Audit Committee. The Audit Committee shall consist of not less than three Directors, to be appointed and to serve at the pleasure of the Board. Except as otherwise provided by such rules, each member of the Audit Committee shall be qualified to serve thereon in accordance with the applicable rules of the New York Stock Exchange. The Audit Committee shall have such powers, duties and authority as shall be determined by resolution of the Board of Directors from time to time, including as set forth in the charter of the Audit Committee adopted by the Board of Directors in accordance with the rules of the New York Stock Exchange. For purposes of this Article 5 and Article 9 of the Bylaws, "independent director" shall mean a director who is: (a) an individual who is not and has not been employed as an executive officer by the Company (or any corporation, the majority of the voting stock of which is owned, directly or indirectly through one or more other subsidiaries, by the Company) within three (3) fiscal years immediately prior to his or her most recent election or appointment as a member of the Board of Directors; or (b) an individual who is not a regular paid advisor or consultant to the Company and who is not an affiliate (within the meaning of Exchange Act Rule 12b-2 of the Securities and Exchange Commission) of any entity that is a regular paid advisor or consultant to the Company; or (c) an individual who is not an employee or owner of five percent (5%) or more of the voting stock of any business or professional entity that has made, during the Company' s last full fiscal year, payments to the Company or its subsidiaries for property, goods or services in excess of five percent (5%) of the lesser of (i) the Company's consolidated gross revenues for its last full fiscal year, or (ii) such other entity's consolidated gross revenues for its last full fiscal year; or (d) an individual who is not an employee or owner of five percent (5%) or more of the voting stock of any business or professional entity to which the Company or its subsidiaries have made, during the Company's last full fiscal year, payments for property, goods or services in excess of five percent (5%) of the lesser of (i) the Company's consolidated gross revenues for its last full fiscal year, or (ii) such other entity's consolidated gross revenues for its last full fiscal year; or (e) an individual who is not a party to a personal service contract with the Company pursuant to which fees or other compensation received by the individual from the Company during his or her last full fiscal year (other than fees received as a member of the Company's Board of Directors or a committee thereof so as to require description of such contract under Item 404(a) of Regulation S-K promulgated by the Securities and Exchange Commission, as in effect on January 1, 1994; or (f) an individual who is not employed by a tax-exempt organization that received, during its last full fiscal year, contributions from the Company in excess of five percent (5%) of the lesser of (i) the consolidated gross revenues of the Company during its last full fiscal year, or (ii) the contributions received by the tax-exempt organization during its last full fiscal year; or (g) an individual who has not carried out a transaction or did not have a relationship, during the Company's last full fiscal year, such that the specifics of a transaction would be required to be described under Item 404 of Regulation S-K promulgated by the Securities and Exchange Commission, as in effect on January 1, 1994; or (h) an individual who is not employed by a public company at which an executive officer of the Company serves as a member of the board of directors; or (i) an individual who has not had any relationship described in paragraphs (a) - (h) with any corporation, the majority of the voting stock of which is owned directly or indirectly, through one or more subsidiaries, by the Company; or (j) an individual who is not a member of the immediate family of any person described in paragraphs (a) - (i). For these purposes, an individual's immediate family shall include such individual's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-laws, and brothers and sisters-in-law. The term "independent director" shall have no legal significance under applicable corporate or securities law or in any respect other than for the purposes of this Bylaw. No inference shall be drawn that a director is "not independent," "interested," or "a party to a contract or transaction" or has a "financial interest" in any contract or transaction within the meaning of any applicable corporate or securities law, and no director shall be disqualified from taking action or refraining from acting on any matter coming before the Board of Directors by reason of his or her status as an independent director under this Bylaw. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the corporation, subject to the rights of holders of any class or series of stock having a preference over the common stock of the corporation as to dividends or upon liquidation to elect directors under specified circumstances. Nominations of persons for election to the Board of Directors may be made at any annual meeting of stockholders, or at any special meeting of stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors or the Nominating and Corporate Governance Committee, or (b) by any stockholder of the corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Bylaw and on the record date for the determination of stockholders entitled to vote at such meeting and (ii) who complies with the notice procedures set forth in this Bylaw. In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the corporation. To be timely, a stockholder's notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the corporation (a) in the case of an annual meeting, not less than ninety (90) days nor more than one hundred-twenty (120) days prior to the anniversary date of the immediately preceding annual meeting of stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within twenty-five (25) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs; and (b) in the case of a special meeting of stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure of the date of the special meeting was made, whichever first occurs. To be in proper written form, a stockholder's notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation and employment of the person, (iii) the class and series and number of shares of each class and series of capital stock of the corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act (or in any law or statute replacing such section), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class and series and number of shares of each class and series of capital stock of the corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and that such stockholder intends to appear in person or by proxy at the meeting to nominate the person or persons named in its notice, and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act (or in any law or statute replacing such section) and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Bylaw. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded. POWERS OF DIRECTORS 6. The Board of Directors shall have all such powers as may be exercised by the Corporation, subject to the provisions of the statutes, the Certificate of Incorporation, and the Bylaws. MEETINGS OF DIRECTORS 7. Meetings of the Board of Directors shall be held at such place within or without the State of Delaware as may from time to time be fixed by resolution of the Board of Directors, or as may be specified by the Chief Executive Officer in the call of any meeting. Regular meetings of the Board of Directors shall be held at such times as may from time to time be fixed by resolution of the Board of Directors and special meetings of the Board of Directors may be held at any time upon the call of two (2) Directors or of the Chief Executive Officer by oral, telegraphic, written, electronic mail or other electronic notice duly sent or mailed to each Director not less than twenty-four (24) hours before such meeting. A meeting of the Board may be held without notice immediately after the annual meeting of stockholders at the same place at which such meeting is held. Notice need not be given of regular meetings of the Board held at times fixed by resolution of the Board. Meetings may be held at any time without notice if all the Directors are present or if those not present waive notice of the meeting in writing. (Telephone Participation in Meetings) Members of the Board of Directors (or any committees thereof) may participate in a meeting of the Board of Directors (or of such committees) by means of conference telephone or other communications equipment via which all persons participating can hear each other. Such participation in the substantive discussion and determinations of a meeting shall constitute presence in person at such meeting. A majority of the Directors shall constitute a quorum, but a smaller number may adjourn any meeting from time to time without further notice until a quorum is secured. OFFICERS OF THE COMPANY 8. The officers of the Company shall be a Chairman of the Board of Directors, a Chief Executive Officer, a President, one or more vice presidents (with such duties and titles as may be assigned to them), a secretary, a treasurer, one or more assistant vice presidents (with such duties and titles as may be assigned to them), and such other officers as may from time to time be chosen by the Board of Directors. The officers of the Company shall hold office until their successors are elected and qualified. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the affirmative vote of a majority of the whole Board of Directors. DUTIES OF THE CHAIRMAN 9. Unless otherwise determined by resolution of the Board, the Chairman shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present. In his or her absence, any independent director who has been designated as a lead director by the Board of Directors or any other Director designated by the Board of Directors shall preside at all meetings of the Board of Directors and of the stockholders. The Chairman shall have such other powers and duties as the Board shall determine from time to time by resolution. DUTIES OF THE CHIEF EXECUTIVE OFFICER 9A. The Chief Executive Officer shall be the chief executive officer of the Company and it shall be the duty of the Chief Executive Officer to carry into effect all orders, resolutions, and policy determinations of the Board of Directors; to execute all contracts and agreements; to keep the seal of the Company; and to sign and to affix the seal of the Company to any instrument requiring the same, which seal shall be attested by the signature of the Secretary or Treasurer or Assistant Secretary or Assistant Treasurer. He shall have the general supervision and direction of the other officers of the Company. He shall submit a report of the operations of the Company for the year to the Directors at their meeting next preceding the annual meeting of the stockholders and to the stockholders at their annual meeting. He shall have the general duties and powers of supervision and management usually vested in the chief executive officer of a corporation. The Chief Executive may also hold another office with the Company. Accordingly, the duties and responsibilities of the position may be assigned by the Board of Directors to any Company officer. DUTIES OF THE PRESIDENT 9B. Unless otherwise decided by the Board of Directors, the President shall be the chief administrative officer of the Company. It shall be his duty to see that all orders and policy determination conveyed by the Chief Executive Officer are carried into effect. He shall have the general supervision and direction of the operations and administration of the affairs of the Company and general supervision and direction of the other officers and employees of the Company and shall see that their duties are properly performed. VICE PRESIDENT 10. The vice president or vice presidents, in the order of their seniority, shall be vested with all the powers and required to perform all the duties of the President in his absence or disability and shall perform such other duties as may be prescribed by the Board of Directors. CHIEF EXECUTIVE PRO TEM 11. In the absence or disability of both the Chief Executive Officer and President, the Board may appoint a chief executive pro tem. SECRETARY 12. The secretary shall attend all meetings of the corporation and the Board of Directors. He shall act as clerk thereof and shall record all of the proceedings of such meetings in a book kept for that purpose. He shall give proper notice of meetings of stockholders and Directors and shall perform such other duties as shall be assigned to him by the Chief Executive Officer, President or the Board of Directors. TREASURER 13. The treasurer shall have custody of the funds and securities of the corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board, or Chief Executive Officer or President, taking proper vouchers for such disbursements and shall render to the Chief Executive Officer, President and Directors, whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the corporation. He shall keep an account of stock and income notes registered and transferred in such manner and subject to such regulations as the Board of Directors may prescribe. He shall give the corporation a bond, if required by the Board of Directors, in such sum and in form and with security satisfactory to the Board of Directors for the faithful performance of the duties of his office and the restoration to the corporation, in case of his death, resignation, or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession, belonging to the corporation. He shall perform such other duties as the Board of Directors may from time to time prescribe or require. DUTIES OF OFFICERS MAY BE DELEGATED 14. In case of the absence or disability of any officer of the corporation or for any other reason deemed sufficient by a majority of the Board, the Board of Directors may delegate his powers or duties to any other officer or to any Director for the time being. The duties relating to the execution of contracts and agreements and the signing of instruments and affixing the seal of the Company and other matters may be delegated to any officer, from time to time, as the Board shall see fit. CERTIFICATES OF STOCK 15. Certificates of stock shall be signed by the Chairman, President or a vice president and either the treasurer, assistant treasurer, secretary or assistant secretary. If a certificate of stock be lost or destroyed, another may be issued in its stead upon proof of such loss or destruction and the giving of a satisfactory bond of indemnity, in an amount sufficient to indemnify the corporation against any claim. TRANSFER OF STOCK 16. All transfer of stock of the corporation shall be made upon its books upon presentation of the certificate or certificates therefor, properly endorsed by the holder of the shares in person or by his lawfully constituted representative, and upon surrender of such certificate or certificates of stock for cancellation. CLOSING OF TRANSFER BOOKS 17. The Board of Directors shall have the power to close the stock transfer books of the corporation for a period not exceeding sixty (60) days preceding the date for any meeting of stockholders or for payment of any dividend or for the allotment of rights or when any change or conversion or exchange of capital stock shall go into effect. In lieu of so closing the books, the Board of Directors may fix in advance a date, not exceeding sixty (60) days preceding the abovementioned dates, as a record date for the determination of the stockholders entitled to notice of or to vote at any such meeting, any adjournment thereof, or entitled to dividends or other rights hereinbefore mentioned. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors (or such later date as the stockholder may request). Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary of the corporation, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days after the date on which such request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Secretary of the corporation at its principal executive offices. Delivery shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by applicable law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the date on which the Board of Directors adopts the resolution taking such prior action. STOCKHOLDERS OF RECORD 18. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by the laws of Delaware. FISCAL YEAR 19. The fiscal year of the corporation shall begin on the first day in January in each year. DIVIDENDS 20. Dividends, to the extent not restricted by provisions of the corporation's Certificate of Incorporation or by subsisting agreements of the corporation, may be declared by the Board of Directors and paid in cash, in property, or in shares of the capital stock of the corporation to the extent permitted by law, out of net assets in excess of its capital or out of its net profits, provided there shall be no impairment of the capital of the corporation represented by its issued and outstanding stock of all classes having a preference upon the distribution of assets. BOOKS AND RECORDS 21. The books, accounts, and records of the corporation may be kept within or without the State of Delaware, at such place or places as may from time to time be designated by the Bylaws or by resolution of the Directors. NOTICES 22. Notice required to be given under the provisions of these Bylaws to any Director, officer or stockholder shall not be construed to mean personal notice, but may be given in writing by depositing the same in a post office or letter box, in a postpaid sealed or unsealed wrapper, addressed to such stockholder, officer or Director at such address as appears on the books of the corporation, and such notice shall be deemed to be given at the time when the same shall be thus mailed; provided, however, that any notice to Directors may also be made by oral, telegraphic, electronic mail or other electronic transmission, and such notice shall be deemed to be given at the time when the same shall be sent or given. In computing the number of days notice required for any meeting, the day on which the notice shall be deposited in the mail or sent by telegraph shall be excluded; provided, however, that in computing the number of hours required for any oral, telegraphic, electronic mail or other electronic notice to Directors of a special meeting of Directors, the time of delivery of such notice shall be the time of sending or giving such notice. WAIVER OF NOTICE 23. Any stockholder, officer, or Director may waive in writing, or by telegraph, any notice required to be given under these Bylaws, whether before or after the time stated therein. INDEMNIFICATION OF DIRECTORS AND OFFICERS 24. Paragraph (a). Right of Indemnification. The Corporation shall, to the fullest extent permitted by applicable law as then in effect, indemnify any person (the "indemnitee") who was or is involved in any manner (including, without limitation, as a party or a witness) or was or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal administrative or investigative (including, without limitation, any action or proceeding by or in the right of the Corporation to procure a judgement in its favor) (a "Proceeding") by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, or of a partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to any employee benefit plan), whether the basis of any such Proceeding is alleged action in an official capacity as director or officer or in any other capacity while serving as a director or officer, against all expenses, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement) actually and reasonably incurred by him in connection with such Proceeding. Such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his heirs, executors, administrators and legal representatives. The right to indemnification conferred in this By-law shall include the right to receive payment of any expenses incurred by the indemnitee in connection with such Proceeding in advance of the final disposition of the Proceeding, consistent with applicable law as then in effect. All rights to indemnification conferred in this By-law, including rights to the advancement of expenses and the evidentiary, procedural and other provisions of this By-law, shall be contract rights. The Corporation may, by action of its Board of Directors, provide indemnification for employees, agents, attorneys and representatives of the Corporation with the same, or with more or less, scope and extent as herein provided for officers and directors. No amendment to the Restated Certificate of Incorporation or amendment or repeal of the By-laws purporting to have the effect of modifying or repealing any of the provisions of this By-law in a manner adverse to the indemnitee shall abridge or adversely affect any right to indemnification or other similar rights and benefits with respect to any acts or omissions occurring prior to such amendment or repeal. This By-law shall be applicable to all Proceedings, whether arising from acts or omissions occurring before or after the adoption of this Bylaw. The phrases "this By-law" and "By-law" shall refer to "By-laws 24 and 24A," and for all purposes, except the corporate procedure required for amendment of the By-law, this By-law shall be considered as one By-law. Paragraph (b). By-Law Not Exclusive. The right of indemnification, including the right to receive payment in advance of expenses, conferred in this By-law shall not be exclusive of any other rights to which any person seeking indemnification may otherwise be entitled under any provision of the Restated Certificate of Incorporation, By-law, agreement, applicable corporate law and statute, vote of disinterested directors or stockholders or otherwise. The indemnitee is free to proceed under any of the rights or procedures available to him. Paragraph (c). Burden of Proof. In any determination, review of a determination, action, arbitration, or other proceeding relating to the right to indemnification conferred in this By-law, the Corporation shall have the burden of proof that the indemnitee has not met any standard of conduct or belief which may be required by applicable law to be applied in connection with a determination that the indemnitee is not entitled to indemnity and also the burden of proof on any of the issues which may be material to a determination that the indemnitee is not entitled to indemnification. Neither a failure to make such a determination of entitlement nor an adverse determination of entitlement to indemnity shall be a defense of the Corporation in an action or proceeding brought by the indemnitee or by or on behalf of the Corporation relating to indemnification or create any presumption that the indemnitee has not met any such standard of conduct or belief or is otherwise not entitled to indemnity. If successful in whole or in part in such an action or proceeding, the indemnitee shall be entitled to be further indemnified by the Corporation for the expenses actually and reasonably incurred by him in connection with such action or proceeding. Paragraph (d). Advancement of Expenses. All reasonable expenses incurred by or on behalf of indemnitee in connection with any Proceeding shall be advanced from time to time to the indemnitee by the Corporation promptly after the receipt by the Corporation of a statement from the indemnitee requesting such advance, whether prior to or after final disposition of such Proceeding. Paragraph (e). Insurance, Contracts and Funding. The Corporation may purchase and maintain insurance to protect itself and any person who is, or may become an officer, director, employee, agent, attorney, trustee or representative (any of the foregoing being herein referred to as a "Representative") of the Corporation or, at the request of the Corporation, a Representative of another corporation or entity, against any expenses, liability or loss asserted against him or incurred by him in connection with any Proceeding in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such expense, liability or loss under the provisions of this By-law or otherwise. The Corporation may enter into contracts with any Representative of the Corporation, or any person serving as such at the request of the Corporation for another corporation or entity, in furtherance of the provisions of this By-law. Such contracts shall be deemed specifically approved and authorized by the stockholders of the Corporation and not subject to invalidity by reason of any interested directors. The Corporation may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification of any person entitled thereto. Paragraph (f) Severability; Statutory Alternative. If any provision or provisions of this By-law shall be held to be invalid, illegal or unenforceable for any reason whatsoever (i) the validity, legality and enforceability of all of the remaining provisions of this By-law shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the remaining provisions of this By-law shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. In the event that the indemnitee elects, as an alternative to the procedures specified in this By-law, to follow one of the procedures authorized by applicable corporate law or statute to enforce his right to indemnification and notifies the Corporation of his election, the Corporation agrees to follow the procedure so elected by the indemnitee. If in accordance with the preceding sentence, the procedure therefor contemplated herein or the procedure elected by the indemnitee in any specific circumstances (or such election by the indemnitee) shall be invalid or ineffective in bringing about a valid and binding determination of the entitlement of the indemnitee to indemnification, the most nearly comparable procedure authorized by applicable corporate law or statute shall be followed by the Corporation and the indemnitee. Paragraph (g). Certain Limitations. The corporation shall indemnify any indemnitee as provided in By-laws 24 and 24A in connection with a Proceeding initiated by such indemnitee only if such Proceeding was authorized by the Board of Directors of the corporation; provided, however, that the corporation shall further indemnify an indemnitee in connection with a Proceeding to enforce such indemnitee's rights under By-laws 24 and 24A. 24A. Procedures; Presumptions and Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation, of the foregoing provisions of this By-law, the following procedures, presumptions and remedies shall apply with respect to advancement of expenses and the right to indemnification under this By-law: Section 1. Advancement of Expenses. The advancement or reimbursement of expenses to an indemnitee shall be made within 20 days after the receipt by the Corporation of a request therefor from the indemnitee. Such request shall reasonably evidence the expenses incurred or about to be incurred by the indemnitee and, if required by law at the time of such advance, shall include or be accompanied by an undertaking by or on behalf of the indemnitee to repay the amounts advanced if it should ultimately be determined that the indemnitee is not entitled to be indemnified against such expenses. Section 2. Procedure for Determination of Entitlement to Indemnification. Section 2.l. To obtain indemnification (except with respect to the advancement of expenses), an indemnitee shall submit to the Chief Executive Officer or Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the indemnitee and reasonably necessary to determine whether and to what extent the indemnitee is entitled to indemnification (the "Supporting Documentation"). The Secretary of the Corporation shall promptly advise the Board of Directors in writing that the indemnitee has requested indemnification. The determination of the indemnitee's entitlement to indemnification shall be made not later than 60 days after receipt by the Corporation of the written request and Supporting Documentation. Section 2.2. The indemnitee's entitlement to indemnification shall be determined in one of the following ways: (a) by a majority vote of the Disinterested Directors (as hereinafter defined) (which term shall mean the Disinterested Director, if there is only one); (b) by a written opinion of the Independent Counsel (as hereinafter defined) if (i) a majority of the Disinterested Directors so directs; (ii) there is no Disinterested Director, or (iii) a Change of Control (as hereinafter defined) shall have occurred and the indemnitee so requests in which case the Disinterested Directors shall be deemed to have so directed; (c) by the stockholders of the Corporation (but only if a majority of the Disinterested Directors determines that the issue of entitlement to indemnification should be submitted to the stockholders for their determination); or (d) as provided in Section 3 of this By-law. Section 2.3. In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 2.2 of this By-law, a majority of the Disinterested Directors shall select the Independent Counsel, but only an Independent Counsel to which the indemnitee does not reasonably object; provided, however, that if a Change of Control shall have occurred, the indemnitee shall select such Independent Counsel, but only an Independent Counsel to which the Board of Directors does not reasonably object. Section 3. Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this By-law, the indemnitee shall be presumed to be entitled to indemnification upon submission of a request for indemnification together with the Supporting Documentation, and thereafter in any determination or review of any determination, and in any arbitration, proceeding or adjudication the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section 2.2 of this By-law to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after receipt by the Corporation of the request therefor together with the Supporting Documentation, the indemnitee shall be deemed to be entitled to indemnification. In either case, the indemnitee shall be entitled to such indemnification, unless (a) the indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (b) such indemnification is prohibited by law, in either case as finally determined by adjudication or, at the indemnitee's sole option, arbitration (as provided in Section 4 of this By-law). The termination of any Proceeding, or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contenders or its equivalent, shall not, of itself, adversely affect the right of the indemnitee to indemnification or create any presumption with respect to any standard of conduct or belief or any other matter which might form a basis for a determination that the indemnitee is not entitled to indemnification. With regard to the right to indemnification for expenses, (a) if and to the extent that the indemnitee has been successful on the merits or otherwise in any Proceeding, or (b) if a Proceeding was terminated without a determination of liability on the part of the indemnitee with respect to any claim, issue or matter therein or without any payments in settlement or compromise being made by the indemnitee with respect to a claim, issue or matter therein, or (c) if and to the extent that the indemnitee was not a party to the Proceeding, the indemnitee shall be deemed to be entitled to indemnification, which entitlement shall not be defeated or diminished by any determination which may be made pursuant to clauses (a), (b) or (c) of Section 2.2. The indemnitee shall be presumptively entitled to indemnification in all respects for any act, omission or conduct taken or occurring which (whether by condition or otherwise) is required, authorized or approved by any order issued or other action by any commission or governmental body pursuant to any federal statute or state statute regulating the Corporation or any of its subsidiaries by reason of its status as a public utility or public utility holding company or by reason of its activities as such. To the extent permitted by law, the presumption shall be conclusive on all parties with respect to acts, omissions or conduct of the indemnitee if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation or its subsidiary. No presumption adverse to an indemnitee shall be drawn with respect to any act, omission or conduct of the indemnitee if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation or its subsidiary taken or occurring in the absence of, or inconsistent with, any order issued or action by any commission or governmental body. Section 4. Remedies of Indemnitee. Section 4.1. In the event that a determination is made pursuant to Section 2 of this By-law that the indemnitee is not entitled to indemnification under this By-law, (a) the indemnitee shall be entitled to seek an adjudication of his entitlement to such indemnification either, at the indemnitee's sole option, in (i) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (ii) to the extent consistent with law, arbitration to be conducted by three arbitrators (or, if the dispute involves less than $100,000, by a single arbitrator) pursuant to the rules of the American Arbitration Association; (b) any such judicial Proceeding or arbitration shall be de novo and the indemnitee shall not be prejudiced by reason of such adverse determination; and (c) in any such judicial Proceeding or arbitration the Corporation shall have the burden of proof that the indemnitee is not entitled to indemnification under this By-law. Section 4.2. If a determination shall have been made or deemed to have been made, pursuant to Sections 2 or 3 of this By-law, that the indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination, unless (a) the indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (b) such indemnification is prohibited by law, in either case as finally determined by adjudication or, at the indemnitee's sole option, arbitration (as provided in Section 4.1 of this By-law). In the event that (i) advancement of expenses is not timely made by the Corporation pursuant to this By-law or (ii) payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 2 or 3 of this By-law, the indemnitee shall be entitled to seek judicial enforcement of the Corporation's obligations to pay to the indemnitee such advancement of expense of indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the State of Delaware or any other court of competent jurisdiction, contesting the right of the indemnitee to receive indemnification hereunder due to the occurrence of a circumstance described in subclause (a) of this Section 4.2 or a prohibition of law (both of which are herein referred to as a "Disqualifying Circumstance"). In either instance, if the indemnitee shall elect, at his sole option, that such dispute shall be determined by arbitration (as provided in Section 4.1 of this By-law), the indemnitee and the Corporation shall submit the controversy to arbitration. In any such enforcement action or other proceeding whether brought by the indemnitee or the Corporation, indemnitee shall be entitled to indemnification unless the Corporation can satisfy the burden or proof that indemnification is prohibited by reason of a Disqualifying Circumstance. Section 4.3. The Corporation shall be precluded from asserting in any judicial Proceeding or arbitration commenced pursuant to this Section 4 that the procedures and presumptions of this By-law are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator or arbitrators that the Corporation is bound by all the provisions of this By-law. Section 4.4. In the event that the indemnitee, pursuant to this By-law, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this By-law, or is otherwise involved in any adjudication or arbitration with respect to his right to indemnification, the indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by him if the indemnitee prevails in such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that the indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the indemnitee in connection with such judicial adjudication or arbitration shall be prorated accordingly. Section 5. Definitions. For purposes of indemnification under this By-law or otherwise. Section 5.1. "Change in Control" means a change in control of the Corporation of a nature that would be required to be reported in response to Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934 (the "Act"), whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20 percent or more of the combined voting power of the Corporation's then outstanding securities without the prior approval of at least two-thirds of the members of the Board of Directors in office immediately prior to such acquisition; (b) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which, members of the Board of Directors in office immediately prior to such transaction or event constitute less than a majority of the Board of Directors thereafter; or (c) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors (including for this purpose any new Director whose election or nomination for election by the Corporation's stockholders was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board of Directors. Section 5.2. "Disinterested Director" means a Director of the Corporation who is not or was not a material party to the Proceeding in respect of which indemnification is sought by the indemnitee. Section 5.3. "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent (a) the Corporation or the indemnitee in any manner or (b) any other party to the Proceeding giving rise to a claim for indemnification under this By-law. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing under the law of the State of Delaware, would have a conflict of interest in representing either the Corporation or the indemnitee in an action to determine the indemnitee's rights under this By-law. Section 6. Acts of Disinterested Directors. Disinterested Directors considering or acting on any indemnification matter under this By-law or under governing corporate law or otherwise may consider or take action as the Board of Directors or may consider or take action as a committee or individually or otherwise. In the event that Disinterested Directors consider or take action as the Board of Directors, one-third of the total number of Directors in office shall constitute a quorum. AMENDMENTS OF BYLAWS 25. These By-laws may be amended or altered by the vote of a majority of the whole Board of Directors at any meeting provided that notice of such proposed amendment shall have been given in the notice given to the Directors of such meeting. Such authority in the Board of Directors is subject to the power of the stockholders to change or repeal any By-laws by a majority vote of the stockholders present and represented at any annual meeting or at any special meeting called for such purpose, and the Board of Directors shall not repeal or alter any By-laws, other than By-law 24A, adopted by the stockholders. EX-10.16 3 wilderotteragreemt.txt WILDEROTTER AGREEMENT Exhibit 10.16 EMPLOYMENT AGREEMENT Mary A. Wilderotter This EMPLOYMENT AGREEMENT (the "Agreement") is dated as of November 1, 2004 (the "Effective Date") by and between Citizens Communications Company (the "Company") and Mary A. Wilderotter ("Executive"). WHEREAS, Executive is not currently employed with the Company as an executive officer and is leaving her current employer (the "Prior Employer") to start work at the Company; and WHEREAS, as of the Effective Date, the Company desires to enter into an agreement with Executive embodying the terms of Executive's employment and pursuant to which Executive will serve as President and Chief Executive Officer, and Executive desires to enter into such an agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Subject to the provisions of Section 8 of this Agreement, Executive shall be employed by the Company, and any of its subsidiaries that the Board of Directors of the Company (the "Board") shall designate for a period commencing on the Effective Date and ending on the fifth anniversary thereof (the "Initial Term"), on the terms and subject to the conditions set forth in this Agreement. Following the Initial Term, the Agreement shall automatically be renewed for additional terms of one year on each anniversary of the last day of the Initial Term (the Initial Term and any annual extensions of the term of this Agreement, together, the "Employment Term"), subject to Section 8 of this Agreement, unless the Company or the Executive gives the other party written notice of non-renewal at least ninety (90) days prior to such anniversary. A written notice of non-renewal given by the Company to the Executive shall be considered a Notice of Termination (pursuant to Section 8(e) of this Agreement) of a termination without Cause by the Company and shall constitute a termination without Cause under Section 8(c) of this Agreement at the expiration of such Employment Term for all purposes hereunder. 2. Position. a. During the Employment Term, Executive shall serve as President and Chief Executive Officer of the Company and shall report directly to the Board. In such position, Executive shall have such duties and authority commensurate with the position of chief executive officer of a company of similar size and nature. As soon as practicable after the Effective Date, Executive shall become a member of the Board. b. During the Employment Term, Executive will devote Executive's full business time and best efforts (excluding any periods of vacation or sick leave) to the performance of Executive's duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services either directly or indirectly, without the prior written consent of the Board; provided that nothing herein shall preclude Executive, (i) subject to the prior approval of the Board, from accepting appointment to or continue to serve on any board of directors or trustees of any business corporation or any charitable organization, (ii) making personal or family investments; provided, however, in each case under this Section 2 (b)(i) or (ii) that such activities, in the aggregate, do not conflict or interfere with the performance of Executive's duties hereunder or conflict with Section 10 of this Agreement. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $700,000, payable by payroll check in substantially equal periodic payments in accordance with the Company's practices for other executive employees, as such practices may be determined from time to time. Executive shall be entitled to such increases in Executive's base salary, if any, as may be determined from time to time in the sole discretion of the Board. Executive's annual base salary, as in effect from time to time, is hereinafter referred to as the "Base Salary." 4. Annual Bonus. During the Employment Term, Executive shall be eligible to earn an annual cash bonus award (an "Annual Bonus"), payable by payroll check, with a target bonus amount equal to 100% of the Base Salary (the "Target Bonus"), with adjustments based on the schedules set forth in the Citizens Incentive Plan, as amended from time to time, but the adjustments shall in no event be less favorable to Executive than those set forth in such Plan for the 2004 calendar year; provided, however, that in no event shall the Annual Bonus in respect of the 2004 calendar year be less than $700,000. 5. Long-Term Incentive. As soon as practicable after the Effective Date, Executive shall upon commencement of her employment hereunder, receive a grant of 150,000 restricted shares of Common Stock (with the other grants hereunder, the "Restricted Shares"). With respect to each fiscal year during the Employment Term after 2004, the Company shall grant no later than each March of the following year (commencing with March, 2006) to Executive a number of Restricted Shares with an aggregate value on the date of each grant equal to between $1,000,000 and $2,000,000, as determined by the Compensation Committee of the Board (the "Compensation Committee"). Subject to Section 8(b)(ii)(D) and Section 8(c)(iii)(D), below, each annual grant of Restricted Shares shall vest and become non-forfeitable as to twenty (20) percent of the shares initially granted, on each anniversary of the date of grant and shall be fully vested and 100 percent non-forfeitable upon the fifth anniversary of the date of grant provided, however, that Executive shall be entitled to participate in any program the Company maintains to allow employees to use vested shares for the payment of applicable taxes at the time of such vesting. 6. Employee Benefits; Business Expenses. a. Employee Benefits. During the Employment Term, Executive (and her eligible dependents) shall be entitled to participate in the Company's pension, profit sharing, medical, dental, life insurance and other employee benefit plans (other than severance plans) (the "Company Plans"), as in effect from time to time (collectively the "Employee Benefits") on the same basis as those benefits are generally made available to other senior executives of the Company, at a level of participation commensurate with her position. 2 b. Business Expenses and Perquisites. (i) Expenses. During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive's duties hereunder shall be reimbursed by the Company in accordance with the Company's policies. (ii) Perquisites. During the Employment Term, Executive shall be entitled to receive such perquisites as are generally made available to other senior executives of the Company at a level that is commensurate with her position. 7. Relocation Period. During the period commencing on the Effective Date and ending no later than the first anniversary thereof (the "Relocation Period"), Executive is expected to arrange relocation from California to Connecticut on a permanent basis for her, her spouse and her dependents. The Company shall, during the Relocation Period, pay or reimburse Executive for all reasonable expenses incurred for temporary housing, local ground transportation, travel to and from California for her, her spouse and her dependents, closing costs and moving expenses in connection with the purchase and sale of permanent housing and other costs and expenses during the Relocation Period related to her maintaining a residence separate from her family and relocating to Connecticut; provided, however, that no later than November 1, 2005, Executive shall have relocated to Connecticut and no further payments for expenses under this Section 7 that are incurred after the end of the Relocation Period shall be borne by the Company. The Company shall pay or reimburse Executive under this Section 7 for all costs and expenses incurred during the Relocation Period in an aggregate amount up to $500,000. 8. Termination. Executive's employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 60 days advance written notice of any resignation of Executive's employment (30 days if such resignation is for "Good Reason" (as hereinafter defined)). Notwithstanding any other provision of this Agreement, the provisions of this Section 8 shall exclusively govern Executive's rights upon termination of employment with the Company. a. By the Company For Cause or By Executive Resignation Without Good Reason. (i) The Employment Term and Executive's employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive's resignation without Good Reason; provided that Executive will be required to give the Company at least 60 days advance written notice of such resignation. For purposes of this Agreement, a failure by Executive to have effected a relocation to Connecticut, reasonably acceptable to the Board before November 1, 2005, shall be deemed to be a resignation without Good Reason by Executive for all purposes hereunder, effective as of November 1, 2005; provided, however, if the Board does not accept that such relocation has occurred before November 1, 2005, Executive shall be given written notice of that fact by the Board as soon as reasonably practicable upon such determination and the resolution of such issue shall be dealt with using the same procedures as would be used in the last two sentences of Section 8(a)(ii). 3 (ii) For purposes of this Agreement, "Cause" shall mean Executive's (A) willful and continued failure (other than as a result of physical or mental illness or injury) to perform her material duties (provided such duties are as described in Section 2) to the Company or its subsidiaries which continues beyond 10 days after a written demand for substantial performance is delivered to Executive by the Company (the "Cure Period"), which demand shall identify and describe such failure with sufficient specificity to allow Executive to respond; (B) willful or intentional conduct that causes material and demonstrable injury, monetarily or otherwise, to the Company; (C) conviction of, or a plea of nolo contendere to, a crime constituting (x) a felony under the laws of the United States or any state thereof or (y) a misdemeanor involving moral turpitude; or (D) material breach of a material provision of this Agreement, including, without limitation, engaging in any action in breach of Section 9 or Section 10 of this Agreement, which continues beyond the Cure Period (to the extent that, in the Board's reasonable judgment, such breach can be cured). For purposes of this Section 8(a)(ii), no act, or failure to act, on the part of Executive shall be considered "willful" or "intentional" unless it is done, or omitted to be done, by Executive in bad faith and without reasonable belief that Executive's action or inaction was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Any determination that Executive has engaged in conduct for which the Board wishes to terminate Executive's employment shall be made after a meeting of the nonemployee directors of the Board at which Executive shall be invited to appear, with counsel, to respond to the allegations set forth in the written notice to the Executive of such meeting (which notice shall provide sufficient specificity to allow Executive to respond to such allegations). The Board may terminate the Executive for "Cause" hereunder following such meeting only upon the affirmative vote of at least 60 percent of the nonemployee directors. (iii) If Executive's employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, Executive shall be entitled to receive: (A) the Base Salary through the date of termination; (B) any Annual Bonus earned but unpaid as of the date of termination for any previously completed fiscal year; (C) reimbursement for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy prior to the date of Executive's termination; (D) any accrued but unpaid vacation; and (E) such Employee Benefits, if any, to which Executive may be entitled under the applicable Company Plans or hereunder (including, without limitation, if applicable, any Restricted Shares) upon termination of employment hereunder, (the payments and benefits described clauses (A) through (E) hereof being referred to, collectively, as the "Accrued Rights"). 4 Following such termination of Executive's employment by the Company for Cause or resignation by Executive, except as set forth in this Section 8(a)(iii) and Section 8(g), Executive shall have no further rights to any compensation or any other benefits under this Agreement. b. Disability or Death. (i) Executive's employment hereunder shall terminate upon Executive's death and may be terminated by the Company if Executive becomes physically or mentally incapacitated and is therefore unable for a period of six (6) consecutive months or for an aggregate of nine (9) months in any twelve (12) consecutive month period to perform Executive's duties (such incapacity is hereinafter referred to as "Disability"). Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. If Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and Executive shall be final and conclusive for all purposes of the Agreement. (ii) Upon termination of Executive's employment hereunder for either Disability or death, Executive or Executive's estate (as the case may be), shall be entitled to receive: (A) the Accrued Rights; (B) continued payment of Executive's Base Salary during the period commencing on the termination date and ending on the date that is six months after the termination date; (C) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to the Citizens Incentive Plan in the year of termination, based on actual performance through the date of termination; and (D) all Restricted Shares that have been granted as of the date of termination shall be fully vested and non-forfeitable as of such date, all other restricted shares and options granted to Executive that are not vested as of such date shall become vested and non-forfeitable or, in the case of options, fully exercisable, and Executive shall not be entitled to any further annual grants of Restricted Shares under Section 5 of this Agreement. (iii) Upon termination of Executive's employment hereunder due to Executive's death or Disability, in addition to the benefits described in Section 8(b)(ii) above, the Company shall provide Executive (in the event of her Disability) and Executive's spouse with medical, dental, life insurance and other health benefits (pursuant to the same Company Plans that are medical, dental, life insurance and other health benefit plans and that are in effect for active employees of the Company), at the sole cost of the Company, until the second anniversary of the date of Executive's death or Disability. 5 Following Executive's termination of employment due to death or Disability, except as set forth in this Section 8(b) and Section 8(g), Executive shall have no further rights to any compensation or any other benefits under this Agreement. c. By the Company Without Cause or by Executive Resignation for Good Reason. (i) Executive's employment hereunder may be terminated (A) by the Company without Cause (which shall not include Executive's termination of employment due to her death or Disability) or (B) by Executive for Good Reason (as defined below). (ii) For purposes of this Agreement, "Good Reason" shall mean (A) the failure of the Company to pay or cause to be paid Executive's Base Salary or Annual Bonus, or grant the Restricted Shares when due hereunder, (B) any substantial and continuing diminution in Executive's position, authority or responsibilities from those described in Section 2 hereof, (C) any relocation of Executive's principal office location more than 25 miles outside of the Stamford, Connecticut metropolitan area, or (D) any other material breach of a material provision of this Agreement; provided that any of the events described in clauses (A), (B), (C) or (D) of this Section 8(c)(ii) shall constitute Good Reason only if the Company fails to cure such event within 10 days after receipt from Executive of written notice of the event which constitutes Good Reason (with sufficient specificity from Executive for the Company to respond to such claim). (iii) If Executive's employment is terminated by the Company without Cause (other than by reason of death or Disability) or by Executive for Good Reason, subject to Executive's execution of a release of all then existing claims against the Company and its subsidiaries, affiliates, shareholders, officers, directors, employees and agents, Executive shall be entitled to receive: (A) the Accrued Rights; (B) subject to Executive's continued compliance with the provisions of Section 9 and Section 10 of this Agreement, an amount equal to the greater of (i) three times the sum of the Base Salary and Target Bonus, payable in equal installments over the thirty-six (36) month period commencing on the date of termination, and (ii) continued payment, during the balance of the Initial Term, of the Base Salary and Target Bonus (the applicable period referenced in clause (i) and (ii) hereof shall be referred to in this Agreement as the "Severance Period"); provided, however, that the aggregate amount described in this subsection (B) shall be reduced by any amounts due and owing by Executive to the Company for funds borrowed from or advanced by the Company (to the extent permitted under applicable law); (C) continuation of medical, dental, life insurance and other health benefits (pursuant to the same Company Plans that are medical, dental, life insurance and other health benefit plans and that are in effect for active employees of the Company) until the earlier to occur of the end of the Severance Period and the date on which Executive becomes eligible to receive comparable benefits from any subsequent employer; and 6 (D) all Restricted Shares shall be vested and non-forfeitable as of the date of termination, all other restricted shares and options granted to Executive that are not vested as of such date shall become vested and nonforfeitable or, in the case of options, fully exercisable and Executive shall not be entitled to any further annual grants of Restricted Shares under Section 5 of this Agreement. Following Executive's termination of employment by the Company without Cause (other than by reason of Executive's death or Disability) or Executive for Good Reason, except as set forth in this Section 8(c)(iii) and Section 8(g), Executive shall have no further rights to any compensation or any other benefits under this Agreement. d. Change in Control. (i) Executive shall also be entitled to the benefits set forth in Section 8(c)(iii) above if, within one year following a Change in Control (defined below), Executive terminates her employment as a result of: (i) any decrease by the Company of the Base Salary or Target Bonus; (ii) any decrease in Executive's pension benefit opportunities or any material diminution in the aggregate employee benefits; or (iii) any material diminution in Executive's title, reporting relationships, duties or responsibilities (each, a "Constructive Termination Event"); provided that either of the events described in clauses (i) and (ii) of this Section 8(d) shall constitute a Constructive Termination Event only if the Company fails to cure such event within 10 days after receipt from Executive of written notice of the event which constitutes a Constructive Termination Event. (ii) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred: (A) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act (but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee)), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (B) Upon the consummation of any merger or other business combination involving the Company, a sale of substantially all of the Company's assets, liquidation or dissolution of the Company or a combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction own, in the same proportion, at least 51% of the voting power, directly or indirectly, of (i) the surviving corporation in any such merger or other business combination; (ii) the purchaser of or successor to the Company's assets; (iii) both the surviving corporation and the purchaser in the event of any combination of Transactions; or (iv) the parent company owning 100% of such surviving corporation, purchaser or both the surviving corporation and the purchaser, as the case may be. 7 (iii) Excess Parachute Payments. (A) If it is determined (as hereafter provided) that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, restricted stock award, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Severance Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive shall receive the greater of (x) the Severance Payment, after payment by Executive of the Excise Tax imposed on the Severance Payment and (y) the amount of the Severance Payment (calculated on a net after-tax basis) which could be paid to Executive under Section 280G of the Code without causing any loss of deduction to the Company under such Section (the "Capped Payment"); provided, however, that if the amount in subsection (x) herein exceeds the amount determined under subsection (y) herein by at least 125% of such amount in subsection (y), the Company shall make an additional payment (the "Gross-Up Payment") to Executive such that, after payment of all Excise Taxes and any other taxes payable in respect of such Gross-Up Payment, Executive shall retain the same amount as if no Excise Tax had been imposed. (B) Subject to the provisions of Section 8(d)(iii)(A) hereof, all determinations required to be made under this Section 8(d), including whether an Excise Tax is payable by Executive and the amount of such Excise Tax, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") used by the Company prior to the Change in Control (or, if such Accounting Firm declines to serve, the Accounting Firm shall be a nationally recognized firm of certified public accountants selected by Executive). The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company shall either (x) make payment of the Severance Payment, less all amounts withheld in respect of the Excise Tax, as required by applicable law, (or, if applicable the Gross-Up Payment) or (y) reduce the Severance Payment by the amount which, based on the Accounting Firm's determination and calculations, would provide Executive with the Capped Payment, and pay to Executive such reduced amount. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that she has substantial authority not to report any Excise Tax on her federal, state, local income or other tax return. All fees and expenses of the Accounting Firm shall be paid by the Company in connection with the calculations required by this section. 8 (C) The federal, state and local income or other tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive shall make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of her federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. e. Notice of Termination. Any purported termination of employment by the Company or by Executive (other than due to Executive's death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13(h) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. f. Board/Committee Resignation; Execution of Release of all Claims. (i) Upon termination of Executive's employment for any reason, Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board (and any committees thereof) and the board of directors (and any committees thereof) of any of the Company's subsidiaries or affiliates. (ii) Upon termination of Executive's employment for any reason, Executive agrees to execute a release of all then existing claims against the Company, its subsidiaries, affiliates, shareholders, directors, officers, employees and agents in relation to claims relating to or arising out of her employment or the business of the Company; provided, however, that any such release shall not bar or prevent Executive from responding to any litigation or other proceeding initiated by a released party and asserting any claim or counterclaim she has in such litigation or other proceeding as if no such release had been given as to such party. Notwithstanding anything set forth in this Agreement to the contrary, upon termination of Executive's employment for any reason, Executive shall not receive any payments or benefits to which she may be entitled hereunder (other than those which by law cannot be subject to the execution of a release) (A) if Executive revokes such release or (B) until eight (8) days after the date Executive signs such release (or until such other date as applicable law may provide that Executive cannot revoke such release). 9 g. Indemnification. While employed hereunder and thereafter, with respect to the period during which she was employed hereunder, Executive shall be indemnified by the Company to the fullest extent permitted by its charter, by-laws or the terms of any insurance or other indemnity policy applicable to officers or directors of the Company (including any rights to advances or reimbursement of legal fees thereunder). The Company shall provide that Executive's right to indemnification hereunder by the Company or any insurance or indemnity policy shall at no time be less than the right of any officer or director of the Company, in the same or similar circumstances. The Company's obligation under this Section 8(g) shall survive any termination of Executive's employment hereunder or the expiration or termination of this Agreement. 9. Non-Competition/Non-Solicitation/Non-Disparagement. a. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Employer and its affiliates and accordingly agrees that, during the Employment Term and, for a period of one year following any termination of Executive's employment with the Company (the "Restricted Period"), Executive will not, whether on Executive's own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever ("Person"), directly or indirectly engage in any business that directly or indirectly competes in any material way with the primary business of the Company: (i) During the Restricted Period, Executive will not, whether on Executive's own behalf or on behalf of or in conjunction with any Person, directly or indirectly: (A) solicit or encourage any employee of the Company or its affiliates to leave the employment of the Company or its affiliates; or (B) hire any such employee who was employed by the Company or its affiliates as of the date of Executive's termination of employment with the Company or who left the employment of the Company or its affiliates coincident with, or within one year prior to or after, the termination of Executive's employment with the Company. b. Executive shall not at any time issue any press release or make any public statement about the Company or any director, officer, employee, successor, parent, subsidiary or agent or representative of, or attorney to the Company (any of the foregoing, a "Company Affiliate") regarding (i) any of the foregoing's financial status, business, services, business methods, compliance with laws, or ethics or otherwise, or (ii) regarding Company personnel, directors, officers, employees, attorneys, agents, including, without limitation, in respect of both clauses (i) and (ii), any statement that is intended or reasonably likely to disparage the Company or any Company Affiliate, or otherwise degrade any Company Affiliate's reputation in the business, industry or legal community in which any such Company Affiliate operates and, the Company shall not at any time issue any press release or make any public statement about Executive or her spouse that is intended or reasonably likely to disparage Executive's reputation in the business, industry or legal community or otherwise degrade her or his reputation or standing in their community; provided, that, Executive and the Company shall be permitted to (a) make any statement that is required by applicable securities or other laws to be included in a filing or disclosure document, subject to prior notice to the other thereof, and (b) defend herself or itself against any statement made by the other party (including those made by any Company Affiliate or by any person affiliated with the Executive or her spouse) that is intended or reasonably likely to disparage or otherwise degrade that party's reputation, only if there is a reasonable belief that the statements made in such defense are not false statements and (c) provide truthful testimony in any legal proceeding. 10 c. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 9 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 10. Confidentiality. a. Executive will not at any time (whether during or after Executive's employment with the Company) (x) retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the Company (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information -- including without limitation rates, trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals -- concerning the past, current or future business, activities and operations of the Company, its subsidiaries or affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis ("Confidential Information") without the prior written authorization of the Board. b. "Confidential Information" shall not include any information that is (a) generally known to the industry or the public other than as a result of Executive's breach of this covenant or any breach of other confidentiality obligations by third parties; (b) made legitimately available to Executive by a third party without breach of any confidentiality obligation; or (c) required by law to be disclosed; provided that Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment. 11 c. Upon termination of Executive's employment with the Company for any reason, Executive shall immediately destroy, delete, or return to the Company, at the Company's option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive's possession or control (including any of the foregoing stored or located in Executive's office, home, laptop or other computer, whether or not Company property) that contain Confidential Information or otherwise relate to any material aspects of the business (that are not otherwise available to the public) of the Company, its affiliates and subsidiaries, except that Executive may retain only those portions of any documents, personal notes, notebooks and diaries that do not contain any Confidential Information. d. The provisions of this Section 10 shall survive the termination of Executive's employment for any reason. 11. Specific Performance. Executive acknowledges and agrees that the Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 9 or Section 10 of this Agreement would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. In the event of an alleged breach of Section 9(b) by the Company, Executive shall not be required to post a bond in order to seek equitable relief or any other equitable remedy. 12. Arbitration. Except as provided in Section 11, any other dispute arising out of or asserting breach of this Agreement, or any statutory or common law claim by Executive relating to her employment under this Agreement or the termination thereof (including any tort or discrimination claim), shall be exclusively resolved by binding statutory arbitration in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Such arbitration process shall take place in New York, New York. A court of competent jurisdiction may enter judgment upon the arbitrator's award. All costs and expenses of arbitration (including fees and disbursements of counsel) shall be borne by the respective party incurring such costs and expenses, unless the arbitrator shall award costs and expenses to the prevailing party in such arbitration. 13. Miscellaneous. a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without regard to conflicts of laws principles thereof. 12 b. Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein. This Agreement may not be altered, modified or amended except by written instrument signed by the parties hereto. c. No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. d. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. e. Assignment. This Agreement, and all of Executive's rights and duties hereunder, shall not be assignable or delegable by Executive. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate or a successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity. f. Set Off; Mitigation. The Company's obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall not be subject to set-off, counterclaim or recoupment of amounts owed by Executive to the Company or its affiliates, other than any amounts due and owing as provided for under Section 8(c)(iii)(B) hereof. Executive shall not be required to mitigate the amount of any payment provided for pursuant to this Agreement by seeking other employment or otherwise and the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive's other employment or otherwise. g. Successors; Binding Agreement. This Agreement shall inure to the benefit of and be binding upon the Company and its subsidiaries and Executive and any personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. Further, the Company will require any successor (whether, direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or assets which is required by this Section 13(g) to assume and agree to perform this Agreement or which otherwise assumes and agrees to perform this Agreement; provided, however, in the event that any successor, as described above, agrees to assume this Agreement in accordance with the preceding sentence, as of the date such successor so assumes this Agreement, the Company shall cease to be liable for any of the obligations contained in this Agreement. 13 h. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. If to the Company: Citizens Communications Company Three High Ridge Park Building 3 Stamford, Connecticut 06905 Attention: Russ Mitten, Esq. With a copy to: Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 Attention: Alvin H. Brown, Esq. If to Executive: To the most recent address of Executive set forth in the personnel records of the Company. With a copy to: Howard, Rice, Nemorovski, Canady, Falk & Rabin LLC 3 Embarcadero Center Seventh Floor San Francisco, California 94111 Attn: Kenneth G. Hausman, Esq. i. Executive Representation. Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the Company and the performance by Executive of Executive's duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound, whether with the Prior Employer or otherwise. j. Prior Agreements. This Agreement supercedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive's employment with the Company and/or its affiliates. 14 k. Cooperation. Executive shall provide Executive's reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive's employment hereunder. This provision shall survive any termination of this Agreement. l. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. m. Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 15 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. CITIZENS COMMUNICATIONS COMPANY: EXECUTIVE: /s/ Citizens Communications Company /s/ Mary A. Wilderotter - ------------------------------------ ------------------------ Citizens Communications Company Mary A. Wilderotter By: /s/ Rudy Graf ------------------------------- Rudy Graf 16 EX-10.17 4 elliottagreemt.txt ELLIOTT AGREEMENT Exhibit 10.17 EMPLOYMENT AGREEMENT Jerry Elliott This EMPLOYMENT AGREEMENT (the "Agreement") is dated as of September 1, 2004 (the "Effective Date") by and between Citizens Communications Company (the "Company") and Jerry Elliott ("Executive"). WHEREAS, Executive is currently employed with the Company as an Executive Vice President and the Chief Financial Officer; and WHEREAS, as of the Effective Date, the Company desires to enter into an agreement with Executive embodying the terms of Executive's employment and pursuant to which Executive will serve as an Executive Vice President and the Chief Financial Officer, and Executive desires to enter into such an agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Subject to the provisions of Section 8 of this Agreement, Executive shall be employed by the Company, and any of its subsidiaries that the Chief Executive Officer (the "CEO") or the Board of Directors of the Company (the "Board") shall designate for a period commencing on the Effective Date and ending on the fifth anniversary thereof (the "Initial Term"), on the terms and subject to the conditions set forth in this Agreement. Following the Initial Term, the Agreement shall automatically be renewed for additional terms of one year on each anniversary of the last day of the Initial Term (the Initial Term and any annual extensions of the term of this Agreement, together, the "Employment Term"), subject to Section 8 of this Agreement, unless the Company or the Executive gives the other party written notice of non-renewal at least ninety (90) days prior to such anniversary. A written notice of non-renewal given by the Company to the Executive shall be considered a Notice of Termination (pursuant to Section 8(e) of this Agreement) of a termination without Cause by the Company and shall constitute a termination without Cause under Section 8(c) of this Agreement at the expiration of such Employment Term for all purposes hereunder. 2. Position. a. During the Employment Term, Executive shall serve as an Executive Vice President and the Chief Financial Officer of the Company and shall report directly to the Chief Executive Officer of the Company and the Board. In such position, Executive shall have such duties and authority commensurate with the position of chief financial officer of a company of similar size and nature. Upon the retirement from the Board of the first member of the Board who is not an "independent director" (within the meaning of the Sarbanes Oxley Act of 2002), Executive shall become a member of the Board. b. During the Employment Term, Executive will devote Executive's full business time and best efforts (excluding any periods of vacation or sick leave) to the performance of Executive's duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services either directly or indirectly, without the prior written consent of the Board; provided that nothing herein shall preclude Executive, subject to the prior approval of the Board, from accepting appointment to or continue to serve on any board of directors or trustees of any business corporation or any charitable organization; provided in each case in the aggregate, that such activities do not conflict or interfere with the performance of Executive's duties hereunder or conflict with Section 10 of this Agreement. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $500,000, payable in substantially equal periodic payments in accordance with the Company's practices for other executive employees, as such practices may be determined from time to time. Executive shall be entitled to such increases in Executive's base salary, if any, as may be determined from time to time in the sole discretion of the CEO and the Board. Executive's annual base salary, as in effect from time to time, is hereinafter referred to as the "Base Salary." 4. Annual Bonus. During the Employment Term, Executive shall be eligible to earn an annual bonus award (an "Annual Bonus"), with a target bonus amount equal to 100% of the Base Salary (the "Target Bonus"), with adjustments based on the schedules set forth in the Citizens Incentive Plan, as amended from time to time, but the adjustments shall in no event be less favorable to Executive than those set forth in such Plan for the 2004 calendar year. 5. Long-Term Incentive. With respect to each fiscal year during the Employment Term, the Company shall grant no later than each March of the following year to Executive a number of restricted shares of common stock (the "Restricted Shares") with an aggregate value on the date of each grant equal to between $750,000 and $1,000,000, as determined by the Compensation Committee of the Board (the "Compensation Committee"). Subject to Section 8(b)(ii)(D) and Section 8(c)(iii)(D), below, each annual grant of Restricted Shares shall vest and become non-forfeitable as to twenty (20) percent of the shares initially granted, on each anniversary of the date of grant and shall be fully vested and 100 percent non-forfeitable upon the fifth anniversary of the date of grant. 6. Employee Benefits; Business Expenses. a. Employee Benefits. During the Employment Term, Executive (and his eligible dependents) shall be entitled to participate in the Company's pension, profit sharing, medical, dental, life insurance and other employee benefit plans (other than severance plans) (the "Company Plans"), as in effect from time to time (collectively the "Employee Benefits") on the same basis as those benefits are generally made available to other senior executives of the Company. b. Business Expenses and Perquisites. (i) Expenses. During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive's duties hereunder shall be reimbursed by the Company in accordance with the Company's policies. (ii) Perquisites. During the Employment Term, Executive shall be entitled to receive such perquisites as are generally made available to other senior executives of the Company at a level that is commensurate with his position. 2 7. Special Bonus. In recognition of Executive's role in the Company's successful achievement of strategic objectives, the Company agrees to pay Executive a special bonus in an amount equal to $250,000 (the "Special Bonus"), which bonus shall be payable in September, 2004. 8. Termination. Executive's employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 60 days advance written notice of any resignation of Executive's employment. Notwithstanding any other provision of this Agreement, the provisions of this Section 8 shall exclusively govern Executive's rights upon termination of employment with the Company. a. By the Company For Cause or By Executive Resignation Without Good Reason. (i) The Employment Term and Executive's employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive's resignation without Good Reason; provided that Executive will be required to give the Company at least 60 days advance written notice of such resignation. (ii) For purposes of this Agreement, "Cause" shall mean Executive's (A) willful and continued failure (other than as a result of physical or mental illness or injury) to perform his material duties (provided such duties are as described in Section 2) to the Company or its subsidiaries which continues beyond 10 days after a written demand for substantial performance is delivered to Executive by the Company (the "Cure Period"), which demand shall identify and describe such failure with sufficient specificity to allow Executive to respond; (B) willful or intentional conduct that causes material and demonstrable injury, monetarily or otherwise, to the Company; (C) conviction of, or a plea of nolo contendere to, a crime constituting (x) a felony under the laws of the United States or any state thereof or (y) a misdemeanor involving moral turpitude; or (D) material breach of a material provision of this Agreement, including, without limitation, engaging in any action in breach of Section 9 or Section 10 of this Agreement, which continues beyond the Cure Period (to the extent that, in the Board's reasonable judgment, such breach can be cured). For purposes of this Section 8(a)(ii), no act, or failure to act, on the part of Executive shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith and without reasonable belief that Executive's action or inaction was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or other senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. Any determination that Executive has engaged in conduct for which the Board wishes to terminate Executive's employment shall be made after a meeting of the nonemployee directors of the Board at which Executive shall be invited to appear, with counsel, to respond to the allegations set forth in the written notice to the Executive of such meeting (which notice shall provide sufficient specificity to allow Executive to respond to such allegations). The Board may terminate the Executive for "Cause" hereunder following such meeting only upon the affirmative vote of at least 60 percent of the nonemployee directors. 3 (iii) If Executive's employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, Executive shall be entitled to receive: (A) the Base Salary through the date of termination; (B) the Special Bonus, to the extent unpaid; (C) any Annual Bonus earned but unpaid as of the date of termination for any previously completed fiscal year; (D) reimbursement for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy prior to the date of Executive's termination; (E) any accrued but unpaid vacation; and (F) such Employee Benefits, if any, to which Executive may be entitled under the applicable Company Plans upon termination of employment hereunder, (the payments and benefits described clauses (A) through (F) hereof being referred to, collectively, as the "Accrued Rights"). Following such termination of Executive's employment by the Company for Cause or resignation by Executive, except as set forth in this Section 8(a)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement. b. Disability or Death. (i) Executive's employment hereunder shall terminate upon Executive's death and may be terminated by the Company if Executive becomes physically or mentally incapacitated and is therefore unable for a period of six (6) consecutive months or for an aggregate of nine (9) months in any twelve (12) consecutive month period to perform Executive's duties (such incapacity is hereinafter referred to as "Disability"). Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. If Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and Executive shall be final and conclusive for all purposes of the Agreement. (ii) Upon termination of Executive's employment hereunder for either Disability or death, Executive or Executive's estate (as the case may be), shall be entitled to receive: 4 (A) the Accrued Rights; (B) continued payment of Executive's Base Salary during the period commencing on the termination date and ending on the date that is six months after the termination date; (C) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to the Citizens Incentive Plan in the year of termination, based on actual performance through the date of termination; and (D) all Restricted Shares that have been granted as of the date of termination shall be fully vested and non-forfeitable as of such date, all other restricted shares and options previously granted to Executive that are not vested as of such date shall become vested and non-forfeitable or, in the case of options, fully exercisable, and Executive shall not be entitled to any further annual grants of Restricted Shares under Section 5 of this Agreement. (iii) Upon termination of Executive's employment hereunder due to Executive's death or Disability, in addition to the benefits described in Section 8(b)(ii) above, the Company shall provide Executive (in the event of his Disability) and Executive's spouse with medical, dental, life insurance and other health benefits (pursuant to the same Company Plans that are medical, dental, life insurance and other health benefit plans and that are in effect for active employees of the Company), at the sole cost of the Company, until the second anniversary of the date of Executive's death or Disability. Following Executive's termination of employment due to death or Disability, except as set forth in this Section 8(b), Executive shall have no further rights to any compensation or any other benefits under this Agreement. c. By the Company Without Cause or by Executive Resignation for Good Reason. (i) Executive's employment hereunder may be terminated (A) by the Company without Cause (which shall not include Executive's termination of employment due to his Disability) or (B) by Executive for Good Reason (as defined below). (ii) For purposes of this Agreement, "Good Reason" shall mean (A) the failure of the Company to pay or cause to be paid Executive's Base Salary or Annual Bonus, or grant the Restricted Shares when due hereunder, (B) any substantial and continuing diminution in Executive's position, authority or responsibilities from those described in Section 2 hereof, (C) any relocation of Executive's principal office location more than 25 miles outside of the Stamford, Connecticut metropolitan area, or (D) any other material breach of a material provision of this Agreement; provided that any of the events described in clauses (A), (B), (C) or (D) of this Section 8(c)(ii) shall constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from Executive of written notice of the event which constitutes Good Reason (with sufficient specificity from Executive for the Company to respond to such claim). 5 (iii) If Executive's employment is terminated by the Company without Cause (other than by reason of death or Disability) or by Executive for Good Reason, subject to Executive's execution of a release of all then existing claims against the Company and its subsidiaries, affiliates, shareholders, officers, directors, employees and agents, Executive shall be entitled to receive: (A) the Accrued Rights; (B) subject to Executive's continued compliance with the provisions of Section 9 and Section 10 of this Agreement, an amount equal to the greater of (i) three times the sum of the Base Salary and Target Bonus, payable in equal installments over the thirty-six (36) month period commencing on the date of termination, and (ii) continued payment, during the balance of the Initial Term, of the Base Salary and Target Bonus (the applicable period referenced in clause (i) and (ii) hereof shall be referred to in this Agreement as the "Severance Period"); provided, however, that the aggregate amount described in this subsection (B) shall be reduced by any amounts owed by Executive to the Company (to the extent permitted under applicable law); (C) continuation of medical, dental, life insurance and other health benefits (pursuant to the same Company Plans that are medical, dental, life insurance and other health benefit plans and that are in effect for active employees of the Company) until the earlier to occur of the end of the Severance Period and the date on which Executive becomes eligible to receive comparable benefits from any subsequent employer; and (D) all Restricted Shares shall be vested and non-forfeitable as of the date of termination, all other restricted shares and options previously granted to Executive that are not vested as of such date shall become vested and nonforfeitable or, in the case of options, fully exercisable and Executive shall not be entitled to any further annual grants of Restricted Shares under Section 5 of this Agreement. Following Executive's termination of employment by the Company without Cause (other than by reason of Executive's death or Disability) or Executive for Good Reason, except as set forth in this Section 8(c)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement. d. Change in Control. (i) Executive shall also be entitled to the benefits set forth in Section 8(c)(iii) above if, within one year following a Change in Control (defined below), Executive terminates his employment as a result of: (i) any decrease by the Company of the Base Salary or Target Bonus; (ii) any decrease in Executive's pension benefit opportunities or any material diminution in the aggregate employee benefits; or (iii) any material diminution in Executive's title, reporting relationships, duties or responsibilities (each, a "Constructive Termination Event"); provided that either of the events described in clauses (i) and (ii) of this Section 8(d) shall constitute a Constructive Termination Event only if the Company fails to cure such event within 30 days after receipt from Executive of written notice of the event which constitutes a Constructive Termination Event. 6 (ii) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred: (A) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act (but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee)), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (B) Upon the consummation of any merger or other business combination involving the Company, a sale of substantially all of the Company's assets, liquidation or dissolution of the Company or a combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction own, in the same proportion, at least 51% of the voting power, directly or indirectly, of (i) the surviving corporation in any such merger or other business combination; (ii) the purchaser of or successor to the Company's assets; (iii) both the surviving corporation and the purchaser in the event of any combination of Transactions; or (iv) the parent company owning 100% of such surviving corporation, purchaser or both the surviving corporation and the purchaser, as the case may be. (iii) Excess Parachute Payments. (A) If it is determined (as hereafter provided) that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, restricted stock award, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Severance Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive shall receive the greater of (x) the Severance Payment, after payment by Executive of the Excise Tax imposed on the Severance Payment and (y) the amount of the Severance Payment (calculated on a net after-tax basis) which could be paid to Executive under Section 280G of the Code without causing any loss of deduction to the Company under such Section (the "Capped Payment"). 7 (B) Subject to the provisions of Section 8(d)(iii)(A) hereof, all determinations required to be made under this Section 8(d), including whether an Excise Tax is payable by Executive and the amount of such Excise Tax, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") used by the Company prior to the Change in Control (or, if such Accounting Firm declines to serve, the Accounting Firm shall be a nationally recognized firm of certified public accountants selected by Executive). The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company shall either (x) make payment of the Severance Payment, less all amounts withheld in respect of the Excise Tax, as required by applicable law, or (y) reduce the Severance Payment by the amount which, based on the Accounting Firm's determination and calculations, would provide Executive with the Capped Payment, and pay to Executive such reduced amount. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal, state, local income or other tax return. All fees and expenses of the Accounting Firm shall be paid by the Company in connection with the calculations required by this section. (C) The federal, state and local income or other tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive shall make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. e. Notice of Termination. Any purported termination of employment by the Company or by Executive (other than due to Executive's death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13(h) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. f. Board/Committee Resignation; Execution of Release of all Claims. (i) Upon termination of Executive's employment for any reason, Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board (and any committees thereof) and the board of directors (and any committees thereof) of any of the Company's subsidiaries or affiliates. 8 (ii) Upon termination of Executive's employment for any reason, Executive agrees to execute a release of all then existing claims against the Company, its subsidiaries, affiliates, shareholders, directors, officers, employees and agents. Notwithstanding anything set forth in this Agreement to the contrary, upon termination of Executive's employment for any reason, Executive shall not receive any payments or benefits to which he may be entitled hereunder (other than those which by law cannot be subject to the execution of a release) (A) if Executive revokes such release or (B) until eight (8) days after the date Executive signs such release (or until such other date as applicable law may provide that Executive cannot revoke such release). 9. Non-Competition/Non-Solicitation/Non-Disparagement. a. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Employer and its affiliates and accordingly agrees that, during the Employment Term and, for a period of one year following any termination of Executive's employment with the Company (the "Restricted Period"), Executive will not, whether on Executive's own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever ("Person"), directly or indirectly engage in any business that directly or indirectly competes in any material way with the primary business of the Company, or otherwise engage in competition with the Company which is materially detrimental to the Company; (i) During the Restricted Period, Executive will not, whether on Executive's own behalf or on behalf of or in conjunction with any Person, directly or indirectly: (A) solicit or encourage any employee of the Company or its affiliates to leave the employment of the Company or its affiliates; or (B) hire any such employee who was employed by the Company or its affiliates as of the date of Executive's termination of employment with the Company or who left the employment of the Company or its affiliates coincident with, or within one year prior to or after, the termination of Executive's employment with the Company. b. Executive shall not at any time issue any press release or make any public statement about the Company or any director, officer, employee, successor, parent, subsidiary or agent or representative of, or attorney to the Company (any of the foregoing, a "Company Affiliate") regarding (i) any of the foregoing's financial status, business, services, business methods, compliance with laws, or ethics or otherwise, or (ii) regarding Company partners, personnel, directors, officers, employees, attorneys, agents, including, without limitation, in respect of both clauses (i) and (ii), any statement that is intended or reasonably likely to disparage the Company or any Company Affiliate, or otherwise degrade any Company Affiliate's reputation in the business, industry or legal community in which any such Company Affiliate operates and, the Company shall not at any time issue any press release or make any public statement about Executive or his spouse that is intended or reasonably likely to disparage Executive's reputation in the business, industry or legal community or otherwise degrade his or her reputation or standing in their community; provided, that, Executive and the Company shall be permitted to (a) make any statement that is required by applicable securities or other laws to be included in a filing or disclosure document, subject to prior notice to the other thereof, and (b) defend himself or itself against any statement made by the other party that is intended or reasonably likely to disparage or otherwise degrade that party's reputation, only if there is a reasonable belief that the statements made in such defense are not false statements and (c) provide truthful testimony in any legal proceeding. 9 c. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 9 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 10. Confidentiality. a. Executive will not at any time (whether during or after Executive's employment with the Company) (x) retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the Company (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information -- including without limitation rates, trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals -- concerning the past, current or future business, activities and operations of the Company, its subsidiaries or affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis ("Confidential Information") without the prior written authorization of the Board. b. "Confidential Information" shall not include any information that is (a) generally known to the industry or the public other than as a result of Executive's breach of this covenant or any breach of other confidentiality obligations by third parties; (b) made legitimately available to Executive by a third party without breach of any confidentiality obligation; or (c) required by law to be disclosed; provided that Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment. 10 c. Except as required by law, Executive will not disclose to anyone, other than Executive's immediate family and legal or financial advisors, the existence or contents of this Agreement; provided that Executive may disclose to any prospective future employer the provisions of Section 9 and 10 of this Agreement provided that such potential employer agrees to maintain the confidentiality of such terms. d. Upon termination of Executive's employment with the Company for any reason, Executive shall immediately destroy, delete, or return to the Company, at the Company's option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive's possession or control (including any of the foregoing stored or located in Executive's office, home, laptop or other computer, whether or not Company property) that contain Confidential Information or otherwise relate to the business of the Company, its affiliates and subsidiaries, except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information. e. The provisions of this Section 10 shall survive the termination of Executive's employment for any reason. 11. Specific Performance. Executive acknowledges and agrees that the Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 9 or Section 10 of this Agreement would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 12. Arbitration. Except as provided in Section 11, any other dispute arising out of or asserting breach of this Agreement, or any statutory or common law claim by Executive relating to his employment under this Agreement or the termination thereof (including any tort or discrimination claim), shall be exclusively resolved by binding statutory arbitration in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Such arbitration process shall take place in New York, New York. A court of competent jurisdiction may enter judgment upon the arbitrator's award. All costs and expenses of arbitration (including fees and disbursements of counsel) shall be borne by the respective party incurring such costs and expenses. 13. Miscellaneous. a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without regard to conflicts of laws principles thereof. b. Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein. This Agreement may not be altered, modified or amended except by written instrument signed by the parties hereto. 11 c. No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. d. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. e. Assignment. This Agreement, and all of Executive's rights and duties hereunder, shall not be assignable or delegable by Executive. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate or a successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity. f. Set Off; Mitigation. The Company's obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall be subject to set-off, counterclaim or recoupment of amounts owed by Executive to the Company or its affiliates. Executive shall not be required to mitigate the amount of any payment provided for pursuant to this Agreement by seeking other employment or otherwise and the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive's other employment or otherwise. g. Successors; Binding Agreement. This Agreement shall inure to the benefit of and be binding upon the Company and its subsidiaries and Executive and any personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. Further, the Company will require any successor (whether, direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or assets which is required by this Section 13(g) to assume and agree to perform this Agreement or which otherwise assumes and agrees to perform this Agreement; provided, however, in the event that any successor, as described above, agrees to assume this Agreement in accordance with the preceding sentence, as of the date such successor so assumes this Agreement, the Company shall cease to be liable for any of the obligations contained in this Agreement. 12 h. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. If to the Company: Citizens Communications Company Three High Ridge Park Building 3 Stamford, Connecticut 06905 Attention: Russ Mitten, Esq. With a copy to: Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 Attention: Alvin H. Brown, Esq. If to Executive: To the most recent address of Executive set forth in the personnel records of the Company. i. Executive Representation. Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the Company and the performance by Executive of Executive's duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound. j. Prior Agreements. This Agreement supercedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive's employment with the Company and/or its affiliates. The provisions of Sections 8(b)(ii)(D) and 8(c)(iii)(D) shall also supersede any provision of any restricted stock or option agreement or plan which is less favorable to Executive in the treatment of restricted shares or options previously granted to him thereunder upon his termination of employment upon death or Disability or without Cause or for Good Reason. k. Cooperation. Executive shall provide Executive's reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive's employment hereunder. This provision shall survive any termination of this Agreement. 13 l. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. m. Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 14 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. CITIZENS COMMUNICATIONS COMPANY: EXECUTIVE: /s/ Citizens Communications Company /s/ Jerry Elliot - ------------------------------------ ------------------ Citizens Communications Company Jerry Elliott By: /s/ Rudy Graf ------------------------------- Rudy Graf 15 EX-10.18 5 larsonagreemt.txt LARSON AGREEMENT Exhibit 10.18 EMPLOYMENT AGREEMENT Robert Larson This EMPLOYMENT AGREEMENT (the "Agreement") is dated as of September 1, 2004 (the "Effective Date") by and between Citizens Communications Company (the "Company") and Robert Larson ("Executive"). WHEREAS, Executive is currently employed with the Company as a Senior Vice President and as the Company's Controller and Chief Accounting Officer; and WHEREAS, as of the Effective Date, the Company desires to enter into an agreement with Executive embodying the terms of Executive's employment, and Executive desires to enter into such an agreement. NOW, THEREFORE, in consideration of the premises and mutual covenants herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Subject to the provisions of Section 8 of this Agreement, Executive shall be employed by the Company, and any of its subsidiaries that the Chief Executive Officer (the "CEO") or the Board of Directors of the Company (the "Board") shall designate for a period commencing on the Effective Date and ending on the fifth anniversary thereof (the "Initial Term"), on the terms and subject to the conditions set forth in this Agreement. Following the Initial Term, the Agreement shall automatically be renewed for additional terms of one year on each anniversary of the last day of the Initial Term (the Initial Term and any annual extensions of the term of this Agreement, together, the "Employment Term"), subject to Section 8 of this Agreement, unless the Company or the Executive gives the other party written notice of non-renewal at least ninety (90) days prior to such anniversary. 2. Position. a. During the Employment Term, Executive shall serve as a Senior Vice President and as the Company's Controller and Chief Accounting Officer and shall report directly to the Chief Financial Officer of the Company. In such position, Executive shall have such duties and authority commensurate with the position of controller and chief accounting officer of a company of similar size and nature and as the Company's Chief Financial Officer shall otherwise determine from time to time. b. During the Employment Term, Executive will devote Executive's full business time and best efforts (excluding any periods of vacation or sick leave) to the performance of Executive's duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict or interfere with the rendition of such services either directly or indirectly, without the prior written consent of the Board; provided that nothing herein shall preclude Executive, subject to the prior approval of the Board, from accepting appointment to or continue to serve on any board of directors or trustees of any business corporation or any charitable organization; provided in each case in the aggregate, that such activities do not conflict or interfere with the performance of Executive's duties hereunder or conflict with Section 10 of this Agreement. 3. Base Salary. During the Employment Term, the Company shall pay Executive a base salary at the annual rate of $175,000, payable in substantially equal periodic payments in accordance with the Company's practices for other executive employees, as such practices may be determined from time to time. Executive shall be entitled to such increases in Executive's base salary, if any, as may be determined from time to time in the sole discretion of the Chief Financial Officer, the CEO and the Board. Executive's annual base salary, as in effect from time to time, is hereinafter referred to as the "Base Salary." 4. Annual Bonus. During the Employment Term, Executive shall be eligible to earn an annual bonus award (an "Annual Bonus"), with a target bonus amount equal to 50% of the Base Salary (the "Target Bonus"), with adjustments based on the schedules set forth in the Citizens Incentive Plan, as amended from time to time, but the adjustments shall in no event be less favorable to Executive than those set forth for the 2004 bonus year. 5. Long-Term Incentive. With respect to each fiscal year during the Employment Term, the Company shall grant no later than each March of the following year to Executive a number of restricted shares of common stock (the "Restricted Shares") with an aggregate value equal to between $200,000 and $300,000, as determined by the Compensation Committee of the Board (the "Compensation Committee"). Subject to Section 8(b)(ii)(D) and Section 8(c)(iii)(D), below, each annual grant of Restricted Shares shall vest and become non-forfeitable as to twenty (20) percent of the shares initially granted, on each anniversary of the date of grant and shall be fully vested and 100 percent non-forfeitable upon the fifth anniversary of the date of grant. 6. Employee Benefits; Business Expenses. a. Employee Benefits. During the Employment Term, Executive (and his eligible dependents) shall be entitled to participate in the Company's pension, profit sharing, medical, dental and other employee benefit plans, (other than severance plans) (the "Company Plans") as in effect from time to time (collectively the "Employee Benefits") on the same basis as those benefits are generally made available to other executives at his level of the Company. b. Business Expenses. During the Employment Term, reasonable business expenses incurred by Executive in the performance of Executive's duties hereunder shall be reimbursed by the Company in accordance with the Company's policies. 7. [Intentionally Left Blank.] 8. Termination. Executive's employment hereunder may be terminated by either party at any time and for any reason; provided that Executive will be required to give the Company at least 60 days advance written notice of any resignation of Executive's employment. Notwithstanding any other provision of this Agreement, the provisions of this Section 8 shall exclusively govern Executive's rights upon termination of employment with the Company. 2 a. By the Company For Cause or By Executive Resignation Without Good Reason. (i) The Employment Term and Executive's employment hereunder may be terminated by the Company for Cause (as defined below) and shall terminate automatically upon Executive's resignation without Good Reason; provided that Executive will be required to give the Company at least 60 days advance written notice of such resignation. (ii) For purposes of this Agreement, "Cause" shall mean Executive's (A) willful and continued failure (other than as a result of physical or mental illness or injury) to perform his material duties (as described in Section 2) to the Company or its subsidiaries which continues beyond 10 days after a written demand for substantial performance is delivered to Executive by the Company (the "Cure Period"), which demand shall identify and describe such failure with sufficient specificity to allow Executive to respond; (B) willful or intentional conduct that causes material and demonstrable injury, monetarily or otherwise, to the Company; (C) conviction of, or a plea of nolo contendere to, a crime constituting (x) a felony under the laws of the United States or any state thereof or (y) a misdemeanor involving moral turpitude; or (D) material breach of this Agreement, including, without limitation, engaging in any action in breach of Section 9 or Section 10 of this Agreement, which continues beyond the Cure Period (to the extent that, in the Board's reasonable judgment, such breach can be cured). For purposes of this Section 8(a)(ii), no act, or failure to act, on the part of Executive shall be considered "willful" unless it is done, or omitted to be done, by Executive in bad faith and without reasonable belief that Executive's action or inaction was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or other senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interests of the Company. (iii) If Executive's employment is terminated by the Company for Cause, or if Executive resigns without Good Reason, Executive shall be entitled to receive: (A) the Base Salary through the date of termination; (B) any Annual Bonus earned but unpaid as of the date of termination for any previously completed fiscal year; (C) reimbursement for any unreimbursed business expenses properly incurred by Executive in accordance with Company policy prior to the date of Executive's termination; (D) any accrued but unpaid vacation; and (E) such Employee Benefits, if any, to which Executive may be entitled under the applicable Company Plans upon termination of employment hereunder, (the payments and benefits described clauses (A) through (E) hereof being referred to, collectively, as the "Accrued Rights"). 3 Following such termination of Executive's employment by the Company for Cause or resignation by Executive, except as set forth in this Section 8(a)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement. b. Disability or Death. (i) Executive's employment hereunder shall terminate upon Executive's death and may be terminated by the Company if Executive becomes physically or mentally incapacitated and is therefore unable for a period of six (6) consecutive months or for an aggregate of nine (9) months in any twelve (12) consecutive month period to perform Executive's duties (such incapacity is hereinafter referred to as "Disability"). Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. If Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and Executive shall be final and conclusive for all purposes of the Agreement. (ii) Upon termination of Executive's employment hereunder for either Disability or death, Executive or Executive's estate (as the case may be), shall be entitled to receive: (A) the Accrued Rights; (B) continued payment of Executive's Base Salary during the period commencing on the termination date and ending on the date that is six months after the termination date; (C) a pro rata portion of the Annual Bonus, if any, that Executive would have been entitled to receive pursuant to the Citizens Incentive Plan in the year of termination, based on actual performance through the date of termination; and (D) all Restricted Shares that have been granted as of the date of termination shall be fully vested and non-forfeitable as of such date, and Executive shall not be entitled to any further annual grants of Restricted Shares under Section 5 of this Agreement. (iii) Upon termination of Executive's employment hereunder due to Executive's death or Disability, in addition to the benefits described in Section 8(b)(ii) above, the Company shall provide Executive (in the event of his Disability) and Executive's spouse with health benefits (pursuant to the same Company Plans that are health benefit plans and that are in effect for active employees of the Company), at the sole cost of the Company, until the first anniversary of the date of Executive's death or Disability. Following Executive's termination of employment due to death or Disability, except as set forth in this Section 8(b), Executive shall have no further rights to any compensation or any other benefits under this Agreement. 4 c. By the Company Without Cause or by Executive Resignation for Good Reason. (i) Executive's employment hereunder may be terminated (A) by the Company without Cause (which shall not include Executive's termination of employment due to his Disability) or (B) by Executive for Good Reason (as defined below). (ii) For purposes of this Agreement, "Good Reason" shall mean (A) the failure of the Company to pay or cause to be paid Executive's Base Salary or Annual Bonus, when due hereunder, (B) any substantial and sustained diminution in Executive's authority or responsibilities from those described in Section 2 hereof, (C) any relocation of Executive's principal office location more than 25 miles outside of the Stamford, Connecticut metropolitan area, or (D) any other material breach of a material provision of this Agreement; provided that any of the events described in clauses (A) , (B), (C) or (D) of this Section 8(c)(ii) shall constitute Good Reason only if the Company fails to cure such event within 30 days after receipt from Executive of written notice of the event which constitutes Good Reason (with sufficient specificity from Executive for the Company to respond to such claim). (iii) If Executive's employment is terminated by the Company without Cause (other than by reason of death or Disability) or by Executive for Good Reason, subject to Executive's execution of a release of all then existing claims against the Company and its subsidiaries, affiliates, shareholders, officers, directors, employees and agents, Executive shall be entitled to receive: (A) the Accrued Rights; (B) subject to Executive's continued compliance with the provisions of Section 9 and Section 10 of this Agreement, an amount equal to the greater of (i) three times the sum of the Base Salary and Target Bonus, payable in equal installments over the thirty-six (36) month period commencing on the date of termination, and (ii) continued payment, during the balance of the Initial Term, of the Base Salary and Target Bonus (each period referenced in clause (i) and (ii) hereof shall be referred to in this Agreement as the "Severance Period"); provided, however, that the aggregate amount described in this subsection (B) shall be reduced by any amounts owed by Executive to the Company (to the extent permitted under applicable law); (C) continuation of health benefits (pursuant to the same Company Plans that are health benefit plans and that are in effect for active employees of the Company) until the earlier to occur of the end of the Severance Period and the date on which Executive becomes eligible to receive comparable health benefits from any subsequent employer; and (D) all Restricted Shares shall be vested and non-forfeitable as of the date of termination, and all other restricted shares and options previously granted to Executive that are not vested as of such date become vested and non-forfeitable or, in the case of options, fully exercisable. 5 Following Executive's termination of employment by the Company without Cause (other than by reason of Executive's death or Disability) or Executive for Good Reason, except as set forth in this Section 8(c)(iii), Executive shall have no further rights to any compensation or any other benefits under this Agreement. d. Change in Control. (i) Executive shall also be entitled to the benefits set forth in Section 8(c)(iii) above if, within one year following a Change in Control (defined below), Executive terminates his employment as a result of: (i) any decrease by the Company of the Base Salary or Target Bonus; (ii) any decrease in Executive's pension benefit opportunities or any material diminution in the aggregate employee benefits; or (iii) any material diminution in Executive's title, reporting relationships, duties or responsibilities (each, a "Constructive Termination Event"); provided that either of the events described in clauses (i) and (ii) of this Section 8(d) shall constitute a Constructive Termination Event only if the Company fails to cure such event within 30 days after receipt from Executive of written notice of the event which constitutes a Constructive Termination Event; provided, further, that a "Constructive Termination Event" shall cease to exist for an event on the 60th day following the later of its occurrence or Executive's knowledge thereof, unless Executive has given the Company written notice thereof prior to such date. (ii) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred: (A) When any "person" as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as used in Section 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange Act (but excluding the Company and any subsidiary and any employee benefit plan sponsored or maintained by the Company or any subsidiary (including any trustee of such plan acting as trustee)), directly or indirectly, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or (B) Upon the consummation of any merger or other business combination involving the Company, a sale of substantially all of the Company's assets, liquidation or dissolution of the Company or a combination of the foregoing transactions (the "Transactions") other than a Transaction immediately following which the shareholders of the Company immediately prior to the Transaction own, in the same proportion, at least 51% of the voting power, directly or indirectly, of (i) the surviving corporation in any such merger or other business combination; (ii) the purchaser of or successor to the Company's assets; (iii) both the surviving corporation and the purchaser in the event of any combination of Transactions; or (iv) the parent company owning 100% of such surviving corporation, purchaser or both the surviving corporation and the purchaser, as the case may be. 6 (iii) Excess Parachute Payments. (A) If it is determined (as hereafter provided) that any payment or distribution by the Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise pursuant to or by reason of any other agreement, policy, plan, program or arrangement, including without limitation any stock option, restricted stock award, stock appreciation right or similar right, or the lapse or termination of any restriction on or the vesting or exercisability of any of the foregoing (a "Severance Payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") (or any successor provision thereto) by reason of being "contingent on a change in ownership or control" of the Company, within the meaning of Section 280G of the Code (or any successor provision thereto) or to any similar tax imposed by state or local law, or any interest or penalties with respect to such excise tax (such tax or taxes, together with any such interest and penalties, are hereafter collectively referred to as the "Excise Tax"), then Executive shall receive the greater of (x) the Severance Payment, after payment by Executive of the Excise Tax imposed on the Severance Payment and (y) the amount of the Severance Payment (calculated on a net after-tax basis) which could be paid to Executive under Section 280G of the Code without causing any loss of deduction to the Company under such Section (the "Capped Payment"). (B) Subject to the provisions of Section 8(d)(iii)(A) hereof, all determinations required to be made under this Section 8(d), including whether an Excise Tax is payable by Executive and the amount of such Excise Tax, shall be made by the nationally recognized firm of certified public accountants (the "Accounting Firm") used by the Company prior to the Change in Control (or, if such Accounting Firm declines to serve, the Accounting Firm shall be a nationally recognized firm of certified public accountants selected by Executive). The Accounting Firm shall be directed by the Company or Executive to submit its preliminary determination and detailed supporting calculations to both the Company and Executive within 15 calendar days after the date of Executive's termination of employment, if applicable, and any other such time or times as may be requested by the Company or Executive. If the Accounting Firm determines that any Excise Tax is payable by Executive, the Company shall either (x) make payment of the Severance Payment, less all amounts withheld in respect of the Excise Tax, as required by applicable law, or (ii) reduce the Severance Payment by the amount which, based on the Accounting Firm's determination and calculations, would provide Executive with the Capped Payment, and pay to Executive such reduced amount. If the Accounting Firm determines that no Excise Tax is payable by Executive, it shall, at the same time as it makes such determination, furnish Executive with an opinion that he has substantial authority not to report any Excise Tax on his federal, state, local income or other tax return. All fees and expenses of the Accounting Firm shall be paid by the Company in connection with the calculations required by this section. 7 (C) The federal, state and local income or other tax returns filed by Executive (or any filing made by a consolidated tax group which includes the Company) shall be prepared and filed on a consistent basis with the determination of the Accounting Firm with respect to the Excise Tax payable by Executive. Executive shall make proper payment of the amount of any Excise Tax, and at the request of the Company, provide to the Company true and correct copies (with any amendments) of his federal income tax return as filed with the Internal Revenue Service and corresponding state and local tax returns, if relevant, as filed with the applicable taxing authority, and such other documents reasonably requested by the Company, evidencing such payment. e. Notice of Termination. Any purported termination of employment by the Company or by Executive (other than due to Executive's death) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 13(h) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. f. Board/Committee Resignation; Execution of Release of all Claims. (i) Upon termination of Executive's employment for any reason, Executive agrees to resign, as of the date of such termination and to the extent applicable, from the Board (and any committees thereof) and the board of directors (and any committees thereof) of any of the Company's subsidiaries or affiliates. (ii) Upon termination of Executive's employment for any reason, Executive agrees to execute a release of all then existing claims against the Company, its subsidiaries, affiliates, shareholders, directors, officers, employees and agents. Notwithstanding anything set forth in this Agreement to the contrary, upon termination of Executive's employment for any reason, Executive shall not receive any payments or benefits to which he may be entitled hereunder (other than those which by law cannot be subject to the execution of a release) (A) if Executive revokes such release or (B) until eight (8) days after the date Executive signs such release (or until such other date as applicable law may provide that Executive cannot revoke such release). 9. Non-Competition/Non-Solicitation/Non-Disparagement. a. Executive acknowledges and recognizes the highly competitive nature of the businesses of the Employer and its affiliates and accordingly agrees that, during the Employment Term and, for a period of one year following any termination of Executive's employment with the Company (the "Restricted Period"), Executive will not, whether on Executive's own behalf or on behalf of or in conjunction with any person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise whatsoever ("Person"), directly or indirectly engage in any business that directly or indirectly competes with the business of the Company, or otherwise engage in competition with the Company which is materially detrimental to the Company; 8 (i) During the Restricted Period, Executive will not, whether on Executive's own behalf or on behalf of or in conjunction with any Person, directly or indirectly: (A) solicit or encourage any employee of the Company or its affiliates to leave the employment of the Company or its affiliates; or (B) hire any such employee who was employed by the Company or its affiliates as of the date of Executive's termination of employment with the Company or who left the employment of the Company or its affiliates coincident with, or within one year prior to or after, the termination of Executive's employment with the Company. b. Executive shall not at any time issue any press release or make any public statement about the Company or any director, officer, employee, successor, parent, subsidiary or agent or representative of, or attorney to the Company (any of the foregoing, a "Company Affiliate") regarding (i) any of the foregoing's financial status, business, services, business methods, compliance with laws, or ethics or otherwise, or (ii) regarding Company partners, personnel, directors, officers, employees, attorneys, agents, including, without limitation, in respect of both clauses (i) and (ii), any statement that is intended or reasonably likely to disparage the Company or any Company Affiliate, or otherwise degrade any Company Affiliate's reputation in the business, industry or legal community in which any such Company Affiliate operates; provided, that, Executive shall be permitted to (a) make any statement that is required by applicable securities or other laws to be included in a filing or disclosure document, subject to prior notice to the Company thereof, and (b) defend himself against any statement made by the Company or any Company Affiliate that is intended or reasonably likely to disparage Executive or his spouse or otherwise degrade Executive's reputation in the business, industry or legal community in which Executive operates, only if Executive reasonably believes that the statements made in such defense are not false statements and (c) provide truthful testimony in any legal proceeding. c. It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 9 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 10. Confidentiality. a. Executive will not at any time (whether during or after Executive's employment with the Company (x) retain or use for the benefit, purposes or account of Executive or any other Person; or (y) disclose, divulge, reveal, communicate, share, transfer or provide access to any Person outside the Company (other than its professional advisers who are bound by confidentiality obligations), any non-public, proprietary or confidential information -- including without limitation rates, trade secrets, know-how, research and development, software, databases, inventions, processes, formulae, technology, designs and other intellectual property, information concerning finances, investments, profits, pricing, costs, products, services, vendors, customers, clients, partners, investors, personnel, compensation, recruiting, training, advertising, sales, marketing, promotions, government and regulatory activities and approvals -- concerning the past, current or future business, activities and operations of the Company, its subsidiaries or affiliates and/or any third party that has disclosed or provided any of same to the Company on a confidential basis ("Confidential Information") without the prior written authorization of the Board. 9 b. "Confidential Information" shall not include any information that is (a) generally known to the industry or the public other than as a result of Executive's breach of this covenant or any breach of other confidentiality obligations by third parties; (b) made legitimately available to Executive by a third party without breach of any confidentiality obligation; or (c) required by law to be disclosed; provided that Executive shall give prompt written notice to the Company of such requirement, disclose no more information than is so required, and cooperate with any attempts by the Company to obtain a protective order or similar treatment. c. Except as required by law, Executive will not disclose to anyone, other than Executive's immediate family and legal or financial advisors, the existence or contents of this Agreement; provided that Executive may disclose to any prospective future employer the provisions of Section 9 and 10 of this Agreement provided that such potential employer agrees to maintain the confidentiality of such terms. d. Upon termination of Executive's employment with the Company for any reason, Executive shall immediately destroy, delete, or return to the Company, at the Company's option, all originals and copies in any form or medium (including memoranda, books, papers, plans, computer files, letters and other data) in Executive's possession or control (including any of the foregoing stored or located in Executive's office, home, laptop or other computer, whether or not Company property) that contain Confidential Information or otherwise relate to the business of the Company, its affiliates and subsidiaries, except that Executive may retain only those portions of any personal notes, notebooks and diaries that do not contain any Confidential Information. e. The provisions of this Section 10 shall survive the termination of Executive's employment for any reason. 11. Specific Performance. Executive acknowledges and agrees that the Employer's remedies at law for a breach or threatened breach of any of the provisions of Section 9 or Section 10 of this Agreement would be inadequate and the Company would suffer irreparable damages as a result of such breach or threatened breach. In recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to cease making any payments or providing any benefit otherwise required by this Agreement and obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 10 12. Arbitration. Except as provided in Section 11, any other dispute arising out of or asserting breach of this Agreement, or any statutory or common law claim by Executive relating to his employment under this Agreement or the termination thereof (including any tort or discrimination claim), shall be exclusively resolved by binding statutory arbitration in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. Such arbitration process shall take place in New York, New York. A court of competent jurisdiction may enter judgment upon the arbitrator's award. All costs and expenses of arbitration (including fees and disbursements of counsel) shall be borne by the respective party incurring such costs and expenses. 13. Miscellaneous. a. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, without regard to conflicts of laws principles thereof. b. Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the employment of Executive by the Company. There are no restrictions, agreements, promises, warranties, covenants or undertakings between the parties with respect to the subject matter herein other than those expressly set forth herein. This Agreement may not be altered, modified or amended except by written instrument signed by the parties hereto. c. No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. d. Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. e. Assignment. This Agreement, and all of Executive's rights and duties hereunder, shall not be assignable or delegable by Executive. Any purported assignment or delegation by Executive in violation of the foregoing shall be null and void ab initio and of no force and effect. This Agreement may be assigned by the Company to a person or entity which is an affiliate or a successor in interest to substantially all of the business operations of the Company. Upon such assignment, the rights and obligations of the Company hereunder shall become the rights and obligations of such affiliate or successor person or entity. f. Set Off; Mitigation. The Company's obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall be subject to set-off, counterclaim or recoupment of amounts owed by Executive to the Company or its affiliates. Executive shall not be required to mitigate the amount of any payment provided for pursuant to this Agreement by seeking other employment or otherwise and the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive's other employment or otherwise. 11 g. Successors; Binding Agreement. This Agreement shall inure to the benefit of and be binding upon the Company and its subsidiaries and Executive and any personal or legal representatives, executors, administrators, successors, assigns, heirs, distributees, devisees and legatees. Further, the Company will require any successor (whether, direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company and any successor to its business and/or assets which is required by this Section 13(g) to assume and agree to perform this Agreement or which otherwise assumes and agrees to perform this Agreement; provided, however, in the event that any successor, as described above, agrees to assume this Agreement in accordance with the preceding sentence, as of the date such successor so assumes this Agreement, the Company shall cease to be liable for any of the obligations contained in this Agreement. h. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or overnight courier or three days after it has been mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. If to the Company: Citizens Communications Company Three High Ridge Park Building 3 Stamford, Connecticut 06905 Attention: Russ Mitten, Esq. With a copy to: Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York 10017 Attention: Alvin H. Brown, Esq. If to Executive: To the most recent address of Executive set forth in the personnel records of the Company. 12 i. Executive Representation. Executive hereby represents to the Company that the execution and delivery of this Agreement by Executive and the Company and the performance by Executive of Executive's duties hereunder shall not constitute a breach of, or otherwise contravene, the terms of any employment agreement or other agreement or policy to which Executive is a party or otherwise bound. j. Prior Agreements. This Agreement supercedes all prior agreements and understandings (including verbal agreements) between Executive and the Company and/or its affiliates regarding the terms and conditions of Executive's employment with the Company and/or its affiliates. The provisions of Section 8(c)(iii)(D) shall also supersede any provision of any restricted stock or option agreement or plan which is less favorable to Executive in the treatment of restricted shares or options previously granted to him thereunder upon his termination of employment without Cause or for Good Reason. k. Cooperation. Executive shall provide Executive's reasonable cooperation in connection with any action or proceeding (or any appeal from any action or proceeding) which relates to events occurring during Executive's employment hereunder. This provision shall survive any termination of this Agreement. l. Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state and local taxes as may be required to be withheld pursuant to any applicable law or regulation. m. Counterparts. This Agreement may be signed in counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. 13 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. CITIZENS COMMUNICATIONS COMPANY: EXECUTIVE: /s/ Citizens Communications Company /s/ Robert Larson - ------------------------------------ ------------------- Citizens Communications Company Robert Larson By: /s/ Rudy Graf ------------------------------- Rudy Graf 14 EX-10.19 6 exhibit10-19credit.txt CREDIT AGREEMENT Exhibit 10.19 - -------------------------------------------------------------------------------- $250,000,000 Competitive Advance and REVOLVING CREDIT FACILITY AGREEMENT Dated as of October 29, 2004 among CITIZENS COMMUNICATIONS COMPANY as Borrower and THE LENDERS NAMED HEREIN as Lenders Bank of America, N.A. as Administrative Agent and Issuing Bank and JPMorgan Chase BAnk as Syndication Agent and Morgan Stanley Bank, DEUTSCHE BANK SECURITIES, INC., THE ROYAL BANK OF SCOTLAND PLC and UBS Securities LLC as Co-Documentation Agents --------------- Banc of America Securities LLC as Lead Arranger and Bookrunner - --------------------------------------------------------------------------------
ARTICLE I DEFINITIONS.....................................................................1 SECTION 1.01. Defined Terms...............................................................1 SECTION 1.02. Terms Generally............................................................17 SECTION 1.03. Letter of Credit Amounts...................................................17 SECTION 1.04. Times of Day...............................................................18 ARTICLE II THE CREDITS...................................................................18 SECTION 2.01. Commitments................................................................18 SECTION 2.02. Loans......................................................................18 SECTION 2.03. Competitive Bid Procedure..................................................20 SECTION 2.04. Standby Borrowing Procedure................................................22 SECTION 2.05. Conversions................................................................22 SECTION 2.06. Fees.......................................................................23 SECTION 2.07. Repayment of Loans.........................................................23 SECTION 2.08. Interest on Loans..........................................................24 SECTION 2.09. Default Interest...........................................................25 SECTION 2.10. Alternate Rate of Interest.................................................25 SECTION 2.11. Changes in Commitments.....................................................25 SECTION 2.12. Prepayment.................................................................26 SECTION 2.13. Reserve Requirements; Change in Circumstances..............................27 SECTION 2.14. Change in Legality.........................................................29 SECTION 2.15. Indemnity..................................................................29 SECTION 2.16. Pro Rata Treatment.........................................................30 SECTION 2.17. Sharing of Setoffs.........................................................30 SECTION 2.18. Payments; Administrative Agent's Clawback..................................31 SECTION 2.19. Taxes......................................................................32 SECTION 2.20. Letters of Credit..........................................................35 ARTICLE III REPRESENTATIONS AND WARRANTIES...............................................44 SECTION 3.01. Organization; Powers; Governmental Approvals...............................44 SECTION 3.02. Financial Statements.......................................................44 SECTION 3.03. No Material Adverse Change.................................................45 SECTION 3.04. Title to Properties; Possession Under Leases...............................45 SECTION 3.05. Ownership of Subsidiaries..................................................45 SECTION 3.06. Litigation; Compliance with Laws...........................................45 SECTION 3.07. Agreements.................................................................46 SECTION 3.08. Federal Reserve Regulations................................................46 SECTION 3.09. Investment Company Act; Public Utility Holding Company Act.................47 SECTION 3.10. Use of Proceeds............................................................47 SECTION 3.11. Tax Returns................................................................47 SECTION 3.12. No Material Misstatements..................................................47 SECTION 3.13. Employee Benefit Plans.....................................................47 SECTION 3.14. Insurance..................................................................48 ARTICLE IV CONDITIONS OF LENDING.........................................................48 SECTION 4.01. Each Borrowing and Issuance................................................48 SECTION 4.02. Effective Date.............................................................48 ARTICLE V AFFIRMATIVE COVENANTS..........................................................50 SECTION 5.01. Existence; Businesses and Properties.......................................50 SECTION 5.02. Financial Statements, Reports, etc.........................................51 SECTION 5.03. Litigation and Other Notices...............................................52 SECTION 5.04. Maintaining Records........................................................53 SECTION 5.05. Use of Proceeds............................................................53 ARTICLE VI NEGATIVE COVENANTS............................................................53 SECTION 6.01. Liens; Restrictions on Sales of Receivables................................53 SECTION 6.02. Ownership of the Principal Subsidiaries....................................54 SECTION 6.03. Asset Sales................................................................54 SECTION 6.04. Mergers....................................................................55 SECTION 6.05. Restrictions on Dividends..................................................55 SECTION 6.06. Transactions with Affiliates...............................................55 SECTION 6.07. Financial Ratio............................................................56 SECTION 6.08. Guarantees.................................................................56 ARTICLE VII EVENTS OF DEFAULT............................................................56 SECTION 7.01. Events of Default..........................................................56 SECTION 7.02. Application of Funds.......................................................58 ARTICLE VIII THE ADMINISTRATIVE AGENT....................................................59 ARTICLE IX MISCELLANEOUS.................................................................62 SECTION 9.01. Notices....................................................................62 SECTION 9.02. Survival of Agreement......................................................63 SECTION 9.03. Binding Effect.............................................................64 SECTION 9.04. Successors and Assigns.....................................................64 SECTION 9.05. Expenses; Indemnity........................................................67 SECTION 9.06. Right of Setoff............................................................69 SECTION 9.07. Applicable Law.............................................................69 SECTION 9.08. Waivers; Amendment.........................................................69 SECTION 9.09. Interest Rate Limitation...................................................70 SECTION 9.10. Entire Agreement...........................................................70 SECTION 9.11. Waiver of Jury Trial.......................................................71 SECTION 9.12. Severability...............................................................71 SECTION 9.13. Counterparts...............................................................71 SECTION 9.14. Headings...................................................................71 SECTION 9.15. Jurisdiction; Consent to Service of Process................................71 SECTION 9.16. USA PATRIOT Act Notice.....................................................72 SECTION 9.17. Payments Set Aside.........................................................72 SECTION 9.18. Treatment of Certain Information; Confidentiality..........................73
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 Assignment and Assumption Exhibit C Form of Opinion of Counsel to Borrower Exhibit D-1 Form of Standby Note Exhibit D-2 Form of Competitive Note Schedule 2.01 Lenders' Commitment Schedule 6.08 Guarantees Schedule 9.01 Administrative Agent's Office; Certain Addresses for Notices Competitive Advance and REVOLVING CREDIT FACILITY AGREEMENT, dated as of October 29, 2004, among CITIZENS COMMUNICATIONS COMPANY, a Delaware corporation (the "Borrower"), the Lenders listed in Schedule 2.01 (together with any assignees pursuant to Section 9.04, the "Lenders") and BanK of America, N.A. a national banking association, 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 and to obtain the issuance of letters of credit on and after the date hereof and at any time and from time to time prior to the Maturity Date (as hereinafter defined) a principal amount not in excess of $250,000,000 (as such amount may be modified pursuant to Section 2.11 hereof) at any time outstanding. 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 for general corporate purposes, including working capital and support of commercial paper issuances and Securitization Transactions (as hereinafter defined) permitted hereunder. 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. "Administrative Agent's Office" means the Administrative Agent's address and, as appropriate, account as set forth on Schedule 9.01, or such other address or account as the Administrative Agent may from time to time notify to the Borrowers and the Lenders. "Administrative Fees" shall have the meaning assigned to such term in Section 2.06(b). "Administrative Questionnaire" shall mean an Administrative Questionnaire in a form supplied by the Administrative Agent. "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 fluctuating rate per annum equal to the higher of (a) the Federal Funds Effective Rate plus 1/2 of 1% and (b) the Prime Rate in effect on such day. "Applicable Rate" shall mean, with respect to any ABR Loan, Eurodollar Standby Loan, Letter of Credit Fee or Commitment Fee, as the case may be, at all times, a percentage per annum determined by reference to the Leverage Ratio as set forth below:
Applicable Rate for Eurodollar Applicable Rate Applicable Rate Standby Loans and for Pricing Level Leverage Ratio for ABR Loans Letters of Credit Commitment Fee - -------------------------------------------------------------------------------------------------------- 1 < 3.0:1 0.00% 1.00% 0.250% - - -------------------------------------------------------------------------------------------------------- 2 >3.0:1 < 3.5:1 0.25% 1.25% 0.375% - - -------------------------------------------------------------------------------------------------------- 3 >3.5:1 < 4.0:1 0.50% 1.50% 0.375% - - -------------------------------------------------------------------------------------------------------- 4 > 4.0:1 0.75% 1.75% 0.500%
Any increase or decrease in the Applicable Rate resulting from a change in the Leverage Ratio shall become effective as of the first Business Day immediately following the date a certificate of a Financial Officer is delivered pursuant to Section 5.02(c); provided, however, that if a such certificate is not delivered when due in accordance with such Section, then Pricing Level 4 shall apply as of the first Business Day after the date on which such certificate was required to have been delivered. Pricing Level 3 shall apply from the Effective Date through the first Business Day after the earlier of the date the certificate is delivered under Section 5.02(c) with respect to the fiscal quarter ending September 30, 2004, and the date the such certificate is required to be delivered under Section 5.02(c). "Asset Exchange" shall mean the exchange or other transfer of telecommunications assets between or among the Borrower and another Person or other Persons in connection with which the Borrower would transfer telecommunications assets and/or other property in consideration of the receipt of telecommunications assets and/or other property having a fair market value substantially equivalent to those transferred by the Borrower (as determined in good faith by the Borrower's Board of Directors); provided that the principal value of the assets being transferred to the Borrower shall be represented by telecommunications assets. "Assignment and Assumption" shall mean an assignment and assumption entered into by a Lender and an assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit B or any other form approved by the Administrative Agent. "Available Amount" of any Letter of Credit shall mean, at any time, the amount of such Letter of Credit as determined in accordance with Section 1.03. "Bank of America" shall mean Bank of America, N.A. 2 "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 or the State of Texas) on which banks are open for business in New York City and Dallas, Texas; 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. "Cash Collateral" has the meaning specified in Section 2.20(g). "Cash Collateralize" has the meaning specified in Section 2.20(g). 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 50% or more 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. "Collateral" means any and all "Collateral", as defined in any applicable Security Document. "Commitment" means, as to each Lender, its obligation to (a) make Standby Loans to the Borrower pursuant to the Agreement, and (b) purchase participations in L/C Obligations, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender's name on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement. Unless earlier terminated pursuant to the terms of this Agreement, the Commitments shall automatically and permanently terminate on the Maturity Date. 3 "Commitment Fee" shall have the meaning assigned to such term in Section 2.06(a). "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 EBITDA" shall mean, with respect to the Borrower and its Subsidiaries for any period: Consolidated Net Income for such period plus (a) without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) consolidated interest expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period, (iv) dividends on preferred stock, (v) losses attributable to minority interests, (vi) investment losses, (vii) any nonrecurring charges for such period relating to severance costs, restructuring costs or acquisition assimilation expenses, (viii) any extraordinary charges or non-cash charges for such period (provided that any cash payment made with respect to any such non-cash charge shall be subtracted in computing Consolidated EBITDA during the period in which such cash payment is made) and (ix) net losses in connection with the early retirement of debt and minus (b) without duplication and to the extent included in determining such Consolidated Net Income, (i) income or gains attributable to minority interests, (ii) investment income and (iii) any extraordinary gains or non-cash gains for such period, all determined on a consolidated basis in accordance with GAAP. For purposes of calculating Consolidated EBITDA for any period of four consecutive fiscal quarters (each, a "Reference Period") in connection with any determination of the Leverage Ratio, if after the first day of such Reference Period and on or prior to any date on which the Leverage Ratio is to be determined the Borrower or a consolidated Subsidiary shall have effected a Material Transaction, Consolidated EBITDA for such Reference Period shall be calculated after giving pro forma effect thereto (without giving effect to cost savings not actually realized), as determined reasonably and in good faith by a Financial Officer, as if such Material Transaction occurred on the first day of such Reference Period; provided, that, such pro forma calculations shall only include such adjustments as are permitted under Regulation S-X of the Securities and Exchange Commission. As used in this definition, "Material Transaction" means any acquisition or disposition outside the ordinary course of business of any property or assets that (x) constitute assets comprising all or substantially all of an operating unit of a business or equity interests of a Person representing a majority of the ordinary voting power or economic interests in such Person that are represented by all its outstanding capital stock and (y) involves aggregate consideration in excess of $50,000,000. Notwithstanding the foregoing, Consolidated EBITDA for any period shall not in any event be calculated to include the operations, income or expenses of any Non-Recourse Joint Venture, except to the extent of dividends or other distributions actually paid to the Borrower or any of its consolidated Subsidiaries (other than Non-Recourse Joint Ventures) during such period. 4 "Consolidated Net Income" shall mean, for any period, the net income or loss of the Borrower and its consolidated Subsidiaries for such period determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Non-Recourse Joint Venture or any other Person (other than the Borrower) in which any other Person (other than the Borrower or any consolidated Subsidiary of the Borrower or any director holding qualifying shares in compliance with applicable law) owns an equity interest, except to the extent of the amount of dividends or other distributions actually paid to the Borrower or any of its consolidated Subsidiaries (other than Non-Recourse Joint Ventures) during such period, and (b) (except as otherwise specified in the definition of Consolidated EBITDA in connection with Material Transactions), the income or loss of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any Subsidiary of the Borrower or the date that such Person's assets are acquired by the Borrower or any Subsidiary of the Borrower. "Consolidated Net Worth" shall mean, as at any date of determination, the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries, including redeemable preferred securities where the redemption date occurs after the Maturity Date, mandatorily redeemable convertible preferred securities, mandatorily convertible Indebtedness (or Indebtedness subject to mandatory forward purchase contracts for equity or similar securities) and minority equity interests in other persons, as determined on a consolidated basis in conformity with GAAP consistently applied. For the purpose of calculating "Consolidated Net Worth", the consolidated stockholders' equity of any Non-Recourse Joint Venture and its subsidiaries shall be excluded from the consolidated stockholders' equity of the Borrower and its consolidated Subsidiaries. "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. 5 "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. "Debtor Relief Laws" shall mean the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally. "Default" shall mean any event or condition which upon notice, lapse of time, or both would constitute an Event of Default. "Defaulting Lender" shall mean any Lender that (a) has failed to fund any portion of the Standby Loans or participations in L/C Obligations required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding. "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). "Eligible Assignee" shall mean (i) a Lender; (ii) an Affiliate of a Lender; and (iii) any other Person (other than a natural person) approved by (a) the Administrative Agent and the Issuing Bank, and (b) unless an Event of Default has occurred and is continuing, the Borrower (each such approval not to be unreasonably withheld or delayed); provided that notwithstanding the foregoing, "Eligible Assignee" shall not include the Borrower or any of the Borrower's Affiliates or Subsidiaries. "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. 6 "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 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 Borrowing" shall mean a Borrowing comprised of Eurodollar Competitive 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 Borrowing" shall mean a Borrowing comprised of Eurodollar Standby Loans. "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 Facilities" shall mean (i) the Competitive Advance and Revolving Credit Facility Agreement, dated as of October 24, 2001, as amended, among the Borrower, the lenders party thereto and The Chase Manhattan Bank, as agent for the lenders and (ii) the $100,000,000 Revolving Credit Facility Agreement, dated as of October 24, 2001, among the Borrower, the lenders party thereto and Morgan Stanley Bank, as administrative agent. "Federal Funds Effective Rate" shall mean, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Effective Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Effective Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent. 7 "Fee Letter" means the letter agreement, dated October 4, 2004, among the Borrower, the Administrative Agent and Banc of America Securities LLC. "Fees" shall mean the Commitment Fee, the Letter of Credit Fees and the Administrative Fees. "Financial Officer" of any corporation shall mean the President, Chief Financial Officer, Chief Executive Officer, Vice President - Finance, Executive Vice President, Chief Accounting Officer or Treasurer of such corporation. Any document delivered hereunder that is signed by a Financial Officer shall be conclusively presumed to have been authorized by all necessary corporate action on the part of the Borrower and such Financial Officer shall be conclusively presumed to have acted on behalf of the Borrower. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "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. "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is resident for tax purposes. For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "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. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guarantee" means, as to any Person, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part). The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term "Guarantee" as a verb has a corresponding meaning. 8 "Guaranty Agreement" means, collectively, each Guarantee executed and delivered pursuant to Section 6.08. "Honor Date" shall have the meaning assigned to such term in Section 2.20(c)(i). "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 than 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 (other than customer deposits made in the ordinary course of business), (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 Swap Contracts (except to the extent such obligations are used as a bona fide hedge of other Indebtedness of such Person), (i) all obligations of such Person as an account party in respect of letters of credit and bankers' acceptances (except to the extent any such obligations are incurred in support of other obligations constituting Indebtedness of such Person and other than, to the extent reimbursed if drawn, letters of credit in support of ordinary course performance obligations) and (j) all Guarantees of such Person in respect of any of the foregoing; provided, however, that the term Indebtedness shall not include endorsements for collection or deposit, in either case in the ordinary course of business. 9 "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, with respect to any Conversion, 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 Maturity 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. "ISP" means, with respect to any Letter of Credit, the "International Standby Practices 1998" published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance). "Issuing Bank" shall mean the Bank of America in its capacity as issuer of the Letters of Credit hereunder, or any successor issuer of Letters of Credit hereunder. "Issuer Documents" shall mean with respect to any Letter of Credit, the Letter of Credit Application, and any other document, agreement and instrument entered into by the Issuing Bank and the Borrower (or any Subsidiary) or in favor of the Issuing Bank and relating to any such Letter of Credit. "Joint Venture" shall mean a general or limited partnership, limited liability company or other entity formed or organized under the laws of the United States of America or any state thereof that would own or operate telecommunications assets and which, in turn, the Borrower would manage. "Joint Venture Transaction" shall mean the formation of a Joint Venture, by the formation of a new entity and the contribution of telecommunications assets (or cash or similar assets) thereto by the Borrower, the investment by the Borrower in a previously existing entity that owns telecommunications assets or other similar transaction. 10 "Laws" means, collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any governmental authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case whether or not having the force of law. "L/C Advance" shall mean with respect to each Standby Lender, such Lender's funding of its participation in any L/C Borrowing in accordance with its Ratable Share. "L/C Borrowing" means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made or refinanced as a Standby Borrowing. "L/C Cash Deposit Account" shall mean an interest bearing cash deposit account to be established and maintained by the Administrative Agent, over which the Administrative Agent shall have sole dominion and control, upon terms as may be satisfactory to the Administrative Agent and the Issuing Bank. "L/C Credit Extension" shall mean with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase in the amount thereof. "L/C Obligations" means, as at any date of determination, the aggregate Available Amounts under all outstanding Letters of Credit, plus the aggregate of all Unreimbursed Amounts, including all L/C Borrowings. For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be "outstanding" in the amount so remaining available to be drawn. "Lenders" shall mean the meaning specified in the introductory paragraph hereto. "Letter of Credit" shall mean any letter of credit issued hereunder. A Letter of Credit may be a commercial letter of credit or a standby letter of credit. "Letter of Credit Application" shall mean an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the Issuing Bank. "Letter of Credit Expiration Date" shall mean the day that is seven days prior to the Maturity Date then in effect for the Standby Loans (or, if such day is not a Business Day, the next preceding Business Day). "Letter of Credit Fee" shall have the meaning assigned to such term in Section 2.20(i). 11 "Letter of Credit Sublimit" shall mean an amount equal to $50,000,000. The Letter of Credit Sublimit is part of, and not in addition to the Total Commitment. "Leverage Ratio" shall mean, with respect to any fiscal quarter, as of the date ending such fiscal quarter, the ratio of (a) Total Indebtedness as of such fiscal quarter end to (b) Consolidated EBITDA, for the four consecutive fiscal quarters immediately prior to such fiscal quarter end (including such fiscal quarter). "LIBO Rate" shall mean, for any Interest Period with respect to any Eurodollar Borrowing, the rate per annum equal to the British Bankers Association LIBOR Rate ("BBA LIBOR"), as published by Reuters (or other commercially available source providing quotations of BBA LIBOR as designated by the Administrative Agent from time to time) at approximately 11:00 A.M., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period. If such rate is not available at such time for any reason, then the "LIBO Rate" for such Interest Period shall be the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Borrowing being made, continued or converted by Bank of America and with a term equivalent to such Interest Period would be offered by Bank of America's London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 A.M. (London time) two Business Days prior to the commencement of such Interest Period. "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. "Loan Documents" means this Agreement, each Note, each Issuer Document, the Fee Letter, the Guaranty Agreement and each Security Document. "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, financial condition or results of operations of the Borrower and the Subsidiaries taken as a whole. "Material Transaction" shall have the meaning assigned to such term in the definition of Consolidated EBITDA. 12 "Maturity Date" shall mean October 29, 2009. "Non-Recourse Joint Venture" shall mean a Joint Venture the Indebtedness of which is Non-Recourse Joint Venture Indebtedness. "Non-Recourse Joint Venture Indebtedness" shall mean secured or unsecured Indebtedness of a Joint Venture that is non-recourse to the Borrower or any Principal Subsidiary or any of their respective assets or property. In furtherance of the foregoing, an obligation of the Borrower that is non-recourse to the Borrower except to the extent of a pledge of the equity of a Joint Venture (the Indebtedness of which is otherwise non-recourse to the Borrower) will be deemed Non-Recourse Joint Venture Indebtedness. "Note" means a promissory note made by the Borrower in favor of a Lender evidencing Loans made by such Lender, substantially in the form of Exhibit D-1 or D-2, as appropriate. "Obligations" means all advances to, and debts, liabilities, obligations, covenants and duties of, the Borrower arising under any Loan Document or otherwise with respect to any Loan or Letter of Credit, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against the Borrower or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding. "Outstanding Amount" means (i) with respect to Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of such Loans occurring on such date; and (ii) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements by the Borrower of Unreimbursed Amounts. "Participant" has the meaning specified in Section 9.04(d). "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. "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 in effect for such day as publicly announced from time to time by Bank of America as its "prime rate". The "prime rate" is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. 13 "Principal Subsidiaries" shall mean any Subsidiary of the Borrower, whose Consolidated Tangible Assets comprise in excess of 25% of the Consolidated Tangible Assets of the Borrower and its consolidated Subsidiaries as of the date hereof or at any time hereafter. The term "Principal Subsidiaries" shall not include any Non-Recourse Joint Venture. "Ratable Share" of any amount, shall mean, with respect to any Lender at any time, the product of such amount times a fraction the numerator of which is the amount of such Lender's Commitment at such time (or, if the Commitments shall have been terminated pursuant to Section 2.11, 2.12 or 7.01 or if the Commitments have expired, such Lender's Commitment as in effect immediately prior to such termination, giving effect to any subsequent assignments) and the denominator of which is the aggregate amount of all Commitments at such time (or, if the Commitments shall have been terminated pursuant to Section 2.11, 2.12 or 7.01 or if the Commitments have expired, the amount of all Commitments as in effect immediately prior to such termination). "Register" shall have the meaning given such term in Section 9.04(c). "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 more than 50% of the Total Commitment; provided, that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the term "Required Lenders" shall mean Lenders holding in the aggregate more than 50% of the Total Outstandings (with the aggregate amount of each Lender's risk participation and funded participation in L/C Obligations being deemed "held" by such Lender for purposes of this definition); provided, further, that the Commitment of, and the portion of the Total Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders. 14 "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any capital stock or other equity interest of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such capital stock or other equity interest, or on account of any return of capital to the Borrower's stockholders, partners or members (or the equivalent Person thereof). "Securitization Transaction" means (a) any transfer of accounts receivable or interests therein (i) to a trust, partnership, corporation or other entity (other than a Subsidiary), which transfer or pledge is funded by such entity in whole or in part by the issuance to one or more lenders or investors of indebtedness or other securities that are to receive payments principally from the cash flow derived from such accounts receivable or interests in accounts receivable, or (ii) directly to one or more investors or other purchasers (other than any Subsidiary), or (b) any transaction in which the Borrower or a Subsidiary incurs Indebtedness secured by Liens on accounts receivable. The "amount" of any Securitization Transaction shall be deemed at any time to be (A) in the case of a transaction described in clause (a) of the preceding sentence, the aggregate uncollected amount of the accounts receivable transferred pursuant to such Securitization Transaction, net of any such accounts receivable that have been written off as uncollectible, and (B) in the case of a transaction described in clause (b) of the preceding sentence, the aggregate outstanding principal amount of the Indebtedness secured by Liens on accounts receivable Incurred pursuant to such Securitization Transaction. "Security Documents" means, collectively, each security agreement or other instrument or document executed and delivered pursuant to the proviso to Section 6.01 or the proviso to Section 6.02 to secure any of the Obligations. "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. 15 "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 Lenders" shall mean at any time, any Lender that has a Commitment at such time. "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. "Swap Contract" means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender). 16 "Total Commitment" shall mean at any time the aggregate amount of the Lenders' Commitments, as in effect at such time. "Total Indebtedness" means, as of any date, the aggregate principal amount of Indebtedness of the Borrower and its consolidated Subsidiaries outstanding as of such date, in the amount and only to the extent that such Indebtedness would be reflected on a balance sheet prepared as of such date on a consolidated basis in accordance with GAAP, minus the amount of the cash and cash equivalents of the Borrower and its consolidated Subsidiaries in excess of $50,000,000 that would be reflected on such balance sheet; provided, however, that Total Indebtedness shall not include (i) Non-Recourse Joint Venture Indebtedness and (ii) the 5% Company Obligated Mandatorily Redeemable Convertible Preferred Securities due 2036 (the "EPPICS"). "Total Outstandings" means the aggregate Outstanding Amount of all Loans and all L/C Obligations. "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 rate of interest applicable to any Fixed Rate Loan. "Unreimbursed Amount" shall have the meaning assigned to such term in Section 2.20(c)(i). 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. 17 SECTION 1.03. Letter of Credit Amounts Unless otherwise specified, all references herein to the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of Credit that, by its terms or the terms of any Issuer Document related thereto provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time. SECTION 1.04. Times of Day Unless otherwise specified, all references herein to times of day shall be references to Central time (daylight or standard, as applicable). 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, 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 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, subject however, to the conditions that, (a) at no time shall (i) the Total Outstandings exceed the Total Commitment, or (ii) the aggregate Outstanding Amount of the Standby Loans of such Lender, plus such Lender's Ratable Share of the Outstanding Amount of all L/C Obligations exceed such Lender's 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 modified 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 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). 18 (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 or more than four Competitive Borrowings 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 at the Administrative Agent's Office, not later than 1:00 P.M., and the Administrative Agent shall by 3:00 P.M. credit the amounts so received to the general deposit 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. 19 (d) Notwithstanding any other provision of this Agreement, the Interest Period requested by the Borrower with respect to any Borrowing shall not end after the Maturity Date. 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 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 after giving effect to any Competitive Borrowing, the Total Outstandings shall not 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. 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. 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 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 Maturity Date). 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. 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. 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. three Business Days before a proposed Competitive Borrowing, and (B) in the case of Fixed Rate Loans, not later than 9:30 A.M. 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. 20 (c) The Administrative Agent shall promptly notify (but in any event no later than 10:00 A.M. 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. (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. 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. 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. 21 (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. 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. 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. three Business Days before a proposed Borrowing, and (b) in the case of an ABR Borrowing, not later than 11:00 A.M. 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 P.M. 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 and with any Interest Period (if applicable) to one or more Standby Loans of the same or any other Type and with any Interest Period (if applicable) 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. on the third Business Day prior to the date of any proposed Conversion into a Eurodollar Standby Loan and (ii) 11:00 A.M., 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 22 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 month's 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 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, and on the date on which the Commitment of such Lender expires or is otherwise terminated as provided herein, a commitment fee (a "Commitment Fee") at a rate per annum equal to the Applicable Rate from time to time in effect on the actual daily amount by which the Commitment of such Lender exceeds the sum of (i) the aggregate Outstanding Amount of the Loans of such Lender, plus (ii) such Lender's Ratable Share of the Outstanding Amount of all L/C Obligations. All Commitment 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 Commitment Fee due to each Lender shall commence to accrue on the date hereof and shall cease to accrue on the date on which the Commitment of such Lender expires or is otherwise terminated as provided herein. (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 between them. (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. 23 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 Maturity Date, and, in the case of each Standby Loan, on the Maturity Date. 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) 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 D-1 or D-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. 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 or 366 days, as the case may be, 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. 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. 24 (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. 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. on the day of the proposed Conversion). Each determination by the Administrative Agent hereunder shall be conclusive absent manifest error. SECTION 2.11. Changes in 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, (ii) no such termination or reduction shall be made which would, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.12, reduce the Total Commitment to an amount less than Total Outstandings, and (iii) if, after giving effect to any reduction of the Total Commitment, the Letter of Credit Sublimit exceeds the amount of the Total Commitment, such Letter of Credit Sublimit shall be automatically reduced by the amount of such excess. 25 (b) 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 Commitment 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 Commitment Fees on the amount of the Commitments so terminated or reduced will accrue. (c) Unless earlier terminated pursuant to the terms of this Agreement, the Commitment of each Lender shall automatically and permanently terminate on the Maturity Date. (d) Any changes in 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 change 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. three Business Days prior to prepayment, in the case of Eurodollar Loans, and (ii) before 11:00 A.M. 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 without the consent of the applicable Lender. (b) 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. (c) If for any reason the Total Outstandings at any time exceed the Total Commitment then in effect, the Borrower shall immediately prepay Loans and/or Cash Collateralize the L/C Obligations in an aggregate amount equal to such excess; provided, however, that the Borrower shall not be required to Cash Collateralize the L/C Obligations pursuant to this Section 2.12(c) unless after the prepayment in full of the Standby Loans the Total Outstandings exceed the Total Commitment then in effect. 26 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 amounts in respect of Letters of Credit to the Issuing Bank, or any Fees or other amounts payable hereunder (other than changes in respect of taxes imposed on the overall net income of such Lender or the Issuing Bank and franchise taxes imposed on it by the jurisdiction in which such Lender or the Issuing Bank 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 the Issuing Bank, or shall impose on such Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or any Eurodollar Loan or Fixed Rate Loan made by such Lender, or any Letter of Credit or any participation therein, 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 increase the cost of the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest, or otherwise) by an amount deemed by such Lender or the Issuing Bank to be material, then, to the extent not otherwise being reimbursed under Section 2.19 hereof, the Borrower will pay to such Lender or the Issuing Bank, as the case may be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, 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. 27 (c) If any Lender or the Issuing Bank 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 the Issuing Bank (or any lending office of such Lender or the Issuing Bank) or any Lender's or the Issuing Bank'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 or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender pursuant hereto, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or such Lender's holding company or the Issuing Bank or the Issuing Bank's holding company, as the case may be, could have achieved but for such adoption, change, or compliance (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy) by an amount deemed by such Lender or the Issuing Bank to be material, then from time to time the Borrower shall pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (d) A certificate of a Lender or the Issuing Bank setting forth such amount or amounts as shall be necessary to compensate such Lender or the Issuing Bank or its holding company 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 or the Issuing Bank, as the case may be, the amount shown as due on any such certificate delivered by it within 10 days after the receipt of the same. (e) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 45 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the occurrence of the event entitling such Lender or the Issuing Bank to such compensation and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the occurrence of the event entitling such Lender or the Issuing Bank to such compensation is retroactive, then the 45-day period referred to above shall be extended to include the period of retroactive effect thereof (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). 28 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, 29 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 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 redeploying 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 Letter of Credit 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 Commitment Fees shall be made to each Lender (through the Administrative Agent) as set forth in Section 2.06(a). 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. 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 or participation in the L/C Obligations as a result of which the unpaid principal portion of the Standby Loans or L/C Obligations of such Lender shall be proportionately less than the unpaid principal portion of the Standby Loans or L/C Obligations 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 or a 30 participation in the Letters of Credit of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans or the L/C Obligations and participations in the Standby Loans or the Letters of Credit held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans or L/C Obligations then outstanding as the principal amount of its Standby Loans or L/C Obligations prior to such exercise of banker's lien, setoff, or counterclaim or other event was to the principal amount of all Standby Loans or L/C Obligations 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 or a Letter of Credit 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 or Letter of Credit directly to the Borrower in the amount of such participation. SECTION 2.18. Payments; Administrative Agent's Clawback. (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 P.M. on the date when due in Dollars to the Administrative Agent at the Administrative Agent's Office 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. (c) (i) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Standby Borrowing (or in the case of any Standby Borrowings consisting of ABR Loans, prior to 1:00 P.M on the proposed date of such ABR Borrowing) that such Lender will not make available to the Administrative Agent such Lender's share of such Standby Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.02 and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Standby Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and (B) in the case of a payment to be made by the Borrower, the interest rate applicable to ABR Loans. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable Standby Borrowing to the Administrative Agent, then the amount so paid shall constitute such Lender's Standby Loan included in such Standby Borrowing. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent. 31 (ii) Payments by Borrower; Presumptions by Administrative Agent. Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or the Issuing Bank, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation. A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this subsection (b) shall be conclusive, absent manifest error. 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, the Issuing Bank's or any Lender's (or any Transferee's) net income and franchise taxes imposed on the Administrative Agent, the Issuing Bank 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), the Issuing Bank 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), the Issuing Bank 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 party hereto on the date hereof represents and warrants that no Taxes will be incurred on the date hereof in connection with the execution and delivery of this Agreement. 32 (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 respect to, this Agreement (hereinafter referred to as "Other Taxes"). Each Lender party hereto on the date hereof 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), the Issuing Bank 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), the Issuing Bank 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), the Issuing Bank or the Administrative Agent, as the case may be, makes written demand therefor. If a Lender (or Transferee), the Issuing Bank or the Administrative Agent shall become aware that it is entitled to receive a refund in respect of Taxes or 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), the Issuing Bank or the Administrative Agent receives a refund in respect of any Taxes or Other Taxes for which such Lender (or Transferee), the Issuing Bank or the Administrative Agent has received payment from the Borrower hereunder, it shall promptly notify the Borrower of such refund and shall, within 15 days after receipt of such refund, repay such refund to the Borrower, net of all out-of-pocket expenses of such Lender (or Transferee), the Issuing Bank or the Administrative Agent, as the case may be, 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), the Issuing Bank or the Administrative Agent, agrees to return such refund (plus penalties, interest, or other charges) to such Lender (or Transferee), the Issuing Bank or the Administrative Agent, as the case may be, in the event such Lender (or Transferee), the Issuing Bank or the Administrative Agent is required to repay such refund. This subsection shall not be construed to require the Administrative Agent, any Lender or the Issuing Bank to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person. (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), the Issuing Bank 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. 33 (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 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 date hereof (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). 34 (i) If any Lender shall request compensation under this Section 2.19, 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 but with the assignment fee in such instance to be paid by the Borrower) 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. SECTION 2.20. Letters of Credit (a) The Letter of Credit Commitment ------------------------------- (i) Subject to the terms and conditions set forth herein, (A) the Issuing Bank agrees, in reliance upon the agreements of the other Lenders set forth in this Section 2.20, (i) from time to time on any Business Day during the period from the Effective Date until the Letter of Credit Expiration Date, to issue Letters of Credit for the account of the Borrower or certain Subsidiaries, and to amend or extend Letters of Credit previously issued by it, in accordance with Section 2.20(b), and (ii) to honor drawings under the Letters of Credit; and (B) the Standby Lenders severally agree to participate in Letters of Credit issued for the account of the Borrower or its Subsidiaries and any drawings thereunder; provided that after giving effect to any L/C Credit Extension with respect to any Letter of Credit, (x) the Total Outstandings shall not exceed the Total Commitment, (y) the aggregate Outstanding Amount of the Standby Loans of any Lender, plus such Lender's Ratable Share of the Outstanding Amount of all L/C Obligations, shall not exceed such Lender's Commitment, and (z) the Outstanding Amount of the L/C Obligations shall not exceed the Letter of Credit Sublimit. Each request by the Borrower for the issuance or amendment of a Letter of Credit shall be deemed to be a representation by the Borrower that the L/C Credit Extension so requested complies with the conditions set forth in the proviso to the preceding sentence. Within the foregoing limits, and subject to the terms and conditions hereof, the Borrower's ability to obtain Letters of Credit shall be fully revolving, and accordingly the Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed. (ii) The Issuing Bank shall not issue any Letter of Credit if: (A) subject to Section 2.20(b)(iii), the expiry date of such requested Letter of Credit would occur more than twelve months after the date of issuance or last extension, unless the Required Lenders have approved such expiry date; or 35 (B) the expiry date of such requested Letter of Credit would occur after the Letter of Credit Expiration Date, unless all the Lenders have approved such expiry date. (iii) The Issuing Bank shall not be under any obligation to issue any Letter of Credit if: (A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Bank from issuing such Letter of Credit, or any Law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) not in effect on the Effective Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Effective Date and which the Issuing Bank in good faith deems material to it; (B) the issuance of such Letter of Credit would violate any Laws or one or more policies of the Issuing Bank; (C) except as otherwise agreed by the Administrative Agent and the Issuing Bank, such Letter of Credit is in an initial stated amount less than $100,000; (D) such Letter of Credit is to be denominated in a currency other than Dollars; (E) such Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder; or (F) a default of any Lender's obligations to fund under Section 2.20(c) exists or any Lender is at such time a Defaulting Lender hereunder, unless the Issuing Bank has entered into satisfactory arrangements with the Borrower or such Lender to eliminate the Issuing Bank's risk with respect to such Lender. (iv) The Issuing Bank shall not amend any Letter of Credit if the Issuing Bank would not be permitted at such time to issue such Letter of Credit in its amended form under the terms hereof. (v) The Issuing Bank shall be under no obligation to amend any Letter of Credit if (A) the Issuing Bank would have no obligation at such time to issue such Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of such Letter of Credit does not accept the proposed amendment to such Letter of Credit. 36 (vi) The Issuing Bank shall act on behalf of the Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and the Issuing Bank shall have all of the benefits and immunities (A) provided to the Administrative Agent in Article VIII with respect to any acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit issued by it or proposed to be issued by it and Issuer Documents pertaining to such Letters of Credit as fully as if the term "Administrative Agent" as used in Article VIII included the Issuing Bank with respect to such acts or omissions, and (B) as additionally provided herein with respect to the Issuing Bank (b) Procedures for Issuance and Amendment of Letters of Credit; Auto-Extension Letters of Credit. (i) Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Borrower delivered to the Issuing Bank (with a copy to the Administrative Agent) in the form of a Letter of Credit Application, appropriately completed and signed by a Financial Officer of the Borrower. Such Letter of Credit Application must be received by the Issuing Bank and the Administrative Agent not later than 11:00 A.M. at least two Business Days (or such later date and time as the Administrative Agent and the Issuing Bank may agree in a particular instance in their sole discretion) prior to the proposed issuance date or date of amendment, as the case may be. In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail reasonably satisfactory to the Issuing Bank: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; and (G) such other matters as the Issuing Bank may reasonably require. In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail reasonably satisfactory to the Issuing Bank (A) the Letter of Credit to be amended; (B) the proposed date of amendment thereof (which shall be a Business Day); (C) the nature of the proposed amendment; and (D) such other matters as the Issuing Bank may reasonably require. Additionally, the Borrower shall furnish to the Issuing Bank and the Administrative Agent such other documents and information pertaining to such requested Letter of Credit issuance or amendment, including any Issuer Documents, as the Issuing Bank or the Administrative Agent may reasonably require. (ii) Promptly after receipt of any Letter of Credit Application, the Issuing Bank will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy of such Letter of Credit Application from the Borrower and, if not, the Issuing Bank will provide the Administrative Agent with a copy thereof. Unless the Issuing Bank has received written notice from any Lender, the Administrative Agent or the Borrower, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions contained in Article IV shall not then be satisfied, then, subject to the terms and conditions hereof, the Issuing Bank shall, on the requested date, issue a Letter of Credit for the account of the Borrower (or the applicable Subsidiary) or enter into the applicable amendment, as the case may be, in each case in accordance with the Issuing Bank's usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Standby Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank a risk participation in such Letter of Credit in an amount equal to the product of such Lender's Ratable Share times the amount of such Letter of Credit. 37 (iii) If the Borrower so requests in any applicable Letter of Credit Application, the Issuing Bank may, in its reasonable discretion, agree to issue a Letter of Credit that has automatic extension provisions (each, an "Auto-Extension Letter of Credit"); provided that any such Auto-Extension Letter of Credit must permit the Issuing Bank to prevent any such extension at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the "NonExtension Notice Date") in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued. Unless otherwise directed by the Issuing Bank, the Borrower shall not be required to make a specific request to the Issuing Bank for any such extension. Once an Auto-Extension Letter of Credit has been issued, the Lenders shall be deemed to have authorized (but may not require) the Issuing Bank to permit the extension of such Letter of Credit at any time to an expiry date not later than the Letter of Credit Expiration Date; provided, however, that the Issuing Bank shall not permit any such extension if (A) the Issuing Bank has reasonably determined that it would not be permitted, or would have no obligation at such time to issue such Letter of Credit in its revised form (as extended) under the terms hereof (by reason of the provisions of clauses (ii) or (iii) of Section 2.20(a) or otherwise), or (B) it has received notice (which may be by telephone or in writing) on or before the day that is five Business Days before the NonExtension Notice Date (1) from the Administrative Agent that the Required Lenders have elected not to permit such extension or (2) from the Administrative Agent, any Lender or the Borrower that one or more of the applicable conditions specified in Section 4.01 is not then satisfied, and in each such case directing the Issuing Bank not to permit such extension. (iv) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, the Issuing Bank will also deliver to the Borrower and the Administrative Agent a true and complete copy of such Letter of Credit or amendment. (v) To the extent requested to do so by any Lender, the Issuing Bank shall provide such Lender with a quarterly report of L/C Outstandings. 38 (c) Drawings and Reimbursements; Funding of Participations. (i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Borrower and the Administrative Agent thereof. Not later than 11:00 A.M. on the date of any payment by the Issuing Bank under a Letter of Credit (each such date, an "Honor Date"), the Borrower shall reimburse the Issuing Bank through the Administrative Agent in an amount equal to the amount of such drawing. If the Borrower fails to so reimburse the Issuing Bank by such time, the Administrative Agent shall promptly notify each Standby Lender of the Honor Date, the amount of the unreimbursed drawing (the "Unreimbursed Amount"), and the amount of such Standby Lender's Ratable Share thereof. In such event, the Borrower shall be deemed to have requested a Standby Borrowing of ABR Loans to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and multiples specified in Section 2.02 for the principal amount of ABR Loans, but subject to the amount of the unutilized portion of the Commitments and the conditions set forth in Section 4.01 (other than the delivery of a notice pursuant to Section 4.01(a)). Any notice given by the Issuing Bank or the Administrative Agent pursuant to this Section 2.20(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice. (ii) Each Standby Lender shall upon any notice pursuant to Section 2.20(c)(i) make funds available to the Administrative Agent for the account of the Issuing Bank at the Administrative Agent's Office in an amount equal to its Ratable Share of the Unreimbursed Amount not later than 1:00 P.M. on the Business Day specified in such notice by the Administrative Agent, whereupon, subject to the provisions of Section 2.20(c)(iii), each Standby Lender that so makes funds available shall be deemed to have made a ABR Standby Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the Issuing Bank. (iii) With respect to any Unreimbursed Amount that is not fully refinanced by a Standby Borrowing of ABR Loans because the conditions set forth in Section 4.01 cannot be satisfied or for any other reason, the Borrower shall be deemed to have incurred from the Issuing Bank an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the rate specified in Section 2.09. In such event, each Standby Lender's payment to the Administrative Agent for the account of the Issuing Bank pursuant to Section 2.03(c)(ii) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.20. (iv) Until each Standby Lender funds its Standby Loan or L/C Advance pursuant to this Section 2.20(c) to reimburse the Issuing Bank for any amount drawn under any Letter of Credit, interest in respect of such Lender's Ratable Share of such amount shall be solely for the account of the Issuing Bank. (v) Each Standby Lender's obligation to make Standby Loans or L/C Advances to reimburse the Issuing Bank for amounts drawn under Letters of Credit, as contemplated by this Section 2.20(c), shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Issuing Bank, the Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided, however, that each Standby Lender's obligation to make Standby Loans pursuant to this Section 2.20(c) is subject to the conditions set forth in Section 4.01 (other than delivery by the Borrower of notice pursuant to Section 4.01(a)). No such making of an L/C Advance shall relieve or otherwise impair the obligation of the Borrower to reimburse the Issuing Bank for the amount of any payment made by the Issuing Bank under any Letter of Credit, together with interest as provided herein. 39 (vi) If any Standby Lender fails to make available to the Administrative Agent for the account of the Issuing Bank any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.20(c) by the time specified in Section 2.20(c)(ii), the Issuing Bank shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Issuing Bank at a rate per annum equal to the greater of the Federal Funds Effective Rate and a rate determined by the Issuing Bank in accordance with banking industry rules on interbank compensation. A certificate of the Issuing Bank submitted to any Standby Lender (through the Administrative Agent) with respect to any amounts owing under this Section 2.20(c)(vi) shall be conclusive absent manifest error. (d) Repayment of Participations. (i) At any time after the Issuing Bank has made a payment under any Letter of Credit and has received from any Standby Lender such Lender's L/C Advance in respect of such payment in accordance with Section 2.20(c), if the Administrative Agent receives for the account of the Issuing Bank any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from the Borrower or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent), the Administrative Agent will distribute to such Lender its Ratable Share thereof (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lender's L/C Advance was outstanding) in the same funds as those received by the Administrative Agent. (ii) If any payment received by the Administrative Agent for the account of the Issuing Bank pursuant to Section 2.20(c)(i) is required to be returned under any of the circumstances described in Section 9.17 (including pursuant to any settlement entered into by the Issuing Bank in its discretion), each Lender shall pay to the Administrative Agent for the account of the Issuing Bank its Ratable Share thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Effective Rate from time to time in effect. The obligations of the Lenders under this clause shall survive the payment in full of the Loans and other obligations hereunder and the termination of this Agreement. 40 (e) Obligations Absolute. The obligation of the Borrower to reimburse the Issuing Bank for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following: (i) any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Issuer Documents; (ii) the existence of any claim, counterclaim, setoff, defense or other right that the Borrower or any Subsidiary may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit; (iv) any payment by the Issuing Bank under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the Issuing Bank under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or (v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or any Subsidiary. The Borrower shall within a reasonable time examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with the Borrower's instructions or other irregularity, the Borrower will notify the Issuing Bank within a reasonable time period (not to exceed two Business Days of receipt of such copy). The Borrower shall be conclusively deemed to have waived any such claim against the Issuing Bank and its correspondents unless such notice is given as aforesaid. (f) Role of Issuing Bank. Each Lender and the Borrower agree that, in paying any drawing under a Letter of Credit, the Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. Neither the Issuing Bank, nor the Administrative Agent, nor their respective Affiliates, directors, officers, employees, agents or advisors, nor any correspondent, participant or assignee of the Issuing Bank shall be liable to any Lender for (i) any action taken or omitted in connection 41 herewith at the request or with the approval of the Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Issuer Document. The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Borrower's pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. Neither the Issuing Bank, nor the Administrative Agent, nor their respective Affiliates, directors, officers, employees, agents or advisors, nor any correspondent, participant or assignee of the Issuing Bank shall be liable or responsible for any of the matters described in clauses (i) through (v) of Section 2.20(e); provided, however, that anything in such clauses to the contrary notwithstanding, the Borrower may have a claim against the Issuing Bank, and the Issuing Bank may be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by the Issuing Bank's willful misconduct or gross negligence or the Issuing Bank's willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and the Issuing Bank shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason. (g) Upon the request of the Administrative Agent, (i) if the Issuing Bank has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Borrowing, or (ii) if, as of the Letter of Credit Expiration Date, any L/C Obligation for any reason remains outstanding, the Borrower shall, in each case, immediately Cash Collateralize the then Outstanding Amount of all L/C Obligations. Sections 2.12(c), and 7.01 set forth certain additional requirements to deliver Cash Collateral hereunder. For purposes of this Section 2.20, Section 2.12(c) and Section 7.01, "Cash Collateralize" means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of the Issuing Bank and the Lenders, as collateral for the L/C Obligations, cash or deposit account balances pursuant to documentation in form and substance satisfactory to the Administrative Agent and the Issuing Bank (which documents are hereby consented to by the Lenders). Derivatives of such term have corresponding meanings. The Borrower hereby grants to the Administrative Agent, for the benefit of the Issuing Bank and the Lenders, a security interest in all such cash, deposit accounts and all balances therein and all proceeds of the foregoing (collectively, the "Cash Collateral"). The Cash Collateral shall be maintained in the L/C Cash Deposit Account. (h) Applicability of ISP and UCP. Unless otherwise expressly agreed by the Issuing Bank and the Borrower when a Letter of Credit is issued (i) the rules of the ISP shall apply to each standby Letter of Credit, and (ii) the rules of the Uniform Customs and Practice for Documentary Credits, as most recently published by the International Chamber of Commerce at the time of issuance shall apply to each commercial Letter of Credit. 42 (i) Letter of Credit Fees. The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Ratable Share a Letter of Credit fee (the "Letter of Credit Fee") for each Letter of Credit equal to the Applicable Rate times the daily maximum amount available to be drawn under such Letter of Credit; provided, that, for the purpose of distributing the Letter of Credit Fee, the Commitment of, and portion of L/C Obligations held or deemed held by, any Defaulting Lender shall be deemed held by the Issuing Bank and the Letter of Credit Fee otherwise payable to such Lender shall be payable instead to the Issuing Bank until such Lender is no longer a Defaulting Lender. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.03. Letter of Credit Fees shall be (i) computed on a quarterly basis in arrears and (ii) due and payable on the first Business Day after the end of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand. If there is any change in the Applicable Rate during any quarter, the daily amount available to be drawn under each standby Letter of Credit shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. Notwithstanding anything to the contrary contained herein, upon the request of the Required Lenders, while any Event of Default exists, all Letter of Credit Fees shall accrue at a rate equal to the Applicable Rate plus 2% per annum. (j) Fronting Fee and Documentary and Processing Charges Payable to Issuing Bank. The Borrower shall pay directly to the Issuing Bank for its own account a fronting fee (i) with respect to each commercial Letter of Credit, at the rate equal to 0.25%, computed on the amount of such Letter of Credit, and payable upon the issuance thereof, (ii) with respect to any amendment of a commercial Letter of Credit increasing the amount of such Letter of Credit, at a rate separately agreed between the Borrower and the Issuing Bank, computed on the amount of such increase, and payable upon the effectiveness of such amendment, and (iii) with respect to each standby Letter of Credit, at the rate per annum equal to 0.25%, computed on the daily amount available to be drawn under such Letter of Credit and on a quarterly basis in arrears, and due and payable on the first Business Day after the end of each March, June, September and December, commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.03. In addition, the Borrower shall pay directly to the Issuing Bank for its own account the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the Issuing Bank relating to letters of credit as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable. (k) Conflict with Issuer Documents. In the event of any conflict between the terms hereof and the terms of any Issuer Document, the terms hereof shall control. (l) Letters of Credit Issued for Subsidiaries. Notwithstanding that a Letter of Credit issued or outstanding hereunder is in support of any obligations of, or is for the account of, a Subsidiary, the Borrower shall be obligated to reimburse the Issuing Bank hereunder for any and all drawings under such Letter of Credit. The Borrower hereby acknowledges that the issuance of Letters of Credit for the account of Subsidiaries inures to the benefit of the Borrower, and that the Borrower's business derives substantial benefits from the businesses of such Subsidiaries. 43 ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Administrative Agent, the Issuing Bank and 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. The Borrower's execution, delivery and performance of the Loan Documents are within its corporate powers, have been duly authorized by all necessary action and do not violate or create a default under (A) law, (B) its constituent documents, or (C) any contractual provision binding upon it, except to the extent (in the case of violations or defaults described under clauses (A) or (C)) where such violation or default would not reasonably be expected to result in a Material Adverse Effect. Each of the Loan Documents 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, including an implied covenant of good faith and fair dealing). (b) Except for (i) any Governmental Approvals required in connection with any Borrowings (such approvals being "Borrowing Approvals") and (ii) any Governmental Approvals the failure to obtain which could not reasonably be expected to result in a Material Adverse Effect or affect the validity or enforceability of this Agreement or any other Loan Document, all Governmental Approvals required in connection with the execution and delivery by the Borrower of this Agreement and the other Loan Documents and the performance by the Borrower of its obligations hereunder and thereunder have been, and, prior to the time of any Borrowing, all Borrowing Approvals will be, duly obtained, are (or, in the case of Borrowing Approvals, will be) 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 (or, in the case of Borrowing Approvals, will not be) the subject of any pending appeal, stay or other challenge. 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. 44 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, 2003, 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 financial condition, results of operations, business, assets or operations of the Borrower and the Subsidiaries taken as a whole (it being understood that the consummation or dissolution of a Joint Venture Transaction, the incurrence of Non-Recourse Joint Venture Indebtedness or the consummation of an Asset Exchange shall not constitute such a material adverse change). 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 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 any other Loan Document, (ii) may reasonably be expected to have a material adverse effect on the ability of the Borrower to perform any of its obligations under this Agreement or any other Loan Document or on the rights of or benefits available to the Lenders under this Agreement or any other Loan Document or (iii) except as disclosed in the Borrower's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 or the Borrower's Quarterly Reports on Form 10-Q for the periods ending March 31, 2004 and June 30, 2004, may reasonably be expected to have a Material Adverse Effect. 45 (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 has 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. 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. 46 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 Loans only for general corporate purposes, including working capital and support of commercial paper issuances and Securitization Transactions permitted hereunder as well as one or more Joint Venture Transactions, acquisitions or Asset Exchanges; provided, however, that no such proceeds shall be used (i) to make any Restricted Payment, or (ii) directly or indirectly in connection with any Hostile Acquisition. 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 (i) 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 and (ii) where such failure to file or pay would not reasonably be expected to result in a Material Adverse Effect. 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 any other Loan Document or included herein or therein or delivered pursuant hereto or thereto 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. 47 (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. 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. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. Each Borrowing and Issuance. The obligation of each Lender to make a Loan on the occasion of any Borrowing, including any Conversion pursuant to Section 2.05 and the obligation of the Issuing Bank to make any L/C Credit Extension, is subject to the satisfaction of the following conditions: (a) The Administrative Agent shall have received a notice of such Borrowing or L/C Credit Extension as required by Section 2.03, 2.04, 2.05 or 2.20 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 or such L/C Credit Extension 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 in which case they shall be true and correct as of such earlier date; (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 or L/C Credit Extension (as the case may be), no Event of Default or Default shall have occurred and be continuing; and each Borrowing and each L/C Credit Extension shall be deemed to constitute a representation and warranty by the Borrower on the date of such Borrowing or L/C Credit Extension (as the case may be) 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 or the Issuing Bank to make any L/C Credit Extension 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): 48 (a) 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 C hereto, and the Borrower hereby instructs such counsel to deliver such opinion to the Administrative Agent; (b) All legal matters incident to this Agreement and the borrowings hereunder shall be satisfactory to the Administrative Agent and the Lenders; (c) 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 clause (ii) above; (iv) irrevocable notices from the Borrower requesting termination of the "Total Commitment" under each of the Existing Facilities effective automatically on the Effective Date and (v) such other documents as the Administrative Agent or the Lenders may reasonably request; (d) 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; (e) The Administrative Agent shall have received all Fees and other amounts due and payable on or prior to the Effective Date; and (f) All "Commitments" (as defined in each of the Existing Facilities) under the Existing Facilities shall have been terminated in accordance with the terms thereof and all "Loans" (as defined in each of the Existing Facilities) outstanding thereunder shall have been repaid or prepaid together with accrued interest thereon and all other amounts payable to the "Lenders" (as defined in each of the Existing Facilities) under the Existing Facilities. 49 ARTICLE V AFFIRMATIVE COVENANTS The Borrower covenants and agrees with the Administrative Agent, the Issuing Bank 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, or any Letter of Credit shall remain outstanding, 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, except in connection with a Joint Venture Transaction or an Asset Exchange, 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, except in connection with a Joint Venture Transaction or an Asset Exchange; (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 validity or amount thereof is being disputed in good faith, and the Borrower has maintained adequate reserves with respect thereto, in each case where the failure to so pay would be reasonably expected to cause a Material Adverse Effect; (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 in all material respects; (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 a Joint Venture Transaction or an Asset Exchange; 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; 50 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 LLP 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 (commencing with the fiscal quarter ended September 30, 2004), 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; (c) concurrently with any delivery of financial statements under paragraph (a) or (b) of this Section, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto and (ii) setting forth reasonably detailed calculations (including with respect to any pro forma effect given to a Material Transaction) demonstrating compliance with Section 6.07 as of the last day of the most recent fiscal quarter covered by such financial statements; (d) 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; 51 (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. Documents required to be delivered pursuant to Section 5.02(a), (b) or (d) (to the extent any such documents are included in materials otherwise filed with the Securities and Exchange Commission (or any successor thereto)) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower's on the Internet at the website address listed in Schedule 9.01; or (ii) on which such documents are posted on the Borrower's behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the compliance certificates required by Section 5.02(c) to the Administrative Agent. Except for such compliance certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents. 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 written 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; and 52 (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. SECTION 5.04. Maintaining Records. Maintain all financial records in accordance with GAAP and, upon reasonable notice, permit the Administrative Agent and each 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 the Administrative Agent or 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 representative shall be appointed by Lenders holding at least 50% of the aggregate outstanding principal balance of the Loans to exercise the rights granted to the Lenders under this Section 5.04.; provided, further, that when an Event of Default exists the Administrative Agent or any Lender may do any of the foregoing, upon reasonable notice, at any time during normal business hours (without appointment of a single representative by the Lenders). SECTION 5.05. Use of Proceeds. Use the proceeds of the Loans only for general corporate purposes, including working capital and support of commercial paper issuances and Securitization Transactions permitted hereunder as well as one or more Joint Venture Transactions, acquisitions or Asset Exchanges; provided, however, that no such proceeds shall be used (i) to make any Restricted Payment, or (ii) directly or indirectly in connection with any Hostile Acquisition. ARTICLE VI NEGATIVE COVENANTS The Borrower covenants and agrees with each Lender, the Issuing Bank 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 or any Letter of Credit shall remain outstanding, it will not: SECTION 6.01. Liens; Restrictions on Sales of Receivables. 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, or sell or assign any accounts receivable (other than in the ordinary course of business substantially in accordance with the Borrower's past practice), 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) pledges or deposits to secure the utility obligations of the Borrower incurred in the ordinary course of 53 business; (c) 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; (d) Liens on the assets of any Principal Subsidiary to secure the repayment of project financing for such Principal Subsidiary; (e) 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; (f) Liens for taxes, assessments and governmental charges or levies, which are not yet due or are which are being contested in good faith by appropriate proceedings; (g) Liens securing Indebtedness of the Borrower or any Principal Subsidiary to the Rural Electrification Administration, the Rural Utilities Service or the Rural Telephone Bank (or any successor to any such agency); (h) carriers', warehousemen's, mechanics', materialmen's, repairmen's, suppliers or other like Liens arising in the ordinary course of business relating to obligations not overdue for a period of more than 60 days or which are bonded or being contested in good faith by appropriate proceedings; (i) pledges or deposits in connection with workers' compensation laws or similar legislation or to secure public or statutory obligations; (j) Liens incurred on deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (k) easements, rights of way, restrictions and other encumbrances incurred which, in the aggregate, do not materially interfere with the ordinary conduct of business; (l) restrictions by Governmental Authorities on the operations, business or assets of the Borrower or its Subsidiaries that are customary in the Borrower's and its Subsidiaries' businesses; (m) sales of accounts receivable pursuant to, and Liens existing or deemed to exist in connection with, any Securitization Transactions, provided the aggregate amount of all such Securitization Transactions shall not at any time exceed $150,000,000; and (n) other Liens securing Indebtedness outstanding in an aggregate principal amount not to exceed $25,000,000; 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 (n)) on its assets so long as such Liens equally and ratably secure the Obligations pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent. 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 (a) to another Subsidiary, (b) in connection with a Joint Venture Transaction or (c) in connection with an Asset Exchange; provided, however, that the Borrower may pledge any shares of common stock, voting stock, or stock convertible into voting or common stock of any Principal Subsidiary so long as such pledge equally and ratably secures the Obligations pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent. SECTION 6.03. Asset Sales. Except in connection with a Joint Venture Transaction or an Asset Exchange, permit any Principal Subsidiary to sell, assign, or otherwise dispose of telecommunications assets (whether in one transaction or a series of transactions), if the net, after-tax proceeds thereof are used by the Borrower or any Subsidiary to prepay (other than a mandatory prepayment in accordance with the terms of the applicable governing documents, including pursuant to any put provision) Indebtedness incurred after the date hereof which Indebtedness has a maturity later than the Maturity Date (other than bridge or other financings incurred in connection with an asset purchase or sale, including acquisition indebtedness or indebtedness of an acquired entity or indebtedness incurred to refinance indebtedness outstanding as of the date hereof). 54 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 in connection with an Asset Exchange, 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. (a) 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. (b) In the case of the Borrower only, declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, in each case if any Event of Default has occurred and is continuing at the time of such action or will result therefrom (but excluding the payment of dividends declared and announced by the Board of Directors at a time when no Event of Default existed). SECTION 6.06. Transactions with Affiliates. Except in connection with a Joint Venture Transaction or an Asset Exchange, 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 (i) 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, (ii) as otherwise may be required by any Federal or state Governmental Authority, or (iii) so long as such transactions are not materially disadvantageous to the Borrower. 55 SECTION 6.07. Financial Ratio Permit the Leverage Ratio on any date prior to the Maturity Date to be greater than 4.5:1. SECTION 6.08. Guarantees Permit any Subsidiary to enter into, directly or indirectly, any Guarantee of any Indebtedness of the Borrower or any Subsidiary unless the Obligations are Guaranteed on a pari passu basis pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent, except (i) any Guarantee in effect at the time such Subsidiary becomes a Subsidiary of the Borrower, so long as such Guarantee was not entered into solely in contemplation of such Person becoming a Subsidiary of the Borrower, (ii) any Guarantee in effect as of the Effective Date that is listed on Schedule 6.08, and (iii) additional Guarantees aggregating not more than $25,000,000 at any one time outstanding. ARTICLE VII EVENTS OF DEFAULT SECTION 7.01. 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 any Loan Document or the Borrowings or any L/C Credit Extension hereunder or thereunder, 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 or any Loan Document, 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) or any L/C Obligation when and as the same shall become due and payable, whether at the due date thereof or at a date fixed 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 L/C Obligation, 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; 56 (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 or any other Loan Document (other than those specified in (b), (c), or (d) above) 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 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 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 (x) $75,000,000 in the aggregate, with respect to any Indebtedness issued on a tax-exempt basis, and (y) $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, pursuant to any put right (or similar right) of the holder thereof, or by 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; or there occurs under any Swap Contract an Early Termination Date (as defined in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which the Borrower or any Principal Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (B) any Termination Event (as so defined) under such Swap Contract as to which the Borrower or any Principal Subsidiary is an Affected Party (as so defined) and, in either event, the Swap Termination Value owed by the Borrower or such Subsidiary as a result thereof is greater than $50,000,000; 57 (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; or (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 any obligation of the Issuing Bank to make L/C Credit Extensions, (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, 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, (iii) require that the Borrower Cash Collateralize the L/C Obligations (in an amount equal to the then Outstanding Amount thereof); and in any event with respect to the Borrower described in paragraph (f) or (g) above, the Commitments and the obligation of the Issuing Bank to make L/C Credit Extensions 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, and the obligation of the Borrower to Cash Collateralize the L/C Obligations as aforesaid shall automatically become due and payable, in each case without further act of the Administrative Agent or any Lender and 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. 58 SECTION 7.02. Application of Funds After the exercise of remedies provided for in Section 7.01 (or after the Loans have automatically become immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in Section 7.01), any amounts received on account of the Obligations shall be applied by the Administrative Agent in the following order: First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Section 2.19) payable to the Administrative Agent in its capacity as such; Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders and the Issuing Bank (including fees, charges and disbursements of counsel to the respective Lenders and the Issuing Bank and amounts payable under Sections 2.15 and 2.19), ratably among them in proportion to the amounts described in this clause Second payable to them; Third, to payment of that portion of the Obligations constituting accrued and unpaid interest on the Loans, L/C Borrowings and other Obligations, ratably among the Lenders and the Issuing Bank in proportion to the respective amounts described in this clause Third payable to them; Fourth, to payment of that portion of the Obligations constituting unpaid principal of the Loans and L/C Borrowings, ratably among the Lenders and the Issuing Bank in proportion to the respective amounts described in this clause Fourth held by them; Fifth, to the Administrative Agent for the account of the Issuing Bank, to Cash Collateralize that portion of L/C Obligations comprised of the aggregate undrawn amount of Letters of Credit; and Last, the balance, if any, after all of the Obligations have been paid in full, to the Borrower or as otherwise required by applicable law. Subject to Section 2.20(c), amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above. ARTICLE VIII THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, Bank of America, is hereby appointed to act as Administrative Agent on behalf of the Lenders and the Issuing Bank. Each of the Lenders, each Transferee and the Issuing Bank by its agreement to be bound hereby, irrevocably authorizes the Administrative Agent to take such actions on behalf of such Lender, Transferee or the Issuing Bank 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 and the Issuing Bank, 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. 59 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 or the Issuing Bank 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 (or such other number of Lenders as is expressly required hereby with respect to such action or inaction) 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 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. 60 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 the Required 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 and 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. Any resignation by Bank of America as Administrative Agent pursuant to this Section shall also constitute its resignation as Issuing Bank. Upon the acceptance of a successor's appointment as Administrative Agent hereunder, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Issuing Bank, (b) the retiring Issuing Bank shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents, and (c) the successor Issuing Bank shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangement satisfactory to the retiring Issuing Bank to effectively assume the obligations of the retiring Issuing Bank with respect to such Letters of Credit. 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 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, 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 or any of them 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. 61 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 "syndication agent" or "co-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 "syndication 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. (a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows: (i) if to the Borrower, the Administrative Agent or the Issuing Bank, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 9.01; and (ii) if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire. Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b). 62 (b) Electronic Communications. Notices and other communications to the Lenders and the Issuing Bank hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or the Issuing Bank pursuant to Article II if such Lender or the Issuing Bank, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor. (c) Change of Address, Etc. Each of the Borrower, the Administrative Agent and the Issuing Bank may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower, the Administrative Agent and the Issuing Bank. (d) Reliance by Administrative Agent, Issuing Bank and Lenders. The Administrative Agent, the Issuing Bank and the Lenders shall be entitled to rely and act upon any notices (including telephonic Standby Borrowing Requests) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Administrative Agent, the Issuing Bank, each Lender, their Affiliates and each of their respective partners, directors, officers, employees, agents and advisors from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording. 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 and the making of each L/C Credit Extension, 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 or any Letter of Credit is outstanding and unpaid or so long as the Commitments have not been terminated. 63 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 permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Administrative Agent, the Issuing Bank, the Lenders and each of their respective Affiliates and the partners, directors, officers, employees, agents and advisors of such Person and of such Person's Affiliates) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b), participations in L/C Obligations) at the time owing to it); provided that (i) except in the case of an assignment of the entire remaining amount of the assigning Lender's Commitment and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender, (x) the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $10,000,000, and (y) the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) of the assigning Lender immediately after the effectiveness of such assignment or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender immediately after the effectiveness of such assignment, shall not be less than $10,000,000; 64 (ii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loans or the Commitment assigned, except that this clause (ii) shall not apply to rights in respect of Competitive Loans; (iii) any assignment of a Commitment must be approved by the Administrative Agent and the Issuing Bank unless the Person that is the proposed assignee is itself a Lender (whether or not the proposed assignee would otherwise qualify as an Eligible Assignee); and (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500, and the Eligible Assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire. Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the Eligible Assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the 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 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section. (c) The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at the Administrative Agent's Office a copy of each Assignment and Assumption 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 and its participation in Letters of Credit, 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 Maturity Date and shall update the Register from time to time upon any change in a Lender's Commitment and Loans and its participation in Letters of Credit 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, any Lender and the Issuing Bank, at any reasonable time and from time to time upon reasonable prior notice. 66 (d) Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person or the Borrower or any of the Borrower's Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of such Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender's participations in L/C Obligations) owing to it); provided 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 and (iii) the Borrower, the Administrative Agent, the Lenders and the Issuing Bank shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 9.08(b) that affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.13, 2.15 and 2.19 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.05 as though it were a Lender, provided such Participant agrees to be subject to Section 2.16 as though it were a Lender. (e) A Participant shall not be entitled to receive any greater payment under Sections 2.13, 2.15 and 2.19 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.19 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.19(f) as though it were a Lender. (f) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. 66 (g) The words "execution," "signed," "signature," and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act. (h) Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Commitment and Loans pursuant to subsection (b) above, Bank of America may, subject to the appointment and acceptance of a successor Issuing Bank as provided below, resign as Issuing Bank. In the event of any such resignation as Issuing Bank, the Borrower shall be entitled to appoint from among the Lenders, subject to acceptance of such appointment by such Lender, a successor Issuing Bank hereunder. If no successor shall have been so appointed by the Borrower and shall have accepted such appointment within 20 Business Days after the retiring Issuing Bank gives notice of its resignation, then the Required Lenders shall have the right to appoint a successor, subject to the approval of the Borrower (which approval shall not be unreasonably withheld or delayed). 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 Issuing Bank gives notice of its resignation, then the retiring Issuing Bank may, on behalf of the Lenders, appoint a successor Issuing Bank from the Lenders, subject to the approval of the Borrower (which approval shall not be unreasonably withheld or delayed); provided, however, that no failure by such Lender to accept such appointment or obtain such approval shall affect the resignation of Bank of America as Issuing Bank. If Bank of America resigns as Issuing Bank, it shall retain all the rights and obligations of the Issuing Bank hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as Issuing Bank and all L/C Obligations with respect thereto (including the right to require the Lenders to make Standby ABR Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.20(c)). Notwithstanding any provision of this Agreement to the contrary, Bank of America shall not have any obligation to make any L/C Credit Extension at any time after notice of its intended resignation hereunder is delivered to the Borrower 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 (including reasonable fees and disbursements of counsel subject to limits agreed to by the Administrative Agent and the Borrower) and (ii) all out-of-pocket expenses incurred by the Administrative Agent, the Issuing Bank and any Lender in connection with any amendments, modifications or waivers of the provisions hereof or thereof or incurred by the Administrative Agent, the Issuing Bank or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement. 67 (b) The Borrower agrees to indemnify the Administrative Agent, the Issuing Bank, 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) any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit) or (ii) any claim, litigation, investigation, or proceeding relating to this Agreement, any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit) 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 gross 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 applicable Indemnitee 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 Indemnitee to be satisfactory and effective to protect against such claim without causing damage to the conduct of, or affecting such Indemnitee's control of, such Indemnitee's defense. The Borrower shall inform such Indemnitee of its intention to participate in the defense of such claim within 15 days after receipt of notice thereof from such Indemnitee. In the case of an investigation, litigation or proceeding to which the indemnity in this section applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, the Borrower's equity holders or creditors or an Indemnitee, whether or not an Indemnitee is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Borrower further agrees that no Indemnitee shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Borrower or its Subsidiaries or Affiliates or their respective equity holders or creditors arising out of, related to or in connection with any aspect of the transactions contemplated hereby, except to the extent of direct, as opposed to special, indirect, consequential or punitive, damages determined in a final nonappealable judgment by a court of competent jurisdiction to have resulted from such Indemnitee's gross negligence or willful misconduct. (c) Each Lender severally agrees to indemnify the Issuing Bank (to the extent not promptly reimbursed by the Borrower) in the amount of its pro rata share (based on its Commitment hereunder or, if the Commitments shall have terminated, based on its outstanding Loans hereunder) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against the Issuing Bank in any way relating to or arising out of this Agreement or any action taken or omitted by the Issuing Bank hereunder or in connection herewith; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or willful misconduct of the Issuing Bank or any of its directors, officers, employees, or agents. Without limitation of the foregoing, each Lender agrees to reimburse the Issuing Bank promptly upon 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 Loans hereunder) for any costs and expenses (including, without limitation, reasonable fees and expenses of counsel) payable by the Borrower under this Section 9.05, to the extent that such Issuing Bank is not promptly reimbursed for such costs and expenses by the Borrower. 68 (d) 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 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, the Issuing Bank and 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 Person 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 or the Issuing Bank, as the case may be, irrespective of whether or not such Lender or the Issuing Bank shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of the Issuing Bank and 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. 69 (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 affected Lender, (ii) change or extend the Commitment of any Lender or decrease or extend any scheduled payment date for the Commitment Fees or Letter of Credit Fees of any Lender without the prior written consent of such affected 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; (iv) change Section 2.16 or Section 7.02 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender; (vi) release all or substantially all of the Subsidiaries party to any Guaranty Agreement from their obligations thereunder (except as expressly provided therein), or limit the liability of such Subsidiaries thereunder, without the written consent of each Lender, or (vii) release all or substantially all of the Collateral from the Liens of the Security Documents (except as expressly provided therein or pursuant to transactions permitted under this Agreement), without the written consent of each Lender; provided further that (A) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Bank in addition to the Lenders required above, affect the rights or duties of the Issuing Bank under this Agreement or any Issuer Document relating to any Letter of Credit issued or to be issued by it; (B) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (C) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender. 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. 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 constitutes 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. Nothing in this Agreement, 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. 70 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 ANY OTHER AGREEMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH. 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, ANY OTHER AGREEMENT OR INSTRUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH, 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. 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 any other agreement or instrument executed and delivered in connection herewith, 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. 71 (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 or any other agreement or instrument executed and delivered in connection herewith 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. SECTION 9.16. USA PATRIOT Act Notice. Each Lender and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act. SECTION 9.17. Payments Set Aside. To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent, the Issuing Bank or any Lender, or the Administrative Agent, the Issuing Bank or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent, the Issuing Bank or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender and the Issuing Bank severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Effective Rate from time to time in effect. The obligations of the Lenders and the Issuing Bank under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement. 72 SECTION 9.18. Treatment of Certain Information; Confidentiality. Each of the Administrative Agent, the Lenders and the Issuing Bank agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates' respective partners, directors, officers, employees, agents, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, the Issuing Bank or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower. For purposes of this Section, "Information" means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the Issuing Bank on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. [Signature pages follow] 73 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 COMMUNICATIONS COMPANY By: /s/ Donald B. Armour -------------------------------------------------- Name: Donald B. Armour Title: Senior Vice-President Finance and Treasurer BANK OF AMERICA, N.A., as Administrative Agent By: /s/ Maurice Washington -------------------------------------------------- Name: Maurice Washington Title: Assistant Vice-President S-1 SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Lenders: ------- BANK OF AMERICA, N.A. By: /s/ David A. Banmiller ---------------------------------------- Name: David A. Banmiller Title: Vice President S-2 SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT DEUTSCHE BANK TRUST COMPANY AMERICAS By: /s/ Anca Trifan --------------------------------------- Name: Anca Trifan Title: Director SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT JPMORGAN CHASE BANK By: /s/ Joan M. Fitzgibbon --------------------------------------- Name: Joan M. Fitzgibbon Title: Managing Director SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT MORGAN STANLEY BANK By: /s/ Daniel Twenge ------------------------------------- Name: Daniel Twenge Title: Vice President SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT THE ROYAL BANK OF SCOTLAND PLC By: /s/ Andrew Wynn ----------------------------------- Name: Andrew Wynn Title: Senior Vice President SIGNATURE PAGE TO CITIZENS COMMUNICATIONS COMPANY COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT UBS LOAN FINANCE LLC By: /s/ Barbara Ezell-McMichael ---------------------------------- Name: Barbara Ezell-McMichael Title: Associate Director By: /s/ Winslowe Ogbourne --------------------------------- Name: Winslowe Ogbourne Title: Associate Director EX-31.1 7 exhib31-1.txt GRAF CERTIFICATION Exhibit 31.1 CERTIFICATIONS I, Rudy Graf, certify that: 1. I have reviewed this quarterly report of Citizens Communications Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 2, 2004 By: /s/ Rudy Graf ------------------------------- Rudy Graf Chief Executive Officer and (principal executive officer) EX-31.2 8 exhib31-2.txt ELLIOTT CERTIFICATION Exhibit 31.2 CERTIFICATIONS I, Jerry Elliott, certify that: 1. I have reviewed this quarterly report of Citizens Communications Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 4, 2004 By: /s/ Jerry Elliott --------------------------- Jerry Elliott Chief Financial Officer (principal financial officer) EX-32.1 9 exhib32-1.txt GRAF 906 CERTIF. Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350. AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Citizens Communications Company (the "Company") on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Rudy Graf, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Rudy Graf - --------------------------- Rudy Graf Chief Executive Officer November 2, 2004 This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Citizens Communications Company and will be retained by Citizens Communications Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 10 exhib32-2.txt ELLIOTT 906 CERTIF. Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350. AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Citizens Communications Company (the "Company") on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerry Elliott, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Jerry Elliott - -------------------------- Jerry Elliott Chief Financial Officer November 4, 2004 This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Citizens Communications Company and will be retained by Citizens Communications Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-99.I 11 harrisagreemt.txt HARRIS AGREEMENT Exhibit 99.1 NOTICE OF DISCLAIMER -------------------- Attached is a document entitled "Employment and Retention Agreement" that Michael G. Harris, Citizens Communications Company's (the Company) Senior Vice President, Information and New Technology, claims is a valid and binding contract between himself and the Company, effective June 1, 2004. The Company, however, believes that no binding contract was ever formed and has so advised Mr. Harris. Although the Compensation Committee of the Company's Board of Directors considered whether to enter into employment and retention agreements with certain of the Company's senior executives as part of the recently-completed initiative to review strategic and financial alternatives, no such agreements were ever authorized or approved by the committee. Nevertheless, it appears that Mr. Harris and the Company's former Chairman and Chief Executive Officer, Leonard Tow, each signed the attached document, which is the basis for Mr. Harris' claim that a contract exists. The Company has advised Mr. Harris that because neither the Compensation Committee nor the full Board approved any contract, Mr. Tow had no authority to sign the attached document and thereby bind the Company to its terms. Because no valid contract was ever formed between the Company and Mr. Harris, the Company believes it is not legally bound to perform any of the obligations stated in the attached document. EMPLOYMENT AND RETENTION AGREEMENT ---------------------------------- AGREEMENT made as of this 1st day of June 2004 (the "Effective Date") by and between CITIZENS COMMUNICATIONS COMPANY, a Delaware Corporation and whose address for the purposes of this Agreement is 3 High Ridge Park, Stamford, CT 06905 ("Citizens") and Michael G. Harris, an individual, whose address is 16 Gorge Lane, Pound Ridge, NY 10576 ("Executive"). RECITALS -------- A. Executive is currently employed by Citizens in the capacity of Chief Technology Officer. B. Executive and Citizens are mutually desirous of, among other things, providing for Executive's services for three years and making provision for special bonuses and severance payments to Executive as well as payments in the instance of Change in Control, as defined in Schedule B attached, all as set forth herein. NOW THEREFORE; it is agreed as follows: 1. EMPLOYMENT: ---------- Citizens employs Executive and Executive accepts such employment as Chief Technology Officer of Citizens and its subsidiaries responsible for all of its technological matters, reporting to and subject to the authority and direction of the Chief Executive of the ILEC Division of Citizens and reporting and subject also to the Board of Directors (the "Board") of Citizens. 2. TERM: PLACE OF EMPLOYMENT: ------------------------- (a) The term of this Agreement shall be three years commencing June 1, 2004 and terminating May 31, 2007 (the "Term") subject to prior termination as herein provided. (b) Executive shall render his services in Fairfield County, CT., provided Executive agrees to take such trips outside said area from time to time as shall be consistent with or reasonably necessary in connection with his duties. 3. (a) Subject to Sections 9 and 10, as compensation for his services, Citizens shall pay Executive (i) a base salary ("Base Salary") at the rate of $225,000.00 per year for each year of the Term for each year for which Executive renders his services, subject to such withholdings required by applicable law, which shall be increased however for each of the second and third years of the Term (each an "Applicable Year") by the percentage increase in the Consumer Price Index prepared by the United States Labor Department for the United States as a whole for the last calendar month in each of the Applicable Years over the last calendar month in the immediately preceding year, plus (ii) a bonus for each full year of the term in an amount not less than $308,000.00, being the bonus paid to Executive under the Citizens Incentive Plan of Citizens for Executive's services in calendar year 2003 (the "Bonus"). -2- (b) As additional compensation, Citizens shall pay Executive, a bonus, denominated a Retention Bonus, in the sum of $56,250.00, being 25% of Executive's annual Base Salary, subject to such withholdings required by applicable law, within five business days, immediately succeeding the earliest to occur of the following: (i) December 31, 2004, (ii) the date on which Citizens, which is presently exploring strategic and financial alternatives has publicly announced that it has determined to accept a particular alternative, (iii) the date of termination of Executive's employment, (w) by reason of death, (x) by reason of "Permanent Incapacity" as defined in Schedule B attached, (y) by Citizens for other than "Good Cause", as defined in Schedule B attached and (z) by Executive for "Good Reason" as defined in Schedule B attached, or (iv) a Change in Control. (c) Nothing herein shall preclude or prevent the Board or the Compensation Committee of the Board in its sole discretion, and from time-to-time, granting additional bonuses to the Executive, which may take the form of cash bonuses, shares of stock, options to acquire shares of stock or other incentive or stock related awards. (d) All reasonable expenses incurred by Executive in the discharge and fulfillment of his duties will be reimbursed or paid by Citizens upon written substantiation by Executive. Executive shall be insured under such group life, medical, dental, major medical and disability insurance that Citizens maintains from time to time during the Term subject to the terms, provisions and conditions of such insurance. -3- 4. RESTRICTED STOCK GRANT: ---------------------- Citizens confirms the prior grant and award to Executive of its Common Stock (the "Inducing Shares") under its 2000 Equity Incentive Plan (the "Plan") as follows: a) 50,000 shares on March 11, 2004 b) 15,000 shares on March 11, 2004 Pursuant to the Plan, there are restrictions on the sale or transferability of these shares which restrictions lapse cumulatively on one third of the shares awarded, each year over a three year period, commencing with the respective date of grant. Notwithstanding the foregoing, all restrictions on the sale or transferability as well as any and all other restrictions on the Inducing Shares, which have not previously lapsed, shall lapse and be of no further force and effect on the earliest to occur of the following: (a) termination of Executive's Employment (i) by reason of his death, (ii) by reason of his Permanent Incapacity, (iii) by Citizens for other than Good Cause, and (iv) by the Executive for Good Reason, or (b) a Change in Control. The Inducing Shares referenced in Item a) above were not certificated but issued in book-entry form. The Inducing Shares in Item b) above shall be treated similarly. A restricted stock agreement covering the Inducing Shares Referenced in Item a) above has heretofore been executed by Citizens and Executive. Simultaneous with the execution of this Agreement, Citizens and Executive shall execute a restricted stock agreement covering the Inducing Shares reference in Item b) above in the form of Schedule A annexed. -4- 5. EXCLUSIVITY: ----------- (a) During the Term, Executive agrees to devote his services and his best energies and abilities, exclusively, to the business and activities of Citizens and its Subsidiaries, and not engage or have an interest in or perform services for any other business or entity of any kind or nature; provided, however, that nothing herein shall prevent Executive from investing in (but not rendering services to) other businesses which are not competitive in any manner with the business then being conducted by Citizens or any of it subsidiaries, or in investing in, but not rendering services to , other businesses which are competitive in any manner with the business then being conducted by Citizens provided in the latter instance that (i) the shares of such business are listed and traded over a national securities exchange, and (ii) Executive's stock interest or potential stock interest (based on grants, options, warrants, or other arrangements then in existence) in any such business which is so traded (together with any and all interest, actual and potential, of all members of Executive's immediate family) is not a controlling interest. (b) While employed by Citizens and for a period of one year after the termination of the Executive's employment for any reason other than termination by Citizens for other than Good Cause or by the Executive for Good Reason, the Executive shall not personally (and shall not personally cause others to) (i) take any action to solicit or divert any material business or customers away from Citizens, (ii) induce customers, potential customers, suppliers, agents or other persons under contract or otherwise associated or doing business with Citizens to terminate, reduce or alter any such association or business, or (iii) induce any person employed by Citizens to (x) terminate such employment arrangement, or (y) interfere with the customers or suppliers or otherwise with Citizens in any manner. -5- 6. UNIQUENESS: ---------- Executive agrees that his services hereunder are special, unique and extraordinary and that in the event of any material breach or attempted material breach of this Agreement by Executive, Citizens will sustain substantial injury and damage, and Executive consents and agrees that, in the event of breach or attempted breach hereof, Citizens shall be entitled to injunctive relief against Executive or any third party to prevent any such breach, in addition to such other rights or remedies available to it. 7. TRADE SECRETS: ------------- Executive acknowledges that his employment hereunder will necessarily involve his understanding of and access to certain trade secrets, technical data, know-how and other confidential information pertaining to the businesses and activities of Citizens and its subsidiaries, which are special, valuable and unique assets of Citizens (such assets being referred to as "Trade Secrets"). Accordingly, Executive agrees that during the period of his employment and at all times thereafter, he will not disclose to any unauthorized third party and such Trade Secrets and will not (other than in connection with carrying out his duties) for any reason remove or retain without the express written consent of Citizens any figures or calculations, letters, papers, records, or other information of a type likely to be regarded as confidential. The provisions of this Section shall survive the expiration or the termination of this Agreement or the Executive's employment for any reason other than termination by Citizens for other than Good Cause or by the Executive for Good Reason. -6- 8. INVENTIONS; CREATIONS: --------------------- All right, title and interest of every kind and nature whatsoever in and to inventions, patents, trademarks, copyrights, films, scripts, ideas, creations, intellectual property and literary, intellectual and other properties furnished to Citizens or any of its subsidiaries and/or used in connection with any of the activities of Citizens or any of its subsidiaries, or with which Executive is connected or associated in connection with the performance of his services, shall as between the parties hereto be, become and remain the sole and exclusive property of Citizens or any of its subsidiaries, as the case may be, for any and all purposes and uses whatsoever, regardless of whether the same were invented, created, written, developed, furnished, produced or disclosed by Executive or by any other party, and Executive shall have no right, title or interest of any kind or nature therein or thereto, or in any results and proceeds there from. Executive agrees that both during and after the term hereof to execute any and all documents which Citizens may deem necessary or appropriate to effectuate the provisions of this Section and, further, that the provisions of this Section shall survive the expiration or the termination, for any reason, of this Agreement or Executive's employment. 9. TERMINATION: ----------- Executive's employment shall terminate on the first to occur of the following: a) Death of Executive. -7- b) On not less than 15 days written notice to Executive in the instance of the Permanent Incapacity of Executive, in which event this Agreement shall terminate on the date set forth in said notice. c) On not less than 30 days written notice to Executive in the event of termination of Executive's employment by Citizens for Good Cause, in which event this Agreement shall terminate on the date set forth in said notice. The notice shall specify the acts or omissions constituting Good Cause. In the event such termination is based on the Executive's willful refusal without proper cause to perform his duties as delineated herein and within 30 days following the giving of said notice of termination Executive has taken reasonable efforts to perform such obligations, the notice of termination shall be of no force and effect. Executive shall have the right to contest or challenge any termination for Good Cause utilizing the arbitration process set forth in Section 17. d) On not less than 30 days written notice from Executive to Citizens in the event of termination of this agreement for Good Reason in which event Executive's employment shall terminate on the date set forth in said notice. The notice shall specify the acts constituting Good Reason. Provided however that if, within 30 days of the giving of such notice Citizens has taken reasonable steps to eliminate the acts or omissions constituting the alleged Good Reason the notice of termination shall be of no force and effect. Citizens shall have the right to contest or challenge any termination for "Good Reason" utilizing the arbitration process set forth in Section 17. A termination of Executive employment by Citizens without Good Cause shall be deemed to be equivalent to a termination by Executive for Good Reason. e) A Change In Control. -8- 10. CONSEQUENCES OF TERMINATION: --------------------------- (a) Termination Under Section 9(a) or 9(b). -------------------------------------- In the event Executive's employment is terminated pursuant to either Section 9(a) or 9(b), Executive shall be entitled to receive and Citizens shall pay Executive the following: (i) Payment of Base Salary to the date of termination if not previously paid, plus the balance of payments of his Base Salary that would otherwise have become payable to Executive for the balance of the Term pursuant to the provisions of this Agreement based on the rate of Base Salary payable at the date of termination, but in no event shall this balance be less than an amount equal to Base Salary for a two year period. (ii) a cash bonus for the year of termination being a fraction of the bonus paid for the immediately preceding calendar year, (or the minimum amount referenced in Section 3(a)(ii) in the event termination occurred in the first year of the Term) the numerator of which is the number of days prior to termination in the year of termination and the denominator of which is 365, plus a cash bonus otherwise payable for the balance of the Term (the "Cash Bonus Balance") in the minimum amount referenced in Section 3(a)(ii), but in no event shall this Cash Bonus Balance be less than the minimum bonus payable under Section 3(a)(ii) for a two year period. -9- (iii) if not previously paid, the Retention Bonus, as provided in Section 3(b). All such payments shall be made promptly but in no event later than 10 business days immediately succeeding termination of employment and shall be subject to such withholdings required by applicable law. In addition, (x) all restrictions on all shares of Citizens Common Stock previously awarded to and then owned and held by Executive, other than Inducing Shares (which are provided for in Section 4) shall lapse on the date of termination, (y) all options to acquire shares of Citizens Common Stock (whether awarded pursuant to one of Citizens' plans or otherwise) which have not then vested, shall be deemed to vest on the date of termination, and, (z) for the two years immediately succeeding termination, Citizens at its sole cost shall provide Executive with a medical, dental, hospitalization and health plan and insurance having the same benefits and coverage with respect to dependents as are contained in the plan of Citizens available to Executive, including life insurance, immediately preceding termination. -10- (b) Termination For Good Cause. -------------------------- In the event the Executive's employment is terminated for Good Cause under Section 9(C), Executive shall be entitled to the balance of his Base Salary to the end of the calendar year in which termination occurs and Bonus for such year, and to no other payment or benefit; the payment shall be paid within 20 business days immediately succeeding termination. Effective with such termination (i) all options to purchase shares of Citizens Common Stock heretofore granted to Executive and which have not then vested shall be and be deemed canceled, forfeited, null and void and of no force and effect, and (ii) all shares of the Common Stock of Citizens previously awarded to and then held by Executive, including the Inducing Shares on which restrictions shall not have then lapsed, shall be deemed canceled, forfeited and null and void and all certificates representing said shares shall forthwith be returned by Executive to Citizens for cancellation and any and all entries on the books and records of Citizens on which the issuing of said shares shall have been recorded, shall be deemed canceled and deleted, null and void and of no force and effect. (c) Termination For Good Reason and Change In Control. ------------------------------------------------- In the event the Executive's employment is terminated pursuant to Section 9(d) or 9(e) (including termination by Citizens other than for Good Cause) Citizens shall pay and provide Executive with all of the payments and benefits (including lapsing of restrictions of Citizens Common Stock and vesting of all options) provided in subsection (a) of this Section 10. All such payments shall be made promptly after but in no event later than 10 business days immediately succeeding termination of employment and shall be subject to such withholdings required by applicable law. -11- (d) Mitigation. ---------- In the event of the termination of Executive's employment under Section 9, Executive shall not be required to mitigate his damages hereunder and payments and benefits to be made in event of termination under said section shall not be limited or reduced by any amount Executive might earn or be able to earn from other employment or ventures, nor shall Executive be obligated to seek other employment or other opportunities. 11. PAYMENTS FOR STOCK AND OPTIONS: ------------------------------ (a) In the event Executive's employment is terminated pursuant to Section (9a)(b) or (d), then Citizens shall pay Executive or his legal representatives for shares or restricted stock of Citizens then owned and held by Executive, including the Inducing Shares, at a price per share obtained by taking the average closing price of such shares over the New York Stock Exchange for the 14 consecutive trading days ending on the trading day immediately preceding the termination date (the "Market Price") and shall pay Executive for each of the options to acquire shares of Citizens then held by Executive as follows: (i) in the instance where the exercise price of options is greater than the Market Price of the shares underlying the Options at the date of termination of employment the value of the options pursuant to the Black-Scholes methodology of evaluating options historically utilized by Citizens in determining such value; or (ii) in the instance where the exercise price of options is less than the Market Price of the shares underlying the options at the date of termination of employment, the greater of (y) the differential between the Market Price and the Exercise Price of the Options and (z) the value of the options utilizing the Black-Scholes methodology described in (i) above. Said payments shall be made simultaneous with the payments under Section 10(a). -12- (b) In the event of termination of Executive's employment by reason of a Change in Control Citizens shall pay Executive for shares of restricted stock of Citizens, including the Inducing Shares, and options to acquire shares of Citizens previously awarded and then owned and held by Executive, in the same manner as set forth in subsection (a) of this Section 11 except that the 14 consecutive day trading period in determining Market Price shall end on the day which is five business days prior to the Change in Control, and payment shall be made simultaneous with the Change in Control. (c) Provided however, that notwithstanding the provisions of sub-sections (a) and (b), on written notice given to Citizens no later than five days immediately succeeding termination of employment, Executive or his legal representatives as the case may be, shall have the right to forego payment for said restricted shares including the Inducing Shares, and options in which event Citizens shall have no obligations of any kind to make payment to Executive or his legal representatives for said shares and options. -13- 12. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY: ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by Citizens or other benefits provided to Executive hereunder (including but not limited to acceleration of vesting of options, lapsing of restrictions on shares of restricted stock and medical, dental, hospitalization and health plan and insurance) to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 12) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the United States Internal Revenue code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the "Excise Tax"), then Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all federal, state, and local taxes (including any interest or penalties imposed with respect to such taxes) including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the payment. -14- (b) All determinations required to be made under this Section 12, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche (the "Accounting Firm") which shall provide detailed supporting calculations both to Citizens and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is required by Citizens (collectively, the "Determination"). All fees charged by the Accounting Firm for its services provided in connection with this Agreement shall be paid by Citizens. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint PriceWaterhouseCoopers or Ernst & Young, or their respective successors, to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon Citizens and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which should have been made were not made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event Executive thereafter is required to make payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by Citizens to or for the benefit of the Executive. -15- 13. INDEMNITY; DIRECTORS' INSURANCE. ------------------------------- (a) Citizens agrees to and confirms its obligation, to indemnify Executive as an officer, director, employee and agent, and its related obligation to advance funds for expenses to the Executive as contained in Citizens' certificate of incorporation, by-laws and any other instruments or provided for by law or otherwise. Such obligation shall be in scope the greatest of (i) the obligations existing as of the date hereof, (ii) the obligations as they may be amended or otherwise revised in the future, or (iii) the maximum protection available for officers and/or directors under applicable law. Citizens agrees that it will use its best efforts to the end that the By-laws and Certificate of Incorporation of Citizens shall not be amended to reduce any indemnity protection presently available to officers and/or directors. -16- (b) Citizens presently maintains Directors and Officers Insurance in limits of Fifty Million Dollars. Citizens agrees to maintain Directors' and Officers' Insurance (at a minimum in such limits) covering Citizens' obligation, among other things, to indemnify the Executive for loss, liability and expenses resulting from litigation relating to his activities as an officer, director, employee or agent of Citizens and/or any of its subsidiaries, on an "occurrence made" basis, and agrees further, following termination of employment under this Agreement, to maintain equivalent coverage for the Executive, for the maximum period of all applicable periods of limitation, (or as a named former officer and director) on a "claims made" basis for his activities during the Term while he was an officer or director of Citizens or any of its subsidiaries. 14. MERGER. ------ (a) In the instance of a merger, consolidation or sale of assets which does not constitute a Change in Control, this Agreement shall not be terminated by any such merger or consolidation of Citizens whether Citizens is or is not the surviving or resulting corporation or as a result of any such sale or transfer of all or substantially all of the assets of Citizens. In the event of any such merger, consolidation or sale or transfer of assets, the provisions of this Agreement provided that concurrently with any merger, consolidation or sale or transfer of assets and as a condition thereof, Citizens will cause any successor or transferee, unconditionally, to assume, and such successor, transferee shall assume by written instrument delivered to the Executive (or his beneficiary or estate), all of the obligations of Citizens hereunder. Failure of Citizens to obtain such assumption or such successor or transferee to execute such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle the Executive to compensation and other benefits from Citizens in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive's employment were terminated by reason of a Change in Control (in the event such merger or consolidation does not constitute a Change In Control under the definition set forth in Schedule "B"), with payment to Executive to be made concurrently with any said merger, consolidation or transfer of assets and the fourteen day period referenced in Section 11(b) shall end on the fifth business day immediately preceding said merger, consolidation or transfer of assets. -17- (b) Without limitation, any dispute or controversy under this section shall be settled by arbitration pursuant to Section 17 and all legal costs as well as other costs and expense of Executive in connection with such dispute or controversy shall be paid by Citizens as those costs and expenses and incurred. -18- 15. DISPUTE; ASSIGNMENT. ------------------- (a) In the event of a dispute between Citizens and the Executive in the instance of termination of Executive's employment for Good Cause or for Good Reason then until there is a determination pursuant to the arbitration process set forth in Section 17, the amounts that would otherwise have been paid to the Executive in the event there were Good Reason for the Executive to have terminated his employment or an absence of Good Cause as a predicate to Citizens terminating Executive's employment, shall be placed by Citizens in a separate fund awaiting the determination in the arbitration process and confirmation of the arbitration award. In the event the arbitrator finds a lack of Good Cause or a presence of Good Reason, the applicable payments by Citizens to Executive shall be made within five business days immediately succeeding a final confirmation of the award. Citizens shall pay Executive's legal fees and expenses in connection with the aforesaid arbitration, as same are incurred, regardless of the outcome thereof. (b) This agreement and the Executive's rights and obligations may not be assigned or delegated by Executive; provided however that this Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representative, executors, administrators, successors, heirs, distributes, devises and legatees. In the event Executive shall die after the termination of his employment and while amounts are still payable to him by reason of his termination of employment, all such amounts, unless otherwise provided for herein, shall be paid to such person or persons appointed in writing by the Executive to receive such amounts, or if no such person is so appointed to the Executive's estate or legal representatives. -19- 16. RELEASE. ------- In exchange for the consideration provided to the Executive pursuant to this Agreement, the Executive, with the intention of binding himself and his heirs, executors, administrators, assigns and legal representatives, hereby releases and forever discharges Citizens and any subsidiary of Citizens, and all of its or their current, former and future officers, directors, shareholders, employees, attorneys, agents, predecessors, successors, assigns and legal representatives, and the pension and welfare benefit plans in which Citizens participates and their respective administrators, fiduciaries, trustees, and insurers, whether acting as agents for Citizens or in an individual capacity, from any and all claims, demands, causes of action and liabilities whatsoever, (other than a breach by Citizens of this Agreement), whether known or unknown, asserted or unasserted, whether based on tort, contract or any other legal or equitable theory, and whether for compensatory, punitive or other damages, remedies or relief, that the Executive ever had or now has by reason of any act, omission, transaction or occurrence, including those on or before the date of this Agreement, and including further without limitation, any and all such claims arising out of or in connection with Executive's employment with Citizens, other than a material breach of this Agreement by Citizens, or the termination of the Executive's employment, and any and all such claims under state, federal, municipal, statutory or common law, including, without limitation, Title VII of the Civil Rights Act of 1964, 42 U.S.C. ss. 1981, the Civil Rights Act of 1866, the Civil Rights Act of 1991, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the American with Disabilities Act, the Employee Retirement Income Security Act, the Fair Labor Standards Act, the Family and Medical Leave Act, the Delaware Fair Employment Practices Act, the Connecticut Human Rights and Opportunities Law, the Connecticut Family and Medical Leave Law, the Connecticut Age Discrimination and Employee Insurance Benefits Law, the Connecticut Smokers' Rights Law, and the Connecticut Constitution, as such laws have been or may be amended. -20- 17. ARBITRATION: EQUITABLE REMEDIES. ------------------------------- (a) Subject to the provisions of subsection (b) of this section, any dispute or controversy under this agreement shall be settled exclusively by arbitration in Stamford, Connecticut by a single arbitrator in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered confirming the arbitration award in any court having jurisdiction. Citizens shall pay and bear all legal and other costs and expenses, (including those of the Executive) arising in connection with any arbitration proceeding and subsequent confirmation pursuant to this Section. Executive's costs and expenses shall be paid by Citizens as same are incurred. (b) Notwithstanding any provision herein to the contrary, the Executive acknowledges and agrees that Citizens' remedy at law for any breach of the covenants contained in Sections 6, 7 and 8 would be inadequate and that for any breach of such covenants Citizens, in addition to such other remedies as may be available to it at law or in equity or as provided for in this Agreement, shall be entitled to an injunction, restraining order, or other equitable relief, without the necessity or posting a bond, restraining the Executive from committing or continuing to commit any violation of such covenants. Any breach or alleged breach of such covenants shall not be subject to the arbitration process set forth in this Section 17. -21- 18. MISCELLANEOUS. ------------- (a) Right to Accelerate. ------------------- Without limitation of any rights of Executive to otherwise cause acceleration of any benefits or monies due or to become due to Executive, his legal representatives, in the event Citizens shall fail to make, when due, any payment referred to in this Agreement or shall refuse to make any such payment, Executive, at his option, may accelerate and declare due, payable and performable all payments, provisions or entitlement under this Agreement, provided, however, that such acceleration shall be effected only by written notice thereof given by Executive to Citizens specifying in detail the basis for acceleration, and shall be effective as of the date which is twenty (20) business day after the receipt of such notice by Citizens; provided further, however, that if within twenty (20) business days following the date of receipt of such notice Citizens shall make the payment in question or shall make provision therefore, the acceleration shall not be effective. Notwithstanding the foregoing, in the event of a dispute between Executive and Citizen relating to Executive's right to accelerate payment or Citizens' failure to make payment the_provisions of this Section 18(a) shall be subject to the provisions of Sections 15(a) and 17. -22- (b) Severability. ------------ If for any reason any provision of this Agreement shall be held invalid, such invalidity shall not affect any other provision of this Agreement not held invalid, and all other such provisions shall to the full extent consistent with law continue in full force and effect so as to carry-out the intent of this Agreement. If any such provision shall be held invalid in part, such invalidity shall in no way affect the rest of such provision not held invalid, and the rest of such provision, together with all other provisions of this Agreement, shall likewise to the full extent consistent with the law continue in full force and effect so as to carry-out the intent of this Agreement. In the event of any aforesaid invalidity, the parties shall both endeavor and negotiate in good faith, to agree upon substitute valid provisions to effectuate the intent of the provisions held to be invalid in whole or in part. -23- (c) Headings. -------- The headings of Sections are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. (d) Governing Law. ------------- Citizens being a Delaware corporation, the validity, interpretation, performance and enforcement of this Agreement shall be governed by the internal laws of the State of Delaware applicable to agreements made and fully to be performed therein, without any reference to any rules of conflicts of laws. (e) Counterparts. ------------ This Agreement may be executed in two or more counterparts, and such counterparts when taken together shall constitute one executed instrument. (f) Notice. ------ All notices and other communications hereunder shall be in writing and shall be deemed given (i) when delivered personally, (ii) when transmitted by email or facsimile transmission to the e-mail address or facsimile number set forth below (during normal business hours of the recipient or the immediate succeeding business day), (iii) when mailed on the second business day immediately succeeding the mailing by registered or certified mail, (return receipt requested), postage prepaid, or (iv) when delivered by overnight courier such as Federal Express or UPS, on the day delivered, addressed to the parties at the following respective addresses (or at such other address or facsimile for a party as shall be specified by like notice, provided that notices of changes of address or facsimile shall be effective only upon receipt thereof); -24- (i) If to Citizens at Three High Ridge Park Stamford, CT 06905 Attention: General Counsel --------- Facsimile #: (203) 614-4651 With A Copy to: -------------- David Kroenlein, Esquire WINSTON & STRAWN, LLP 200 Park Avenue New York, NY 10166 Facsimile #: (212) 294-4700 (ii) If to Executive at: 16 Gorge Lane Pound Ridge, NY 10576 Facsimile #: (914) 764-0838 -25- (g) No provision of this Agreement may be modified or waived unless such modification is agreed to in writing and signed by the Executive and by a duly authorized officer of Citizens, or such waiver is signed by the waiving party. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provisions of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Failure by the Executive or Citizens to insist upon strict compliance with any provision of this Agreement or to assert any right the Executive or Citizens may have hereunder, including without limitation, the right of the Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision of or right provided for in this Agreement. The rights of, and benefits payable to, the Executive, his estate or his beneficiaries pursuant to this Agreement or in addition to any rights of, or benefits payable to, the Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of Citizens. No agreement or representations, oral or otherwise, express or implied, with regard to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The word "including" shall be deemed to be immediately succeeded by the words "but not limited to". -26- IN WITNESS WHEREOF, Citizens has caused this Agreement to be executed by a duly authorized officer of Citizens and the Executive, both has executed this Agreement, as of the day first above written below. CITIZENS COMMUNICATIONS COMPANY By: /s/ Leonard Tow --------------------------------- Its Chairman and CEO /s/ Michael G. Harris - --------------------------------------- Michael G. Harris -27- SCHEDULE A RESTRICTED STOCK AGREEMENT This Agreement is made June 1, 2004 as of March 11, 2004 ("Date of Award") between Citizens Communications Company, a Delaware corporation (the "Company") and Michael G. Harris (the "Grantee"). In consideration of the agreements set forth below, the Company and the Grantee agree as follows: 1. Grant: A restricted stock award ("Award") of 15,000 shares ("Award Shares") of the Company's common stock ("Common Stock"), is hereby granted by the Company to the Grantee subject to the following terms and conditions and to the provisions of the 2000 Equity Incentive Plan (the "Plan"), the terms of which are incorporated by reference herein. 2. Transfer Restrictions: None of the Award Shares shall be sold, assigned, pledged or otherwise transferred, voluntarily or involuntarily by the Grantee. 3. Release of Restrictions: (a) The restrictions set forth in Section 2 above shall lapse on one-third (1/3) of the Award Shares on May 31, 2005, one-third (1/3) of the Award Shares on May 31, 2006, and on the remaining one-third (1/3) on May 31, 2007. (b) The restrictions set forth in Section 2 above with respect to the Award Shares, to the extent they have not lapsed in accordance with subsection (a) of this Section 3, shall lapse on the first to occur of the following: (A) Termination of Grantee's employment pursuant to Grantee's employment agreement with the Company dated June 1, 2004 (the "Employment Agreement") (i) by reason of Grantee's death, (ii) by reason of Grantee's Permanent Incapacity (iii) by the Company for other than Good Cause (iv) by Grantee for Good Reason (B) By reason of Change in Control All of said terms which are initial capitalized are defined in the Employment Agreement. 4. Forfeiture: The Award Shares, with respect to which the restrictions have not been previously lapsed pursuant to Section 3, shall be forfeited to the Company upon the termination of Grantee's employment with the Company for Good Cause by the Company or for other than Good Reason by Grantee. 5. Adjustment of Shares: Notwithstanding anything contained herein to the contrary, in the event of any change in the outstanding Common Stock resulting from a reorganization, merger, consolidation, split-up, spin-off, recapitalization, share split, reverse share split, share distribution, combination of shares, exchange of shares, or the payment of a share dividend (any such event being referred to herein as a "Corporate Event"), the Award Shares shall be treated in the same manner in any such transaction as other Common Stock. Any Common Stock or other securities received by the Grantee with respect to the Award Shares as a result of any Corporate Event shall be subject to the restrictions and conditions set forth herein. Any cash proceeds received with respect to the Award Shares as a result of any Corporate Event shall be accrued as a contingent cash obligation and shall be payable to the Grantee only upon the lapse of the restrictions herein in accordance with Section 3. 6. Rights of Stockholder: The Grantee shall be entitled to all of the rights of a stockholder with respect to the Award Shares including the right to vote such shares and to receive dividends and other distributions payable with respect to such shares shall be the same restrictions as the underlying shares. Said restrictions shall lapse at the same time as restrictions lapse on the underlying shares. 7. Escrow of Share Certificates: Certificates for the Award Shares shall be issued in the Grantee's name and shall be held by the Company's transfer agent until all restrictions lapse or such shares are forfeited as provided herein. A certificate or certificates representing the Award Shares as to which restrictions have lapsed shall be delivered upon the Grantee's request upon such lapse. 8. Government Regulations: Notwithstanding anything contained herein to the contrary, the Company's obligations to issue or deliver certificates evidencing the Award Shares shall be subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required. 9. Withholding Taxes: The Company shall have the right to require the Grantee to remit to the Company, or to withhold from other amounts payable to the Grantee, as compensation or otherwise, an amount sufficient to satisfy all federal, state and local withholding tax requirements. The Company may offer Grantee the right to have withholding requirements satisfied by the Company's withholding of shares upon the timely written election of Grantee to utilize shares for withholding tax purposes. -2- 10. Employment: Nothing in the Agreement shall confer upon Grantee any right to continue in the employ of the Company, nor shall it interfere in any way with the right of the Company to terminate Grantee's employment at any time. 11. Plan: Grantee acknowledges receipt of a copy of the Plan, agrees to be bound by the terms and provisions of the Plan, and agrees to acknowledge, upon request of the Company, receipt of any prospectus or prospectus amendment provided to Grantee by the Company. 12. Security Laws: Grantee agrees to comply with all applicable securities laws upon sales or disposition of shares acquired hereunder. 13. Notices: Notices to the Company shall be addressed to it at: 3 High Ridge Park Stamford, Connecticut 06905 and to Grantee at: 16 Gorge Lane Pound Ridge, NY 10576 Company or Grantee may from time to time designate in writing different addresses for receipt of notice. Notice shall be deemed given when properly addressed and sent first class or express mail. 14. Governing Law: The terms of this Agreement shall be binding upon Company, Grantee and their respective successors and permitted assigns. This Agreement shall be performed under and determined in accordance with internal laws of the State of Connecticut. IN WITNESS WHEREOF, the Company has caused this Award to be granted on the date first above written. /s/ L. Russell Mitten /s/ Michael G. Harris - ----------------------------------- ----------------------------- L. Russell Mitten Michael G. Harris Citizens Communications Company -3- SCHEDULE B A. "Change in Control" means ------------------------- (1) the acquisition by any individual, entity or group (a "Person"), including any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Exchange Act, of 33% or more of either (i) the then outstanding shares of common stock of Citizens (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding securities of Citizens entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (A) any acquisition by Citizens, (B) any acquisition by an employee benefit plan (or related trust) sponsored or maintained by Citizens or any corporation controlled by Citizens, (C) any acquisition by any corporation pursuant to a reorganization, merger or consolidation involving Citizens, if, immediately after such reorganization, merger or consolidation, each of the conditions described in clauses (i), (ii) and (iii) of subsection (3) of this Section shall be satisfied, or (D) any acquisition by the Executive or any group of persons including the Executive; and provided further that, for purposes of clause (A), if any Person (other than Citizens or any employee benefit plan (or related trust) sponsored or maintained by Citizens or any corporation controlled by Citizens) shall become the beneficial owner of 33% or more of the Outstanding Company Common Stock or 33% or more of the Outstanding Company Voting Securities by reason of an acquisition by Citizens and such Person shall, after such acquisition by Citizens, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Voting Securities, such beneficial ownership shall constitute a Change in Control. (2) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such Board; provided, however, that any individual who becomes a director of Citizens subsequent to the date hereof whose election, or nomination for election by Citizens' stockholders, was approved by the vote of at least three-quarters (3/4) of the directors then comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of Citizens in which such person is named as a nominee for director, without objection to such nomination) shall be deemed to have been a member of the Incumbent Board; and provided further, that no individual who was initially elected as a director of Citizens as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board shall be deemed to have been a member of the Incumbent Board. (3) Consummation of a reorganization, merger or consolidation unless, in any such case, immediately after such reorganization, merger or consolidation, (i) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and more than 50% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior or such reorganization, merger or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (other than Citizens, any employee benefit plan (or related trust) sponsored or maintained by Citizens or the corporation resulting from such reorganization, merger or consolidation ( or any corporation controlled by Citizens), or any Person which beneficially owned, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 33% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly 33% or more of the then outstanding shares of common stock of such corporation or 33% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger or consolidation; or (4) approval by the stockholders of Citizens of a plan of complete liquidation or dissolution of Citizens, or consummation of the sale or other disposition of all or substantially all of the assets of Citizens other than to a corporation with respect to which, immediately after such sale or other disposition, (A) more than 50% of the then outstanding shares of common stock thereof and more than 50% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (other than Citizens, any employee benefit plan (or related trust) sponsored or maintained by Citizens or such corporation (or any corporation controlled by Citizens), or any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 33% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 33% or more of the then outstanding shares of Common stock thereof or 33% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (C) at least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition. -2- (5) a person other than Citizens, an employee benefit plan (or related trust) sponsored or maintained by Citizens or any corporation controlled by Citizens or the Executive or any group of persons including the Executive, otherwise effectively controls the operation of Citizens, whether by control of the Board, by contract or otherwise. Notwithstanding anything contained in this Agreement to the contrary, if the Executive's employment is terminated prior to a Change in Control and the Executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change in Control (a "Third Party"), and who in fact effects a Change in Control, or (ii) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the date of a Change in Control shall mean the date immediately prior to the date of such termination of the Executive's employment. B. "Good Cause" means: ------------------ (i) Chronic alcoholism or chronic drug addiction materially affecting Executive's performance, (ii) Executive's conviction of a felony involving moral turpitude, which through lapse of time or otherwise is not subject to appeal, (iii) willful malfeasance by the Executive consisting of his refusal without proper cause to perform his duties (iv) a breach by Executive of the Agreement to which this Schedule B is attached or (v) Executive's deliberate, willful or gross misconduct with respect to Citizens. C. "Permanent Incapacity" means: ---------------------------- the executive's absence from his duties with Citizens on a full-time basis for at least 180 consecutive days as a result of Executive incapacity due to mental or physical illness. D. "Good Reason" means: ------------------- Without the Executive's consent, the occurrence of any of the following events: (1) (i) the assignment to the Executive on a permanent basis of duties materially inconsistent with the Executive's position, duties, responsibilities, or status with Citizens in accordance with this Agreement, (ii) a material, adverse and permanent change in the Executive's reporting responsibilities, titles, or offices with Citizens that is not in accordance with this Agreement, or (iii) any removal or involuntary termination of the Executive by Citizens otherwise than as permitted by a breach by Executive of the Agreement to which this Schedule B is attached (the "Agreement") provided, however, that notwithstanding anything in this paragraph (1) to the contrary, clauses (i) and (ii) shall not be applicable to any occurrence that is solely attributable to the fact that Citizens is no longer a publicly traded entity; -3- (2) a reduction by Citizens in the Executive's rate of annual Base Salary, as the same may be increased from time to time, or Citizens' failure to pay the Executive within 120 days following the end of any fiscal year the bonus referenced in Section 3(a) of the Agreement; (3) any requirement of Citizens that the Executive be permanently based other than in Fairfield County, Connecticut. (4) the failure of Citizens to (i) continue in effect any employee benefit plan or compensation plan in which the Executive is eligible to participates of the Effective date, unless the Executive is permitted to participate in other plans providing the Executive substantially comparable benefits, or the taking of any action by Citizens that would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any such plan, (ii) provide the Executive and the Executive's dependents with medical, dental, and health care benefits in accordance with the plans, practices, programs and policies of Citizens as set forth in the Agreement to which this Schedule is annexed, (iii) provide the Executive with paid vacation in accordance with the plans, policies, programs and practices of Citizens as in effect for the Executive as of the Effective date. -4- -----END PRIVACY-ENHANCED MESSAGE-----