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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 1-707
KANSAS CITY POWER & LIGHT COMPANY
(Exact name of registrant as specified in its charter)
Missouri 44-0308720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1201 Walnut, Kansas City, Missouri 64106-2124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 556-2200
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 ( )
The number of shares outstanding of the registrant's Common stock at
November 7, 2001, was 61,872,810 shares.
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Balance Sheets
(Unaudited)
September 30 December 31
2001 2000
(thousands)
ASSETS
Current Assets
Cash and cash equivalents $ 27,937 $ 34,877
Receivables 221,625 115,356
Equity securities 283 18,597
Fuel inventories, at average cost 20,050 20,802
Materials and supplies, at average cost 48,827 46,402
Deferred income taxes 4,105 737
Other 15,856 14,455
Total 338,683 251,226
Nonutility Property and Investments
Telecommunications property 386,246 -
Affordable housing limited partnerships 87,121 98,129
Gas property and investments 35,323 47,654
Nuclear decommissioning trust fund 59,134 56,800
Other 63,027 81,624
Total 630,851 284,207
Utility Plant, at Original Cost
Electric 4,197,174 3,832,655
Less-accumulated depreciation 1,761,065 1,645,450
Net utility plant in service 2,436,109 2,187,205
Construction work in progress 92,359 309,629
Nuclear fuel, net of amortization
of $122,770 and $110,014 24,463 30,956
Total 2,552,931 2,527,790
Deferred Charges
Regulatory assets 133,610 139,456
Prepaid pension costs 82,392 68,342
Goodwill 98,637 11,470
Other deferred charges 16,897 11,400
Total 331,536 230,668
Total $ 3,854,001 $ 3,293,891
LIABILITIES AND CAPITALIZATION
Current Liabilities
Notes payable $ 22,440 $ -
Commercial paper 193,248 55,600
Current maturities of long-term debt 367,842 93,645
Accounts payable 134,086 158,242
Accrued taxes 76,997 14,402
Accrued interest 15,468 12,553
Accrued payroll and vacations 24,160 28,257
Accrued refueling outage costs 10,526 1,890
Other 51,101 14,877
Total 895,868 379,466
Deferred Credits and Other Liabilities
Deferred income taxes 604,397 590,220
Deferred investment tax credits 46,820 50,037
Deferred telecommunications revenue 45,595 -
Accrued nuclear decommisioning costs 60,401 57,971
Other 72,220 63,936
Total 829,433 762,164
Capitalization (see statements) 2,128,700 2,152,261
Commitments and Contingencies (Note 4)
Total $ 3,854,001 $ 3,293,891
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
1
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Capitalization
(Unaudited)
September 30 December 31
2001 2000
(thousands)
Long-term Debt (excluding current maturities)
General Mortgage Bonds
Medium-Term Notes due 2003-08,
7.28% and 7.18%, weighted-average rate $ 179,000 $ 206,000
3.37%* Environmental Improvement Revenue
Refunding Bonds due 2012-23 158,768 158,768
Senior Notes
7.125% due 2005 250,000 250,000
Unamortized discount (467) (550)
Medium-Term Notes
6.69%** due 2002 - 200,000
Environmental Improvement Revenue Refunding Bonds
3.25%* Series A & B due 2015 106,500 106,500
4.50%* Series C due 2017 50,000 50,000
3.25%* Series D due 2017 40,000 40,000
Subsidiary Obligations
Senior Discount Notes
12.5% due 2008 200,443 -
Unamortized discount (1,830) -
R.S. Andrews Enterprises, Inc. long-term debt
8.27% weighted-average rate due 2002-07 2,628 -
Affordable Housing Notes
8.15% and 8.29%, weighted-average rate 20,333 31,129
due 2003-08
Total 1,005,375 1,041,847
Company-obligated Mandatorily Redeemable
Preferred Securities of a trust holding solely
KCPL Subordinated Debentures 150,000 150,000
Cumulative Preferred Stock
$100 Par Value
3.80% - 100,000 shares issued 10,000 10,000
4.50% - 100,000 shares issued 10,000 10,000
4.20% - 70,000 shares issued 7,000 7,000
4.35% - 120,000 shares issued 12,000 12,000
$100 Par Value - Redeemable
4.00% - 62
Total 39,000 39,062
Common Stock Equity
Common stock-150,000,000 shares authorized
without par value 61,908,729 shares issued,
stated value 449,697 449,697
Retained earnings (see statements) 499,739 473,321
Accumulated other comprehensive income
Loss on derivative hedging instruments (13,455) -
Capital stock premium and expense (1,656) (1,666)
Total 934,325 921,352
Total $ 2,128,700 $ 2,152,261
* Variable rate securities, weighted-average rate as of September 30, 2001
** Variable rate securities, weighted-average rate as of December 31, 2000
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
2
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Income
(Unaudited)
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
(thousands)
Operating Revenues
Electric sales revenues $ 471,863 $ 361,396 $1,048,261 $ 827,850
Gas sales revenues (465) 16,043 16,641 37,905
Telecommunications revenues 4,528 - 11,520 -
Other revenues 16,717 925 52,410 2,868
Total 492,643 378,364 1,128,832 868,623
Operating Expenses
Fuel 52,533 54,149 124,836 119,334
Purchased power 142,103 69,463 298,750 141,098
Gas purchased and production expenses 339 11,198 17,454 21,760
Other 78,304 69,501 243,163 183,859
Maintenance 18,835 17,258 60,588 55,775
Depreciation and depletion 40,424 34,242 117,046 99,325
Gain on property (463) (46,975) (22,169) (50,665)
General taxes 28,839 27,342 74,253 70,637
Total 360,914 236,178 913,921 641,123
Operating income 131,729 142,186 214,911 227,500
Loss from equity investments (389) (2,444) (501) (18,684)
Other income and expenses (20,832) (274) (21,363) (9,789)
Interest charges 28,645 20,407 78,481 56,775
Income before income taxes, extraordinary
item and cumulative effect of changes
in accounting principles 81,863 119,061 114,566 142,252
Income taxes 26,331 37,443 25,774 33,319
Income before extraordinary item and
cumulative effect of changes in
accounting principles 55,532 81,618 88,792 108,933
Early extinguishment of debt,
net of income taxes - - 15,872 -
Cumulative effect to January 1, 2000,
of changes in accounting principles,
net of income taxes - - - 30,073
Net income 55,532 81,618 104,664 139,006
Preferred stock dividend requirements 412 412 1,236 1,236
Earnings available for common stock $ 55,120 $ 81,206 $ 103,428 $ 137,770
Average number of common shares outstanding 61,870 61,846 61,860 61,869
Basic and diluted earnings per common share
before extraordinary item and cumulative
effect of changes in accounting principles $ 0.89 $ 1.31 $ 1.41 $ 1.74
Early extinguishment of debt - - 0.26 -
Cumulative effect to January 1, 2000, of
changes in accounting principles - - - 0.49
Basic and diluted earnings per common share $ 0.89 $ 1.31 $ 1.67 $ 2.23
Cash dividends per common share $ 0.415 $ 0.415 $ 1.245 $ 1.245
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
3
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Cash Flows
(Unaudited)
Year to Date September 30 2001 2000
(thousands)
Cash Flows from Operating Activities
Net income $ 104,664 $ 139,006
Adjustments to reconcile income to net cash
from operating activities:
Early extinguishment of debt, net of income taxes (15,872) -
Cumulative effect of changes in
accounting principles, net of income taxes - (30,073)
Depreciation and depletion 117,046 99,325
Amortization of:
Nuclear fuel 12,757 12,725
Other 12,892 8,992
Deferred income taxes (net) 3,634 (18,830)
Investment tax credit amortization (3,217) (3,353)
Accretion of Senior Discount Notes (net) 11,083 -
Loss from equity investments 501 18,684
Gain on sale of KLT Gas properties (20,137) (60,413)
Asset impairments - 16,099
Allowance for equity funds
used during construction (3,551) (3,090)
Other operating activities (Note 1) (81,180) 42,374
Net cash from operating activities 138,620 221,446
Cash Flows from Investing Activities
Utility capital expenditures (154,743) (325,004)
Allowance for borrowed funds
used during construction (8,404) (8,682)
Purchases of investments (40,693) (53,575)
Purchases of nonutility property (47,812) (18,069)
Sale of KLT Gas Properties 42,293 36,925
Sale of securities 21,779 -
Hawthorn No. 5 partial insurance recovery 30,000 50,000
Loan to DTI prior to majority ownership (94,000) -
Other investing activities 6,984 18,191
Net cash from investing activities (244,596) (300,214)
Cash Flows from Financing Activities
Issuance of long-term debt 99,500 294,000
Repayment of long-term debt (63,366) (108,000)
Net change in short-term borrowings 144,731 (16,574)
Dividends paid (78,246) (78,256)
Other financing activities (3,583) (6,527)
Net cash from financing activities 99,036 84,643
Net Change in Cash and Cash Equivalents (6,940) 5,875
Cash and Cash Equivalents at Beginning of Year 34,877 13,073
Cash and Cash Equivalents at End of Period $ 27,937 $ 18,948
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
4
KANSAS CITY POWER & LIGHT COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
(thousands)
Net income $ 55,532 $ 81,618 $ 104,664 $ 139,006
Other comprehensive income (loss):
Loss on derivative
hedging instruments (5,537) - (39,705) -
Income tax benefit 2,287 - 16,494 -
Net loss on derivative
hedging instruments (3,250) - (23,211) -
Reclassification to revenues
and expenses, net of tax 653 - (7,687) 2,337
Comprehensive income before
cumulative effect of a
change in accounting
principles, net of
income taxes 52,935 81,618 73,766 141,343
Cumulative effect to
January 1, 2001, of a
change in accounting
principles, net of
income taxes - - 17,443 -
Comprehensive Income $ 52,935 $ 81,618 $ 91,209 $ 141,343
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Statements of Retained Earnings
(Unaudited)
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
(thousands)
Beginning balance $ 470,289 $ 424,163 $ 473,321 $ 418,952
Net income 55,532 81,618 104,664 139,006
525,821 505,781 577,985 557,958
Dividends declared
Preferred stock -
at required rates 411 412 1,235 1,236
Common stock 25,671 25,667 77,011 77,020
Ending balance $ 499,739 $ 479,702 $ 499,739 $ 479,702
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
5
KANSAS CITY POWER & LIGHT COMPANY
CERTAIN FORWARD-LOOKING INFORMATION
Statements made in this report that are not based on historical facts
are forward-looking, may involve risks and uncertainties, and are
intended to be as of the date when made. In connection with the safe
harbor provisions of the Private Securities Litigation Reform Act of
1995, the Company is providing a number of important factors that
could cause actual results to differ materially from provided forward-
looking information. These important factors include:
- - future economic conditions in the regional, national and
international markets
- - state, federal and foreign regulation
- - weather conditions
- - cost of fuel
- - financial market conditions, including, but not limited to changes
in interest rates
- - inflation rates
- - increased competition, including, but not limited to, the
deregulation of the United States electric utility industry, and the
entry of new competitors
- - ability to carry out marketing and sales plans
- - ability to achieve generation planning goals and the occurrence of
unplanned generation outages
- - nuclear operations
- - ability to enter new markets successfully and capitalize on growth
opportunities in nonregulated businesses
- - adverse changes in applicable laws, regulations or rules governing
environmental including air quality regulations, tax or accounting
matters
- - delays in the anticipated in service dates of new generating
capacity
- - market conditions in the telecommunications industry
- - other risks and uncertainties
THE COMPANY
Effective October 1, 2001, the Company completed its corporate
reorganization creating a holding company structure. Great Plains
Energy Incorporated became the holding company of Kansas City Power &
Light Company (KCPL), Great Plains Power Incorporated (GPP) and KLT
Inc.
Through September 30, 2001, the date of these reports, the
consolidated company (referred to throughout as consolidated or the
Company) consisted of KCPL, KLT Inc., GPP, and Home Service Solutions
Inc. (HSS). KLT Inc.'s major holdings consisted of DTI Holdings, Inc.
and subsidiaries, including Digital Teleport, Inc. (DTI), Strategic
Energy LLC (SEL), KLT Gas, and investments in affordable housing
limited partnerships. HSS had two subsidiaries: Worry Free Service,
Inc. and R.S. Andrews Enterprises, Inc. (RSAE).
6
Notes to Consolidated Financial Statements
In management's opinion, the consolidated interim financial statements
reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for
the interim periods presented. These statements and notes should be
read in connection with the financial statements and related notes
included in our 2000 annual report on Form 10-K.
1. SUPPLEMENTAL CASH FLOW INFORMATION (a)
Year to Date September 30
2001 2000
(thousands)
Cash flows affected by changes in:
Receivables $(101,179) $ (54,142)
Fuel inventories 752 2,831
Materials and supplies (2,425) (991)
Accounts payable (61,674) 29,821
Accrued taxes 60,157 75,287
Accrued interest 2,873 (6,507)
Wolf Creek refueling outage accrual 8,636 4,013
Pension and postretirement
benefit obligations (17,997) (10,706)
Other 29,677 2,768
Total other operating activities $ (81,180) $ 42,374
Cash paid during the period for:
Interest $ 61,984 $ 61,591
Income taxes $ 7,822 $ 8,370
During the first quarter of 2001, KLT Telecom increased its equity
ownership in DTI to a majority ownership and HSS increased its equity
ownership in RSAE to a majority ownership. The effect of these
transactions is summarized in the tables that follow (b).
DTI RSAE Total
(thousands)
Cash paid to obtain majority ownership $ (39,855) $ (560) $ (40,415)
ownership
Subsidiary cash 4,557 1,053 5,610
Purchases of subsidiaries,
net of cash received $ (35,298) $ 493 (34,805)
Purchases of other investments
through September 30, 2001 (5,888)
Total purchases of investments $ (40,693)
7
DTI at RSAE at
February 8 January 1
2001 2001
Initial consolidation of subsidiaries: (thousands)
Assets
Cash $ 4,557 $ 1,053
Receivables 1,012 4,078
Other nonutility property and investments 363,825 6,267
Goodwill 62,974 24,496
Other assets 5,143 3,919
Eliminate equity investment (67,660) (7,200)
Total assets $ 369,851 $ 32,613
Liabilities
Notes payable $ 5,300 $ 10,057
Accounts payable 31,299 6,219
Accrued taxes 2,414 24
Deferred income taxes 7,437 -
Deferred telecommunications revenue 41,522 -
Other liabilities and deferred credits 5,009 13,418
Loan from KLT Telecom (c) 94,000 -
Long-term debt 182,870 2,895
Total liabilities $ 369,851 $ 32,613
(a) The initial consolidations of DTI and RSAE are not reflected
in the Consolidated Statement of Cash Flows year to date September
30, 2001.
(b) Additional adjustments to purchase accounting may be made.
(c) KLT Telecom provided a $94 million loan to DTI for the
completion of the tender offer of 50.4 percent of DTI's Senior
Discount Notes prior to increasing its DTI investment to a
majority ownership. This loan is eliminated in consolidation.
Sale of KLT Gas properties in September 2000:
(thousands)
Cash proceeds $ 36,925
Equity securities 106,000
Receivable 2,463
Total 145,388
Property (58,814)
Accounts payable (15,409)
Other assets and liabilities (10,752)
Gain on sale before tax $ 60,413
KLT Gas Inc. sold producing natural gas properties to Evergreen
Resources, Inc. (Evergreen) in two parts with the first part closed in
September 2000 (total proceeds of $145 million).
8
2. CAPITALIZATION
KCPL Financing I (Trust) has previously issued $150,000,000 of 8.3%
preferred securities. The sole asset of the Trust is the $154,640,000
principal amount of 8.3% Junior Subordinated Deferrable Interest
Debentures, due 2037, issued by KCPL.
KCPL is authorized to issue an additional $150 million of debt
securities under its shelf registration statement dated November 21,
2000. KCPL plans an issuance of these debt securities in the fourth
quarter of 2001.
DTI's Senior Discount Notes are senior unsecured obligations of DTI.
The discount on the Senior Discount Notes accrues from the date of the
issue until March 1, 2003, at which time interest on the Senior
Discount Notes accrues at a rate of 12.5% per year. Cash interest is
payable semi-annually in arrears on March 1 and September 1,
commencing September 1, 2003.
During the third quarter 2001, KCPL remarketed $48.3 million of its
$158.8 million variable rate environmental improvement revenue
refunding general mortgage bonds due 2012-23 at a fixed rate of 3.90%
through August 31, 2004. KCPL also remarketed its series A and B due
2015 and series D due 2017 environmental improvement revenue refunding
bonds at a fixed rate of 3.25% through August 29, 2002. Series C due
2017 has a fixed rate of 4.50% through August 31, 2003.
On October 3, 2001, GPE entered into a $110 million bridge revolving
credit facility with tiered pricing based on the credit rating of
GPE's unsecured long-term debt securities that terminates on February
28, 2002. GPE drew down $101 million on October 3, of which $100
million was loaned to KLT. KLT used the proceeds to pay off its
outstanding long-term bank credit agreement (the balance of $99.5
million is reflected in current maturities of long-term debt on the
Consolidated Balance Sheet at September 30, 2001). After the payoff,
KLT terminated its bank credit agreement.
3. SEGMENT AND RELATED INFORMATION
The Company's reportable segments include KCPL, KLT Inc. and HSS.
KCPL includes the regulated electric utility, GPP's operations
(immaterial through September 30, 2001) and unallocated corporate
charges. KLT Inc. and HSS are holding companies for various
unregulated business ventures.
The summary of significant accounting policies applies to all of the
segments. The Company evaluates performance based on several factors
including net income. The Company eliminates all intersegment sales
and transfers. The tables below reflect summarized financial
information concerning the Company's reportable segments.
9
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
KCPL (millions)
Operating revenues $ 323.2 $ 324.3 $ 759.6 $ 742.7
Fuel expense (52.5) (54.1) (124.8) (119.3)
Purchased power expense (21.1) (43.0) (59.1) (78.6)
Other (a) (93.1) (104.3) (280.1) (285.2)
Depreciation and depletion (34.4) (31.7) (100.9) (91.9)
Gain (loss) on property (0.1) 0.8 (0.2) 3.6
Other income and expenses (3.9) (3.7) (7.5) (8.3)
Interest charges (21.6) (16.4) (59.3) (45.6)
Income taxes (36.9) (28.0) (47.0) (45.8)
Cumulative effect of changes in
pension accounting - - - 30.1
Net income $ 59.6 $ 43.9 $ 80.7 $ 101.7
KLT Inc.
Operating revenues $ 152.8 $ 53.0 $ 317.2 $ 123.0
Purchased power expense (121.1) (26.5) (239.7) (62.5)
Other (a) (17.5) (19.3) (60.3) (42.6)
Depreciation and depletion (5.5) (2.0) (14.3) (6.0)
Gain on property 0.6 59.6 23.7 60.5
Income (loss) from equity investment (0.4) 0.2 (0.4) (13.3)
Other income and expenses (17.1) 3.3 (17.2) (2.3)
Interest charges (6.7) (4.0) (18.1) (11.2)
Income taxes 11.2 (16.1) 20.9 4.4
Early extinguishment of debt - - 15.9 -
Net income (loss) $ (3.7) $ 48.2 $ 27.7 $ 50.0
HSS
Operating revenues $ 16.6 $ 1.0 $ 52.0 $ 2.9
Other (a) (15.7) (1.7) (55.1) (4.3)
Depreciation and depletion (0.5) (0.5) (1.8) (1.4)
Loss on property - (13.4) (1.3) (13.4)
Loss from equity investments - (2.7) (0.1) (5.4)
Other income and expenses 0.3 0.1 3.4 0.8
Interest charges (0.4) - (1.1) -
Income taxes (0.6) 6.7 0.3 8.1
Net loss $ (0.3) $ (10.5) $ (3.7) $ (12.7)
10
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
Consolidated (millions)
Operating revenues $ 492.6 $ 378.3 $1,128.8 $ 868.6
Fuel expense (52.5) (54.1) (124.8) (119.3)
Purchased power expense (142.2) (69.5) (298.8) (141.1)
Other (a) (126.3) (125.3) (395.5) (332.1)
Depreciation and depletion (40.4) (34.2) (117.0) (99.3)
Gain on property 0.5 47.0 22.2 50.7
Loss from equity investments (0.4) (2.5) (0.5) (18.7)
Other income and expenses (20.7) (0.3) (21.3) (9.8)
Interest charges (28.7) (20.4) (78.5) (56.8)
Income taxes (26.3) (37.4) (25.8) (33.3)
Early extinguishment of debt and
cumulative effect of changes in
pension accounting - - 15.9 30.1
Net income $ 55.6 $ 81.6 $ 104.7 $ 139.0
(a) Other includes gas purchased and production expenses, telecommunications
expenses, other operating, maintenance and general tax expense.
September 30 KCPL KLT Inc. HSS Consolidated
2001 (millions)
Assets $3,065.3 $ 733.6(b) $ 55.1 $3,854.0
Net equity method
investments (c) - - - -
Year to date capital and 158.5 85.0 (0.3) 243.2
investments expenditures
2000
Assets $ 2,952.0 $ 381.5 $ 27.9 $3,361.4
Net equity method
investments (c) - 24.7 8.0 32.7
Year to date capital and
investments expenditures 328.8 67.7 0.1 396.6
(b) Includes assets associated with DTI of $454 million and SEL of
$114 million.
(c) Excluding affordable housing limited partnerships.
11
The following table provides additional detail on the operations of the KLT
Inc. segment.
Three Months Ended Year to Date
September 30 September 30
2001 2000 2001 2000
DTI (a) (millions)
Operating revenues $ 4.6 - $ 11.6 -
Other (6.9) - (17.5) -
Depreciation and depletion (5.0) - (12.6) -
Loss from equity investments - - - $ (14.0)
Other income and expenses 0.2 - 1.2 -
Interest charges (4.8) - (11.8) -
Income taxes 4.1 - 10.3 5.1
Early extinguishment of debt - - 15.9 -
Net loss $ (7.8) - $ (2.9) $ (8.9)
SEL (a)
Operating revenues $ 148.7 $ 43.0 $ 304.2 $ 94.5
Purchased power expense (121.1) (26.5) (239.7) (62.5)
Other (6.7) (9.3) (29.8) (18.6)
Depreciation and depletion (0.1) (0.1) (0.2) (0.3)
Income from equity investments - - - 0.1
Other income and expenses (3.7) (2.2) (4.9) (4.3)
Interest charges - (0.1) (0.1) (0.2)
Income taxes (7.1) (1.8) (12.2) (3.3)
Net income $ 10.0 $ 3.0 $ 17.3 $ 5.4
KLT Gas
Operating revenues $ (0.5) $ 10.0 $ 1.4 $ 28.5
Other (2.3) (8.6) (8.3) (19.6)
Depreciation and depletion (0.4) (1.9) (1.4) (5.7)
Gain on property 0.6 59.7 21.5 58.3
Income from equity investments - 0.9 1.0 2.3
Other income and expenses 0.2 1.9 0.2 1.9
Interest charges - (1.4) - (3.5)
Income taxes 2.7 (19.6) (0.8) (16.2)
Net income $ 0.3 $ 41.0 $ 13.6 $ 46.0
Other
Other $ (1.6) $ (1.4) $ (4.7) $ (4.4)
Depreciation and depletion - - (0.1) -
Gain (loss) on property - (0.1) 2.2 2.2
Loss from equity investments (0.4) (0.7) (1.4) (1.7)
Other income and expenses (13.8) 3.6 (13.7) 0.1
Interest charges (1.9) (2.5) (6.2) (7.5)
Income taxes 11.5 5.3 23.6 18.8
Net income (loss) $ (6.2) $ 4.2 $ (0.3) $ 7.5
(a) KLT Inc. acquired a majority ownership in SEL during the second quarter of
2000 and in DTI in February 2001. Prior to this, the investments in SEL
and DTI were recorded on an equity basis. In the second quarter of 2000,
SEL was included in the Company's consolidated financial statements from
January 1, 2000, with the appropriate adjustments to minority interest
from January 1, 2000, through the date of the acquisition.
12
4. COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company operates in an environmentally responsible manner and uses
the latest technology available to avoid and treat contamination. The
Company continually conducts environmental audits designed to ensure
compliance with governmental regulations and to detect contamination.
However, governmental bodies may impose additional or more rigid
environmental regulations that could require substantial changes to
operations or facilities.
Mercury Emissions
In December 2000, The United States Environmental Protection
Agency (EPA) announced it would propose regulations to reduce
mercury emissions by 2003 and issue final rules by 2004. KCPL
cannot predict the likelihood or compliance costs of such
regulations.
Air Particulate Matter
In July 1997, the EPA published new air quality standards for
particulate matter. Additional regulations implementing these
new particulate standards have not been finalized. Without the
implementation regulations, the impact of the standards on KCPL
cannot be determined. However, the impact on KCPL and other
utilities that use fossil fuels could be substantial. Under the
new fine particulate regulations, the EPA is conducting a three-
year study of fine particulate emissions. Until this testing and
review period has been completed, KCPL cannot determine
additional compliance costs, if any, associated with the new
particulate regulations.
Nitrogen Oxide
In 1997, the EPA also issued new proposed regulations on reducing
nitrogen oxide (NOx) emissions. The EPA announced in 1998 final
regulations implementing reductions in NOx emissions. These
regulations initially called for 22 states, including Missouri,
to submit plans for controlling NOx emissions. The regulations
require a significant reduction in NOx emissions from 1990 levels
at KCPL's Missouri coal-fired plants by the year 2003.
In December 1998, KCPL and several other western Missouri
utilities filed suit against the EPA over the inclusion of
western Missouri in the 1997 NOx reduction program based upon the
1-hour NOx standard. On March 3, 2000, a three-judge panel of
the District of Columbia Circuit of the U.S. Court of Appeals
sent the NOx rules related to Missouri back to the EPA, stating
the EPA failed to prove that fossil plants in the western part of
Missouri significantly contribute to ozone formation in downwind
states. On March 5, 2001, the U.S. Supreme Court denied
certiorari, making the decision of the Court of Appeals final.
The full impact of this decision is unknown at this time;
however, it is likely to delay the implementation of new NOx
regulations by EPA in the western portion of Missouri for some
time.
To achieve the reductions proposed in the 1997 NOx reduction
program, if required to be implemented, KCPL would need to incur
significant capital costs, purchase power or purchase NOx
emissions allowances. It is possible that purchased power or
emissions allowances may be too costly. Preliminary analysis of
the regulations indicates that selective catalytic reduction
technology, as well as other changes, may be required for some of
the KCPL units. Currently, KCPL estimates that additional
capital expenditures to comply with these regulations could range
from $40 million to $60 million. Operations and maintenance
expenses could also increase by more than $2.5 million per year.
These capital expenditure estimates do not include the costs of
the new air quality control equipment installed at Hawthorn No.
5. The new air control equipment installed at Hawthorn No. 5
complies with
13
the proposed requirements discussed above. KCPL continues to
refine these preliminary estimates and explore alternatives.
The ultimate cost of these regulations, if any, could be
significantly different from the amounts estimated above.
Nuclear Insurance
As of November 15, 2001, Nuclear Electric Insurance Limited (NEIL),
the provider of some types of insurance for the Owners of Wolf Creek,
is increasing the potential retrospective assessments in its nuclear
insurance policies. If losses incurred at any of the nuclear plants
insured under the NEIL policies exceed premiums, reserves and other
NEIL resources, the company may be subject to retrospective
assessments under the amended NEIL policies of approximately $10.7
million per year. For additional information regarding our nuclear
insurance coverage, see Note 5 of the Notes to Consolidated Financial
Statements in our Annual Report on Form 10-K for the year ended
December 31, 2000.
Low-Level Waste
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated
that the various states, individually or through interstate compacts,
develop alternative low-level radioactive waste disposal facilities.
The states of Kansas, Nebraska, Arkansas, Louisiana and Oklahoma
formed the Central Interstate Low-Level Radioactive Waste Compact and
selected a site in northern Nebraska to locate a disposal facility.
Wolf Creek Nuclear Operating Corporation (WCNOC) and the owners of the
other five nuclear units in the compact provided most of the pre-
construction financing for this project. As of September 30, 2001,
KCPL's net investment on its books was $7.4 million.
Significant opposition to the project has been raised by Nebraska
officials and residents in the area of the proposed facility, and
attempts have been made through litigation and proposed legislation in
Nebraska to slow down or stop development of the facility. On
December 18, 1998, the application for a license to construct this
project was denied. This issue is being addressed in the courts. The
passage of time, along with the appointment of a new state
administration in Nebraska, has increased the chances for reversal of
the license denial.
In May 1999, the Nebraska legislature passed a bill withdrawing
Nebraska from the Compact. In August 1999, the Nebraska governor gave
official notice of the withdrawal to the other member states.
Withdrawal will not be effective for five years and will not, of
itself, nullify the site license proceeding.
Coal Contracts
KCPL's remaining share of coal purchase commitments under existing
contracts total $84.7 million. Obligations for the remainder of 2001
through 2003, based on estimated prices for those years, total $11.0
million, $54.5 million, and $19.2 million, respectively. These
amounts are net of purchases made year to date September 30, 2001.
5. RECEIVABLES
September 30 December 31
2001 2000
(thousands)
KCPL Receivable Corporation $ 74,175 $ 48,208
Other Receivables 147,450 67,148
Receivables $221,625 $115,356
14
Accounts receivable sold under the revolving agreement between KCPL
Receivable Corporation and KCPL totaled $134.2 million at September
30, 2001, and $108.2 million at December 31, 2000. In consideration
of the sale, KCPL received $60 million in cash and the remaining
balance in the form of a subordinated note from KCPL Receivable
Corporation.
Other receivables at September 30, 2001, consist primarily of
receivables from partners in jointly-owned electric utility plants,
bulk power sales receivables and accounts receivable held by
subsidiaries, including receivables of $91 million from SEL due to the
strong growth of their electric energy management business and the
increase to a majority ownership of DTI and RSAE (see Note 1 -
Supplemental Cash Flow Information).
6. DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133 - Accounting for Derivative
Instruments and Hedging Activities, as amended. SFAS 133 requires
that every derivative instrument be recorded on the balance sheet as
an asset or liability measured at its fair value and that changes in
the fair value be recognized currently in earnings unless specific
hedge accounting criteria are met.
SFAS 133 requires that as of the date of initial adoption, the
difference between the fair market value of derivative instruments
recorded on the balance sheet and the previous carrying amount of
those derivatives be reported in net income or other comprehensive
income, as appropriate, as a cumulative effect of a change in
accounting principle. The adoption of SFAS 133 on January 1, 2001,
required the Company to record a $0.2 million expense, net of $0.1
million of income tax. The Company did not reflect this immaterial
amount as a cumulative effect. This entry increased interest expense
by $0.6 million and reduced purchased power expense by $0.3 million.
The Company also recorded $17.4 million, net of $12.6 million of
income tax, as a cumulative effect of a change in accounting principle
applicable to comprehensive income for its cash flow hedges.
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks
including interest rates and commodity prices. Management has
established risk management policies and strategies to reduce the
potentially adverse effects that the volatility of the markets may
have on its operating results.
The Company's interest rate risk management strategy uses derivative
instruments to minimize significant, unanticipated earnings
fluctuations caused by interest-rate volatility on a portion of its
variable rate debt. The Company maintains commodity-price risk
management strategies that use derivative instruments to minimize
significant, unanticipated earnings fluctuations caused by commodity
price volatility.
The Company's risk management activities, including the use of
derivatives, are subject to the management, direction and control of
Risk Management Committees.
Interest Rate Risk Management
KCPL utilizes interest rate management derivatives to reduce a portion
of KCPL's interest rate risk by converting a portion of its variable
interest rate payments into fixed interest rate payments.
In 2000, KCPL issued $200 million of unsecured, floating rate medium-
term notes. Simultaneously, KCPL entered into interest rate cap
agreements to hedge the interest rate risk on the notes. The cap
agreements are designated as cash flow hedges. The difference between
the fair market value
15
of the cap agreements recorded on the balance sheet at initial adoption
and the unamortized premium was reported in interest expense.
KCPL entered into interest rate swap agreements to limit the interest
rate on $30 million of long-term debt. These swaps do not qualify for
hedge accounting. The swap agreements mature in 2003 and effectively
fix the interest to a weighted-average rate of 3.88%. The fair market
values of these agreements are recorded as current assets and
liabilities and adjustments to interest expense on the income
statement. Changes in the fair market value of these instruments are
recorded in the income statement.
Commodity Risk Management
SEL utilizes an option and power swap agreements to hedge energy
prices in various markets. The option and a majority of the swap
agreements are designated as cash flow hedges.
The remaining swap agreements do not qualify for hedge accounting.
The fair market value of these swaps at January 1, 2001, was recorded
as an asset or liability on the balance sheet and an adjustment to the
cost of purchased power. The change in the fair market value and
future changes in the fair market values of these swaps will also be
recorded in purchased power.
The option allows SEL to purchase up to 270 megawatts of power at a
fixed rate of $21 per mwh. The swap agreements protect SEL from price
volatility by fixing the price per mwh. The fair market value of this
option and the swap agreements designated as cash flow hedges at
January 1, 2001, was recorded as a current asset and a cumulative
effect of a change in accounting principle in comprehensive income.
When the power is purchased and to the extent the hedge is effective
at mitigating the cost of purchased power, the amounts accumulated in
other comprehensive income are reclassified to the consolidated income
statement. However, most of the energy purchased under the option and
the energy hedged with the swaps has been sold to customers through
contracts at prices different than the fair market value used to value
the option and the swaps. Therefore, SEL will not receive income or
losses to the extent represented in comprehensive income in the
current or future periods. To the extent that the hedges are not
effective, the ineffective portion of the changes in fair market value
will be recorded directly to purchased power.
KLT Gas' risk management policy is to use firm sales agreements or
financial hedge instruments to mitigate its exposure to market price
fluctuations on up to 100% of its daily natural gas production. These
hedging instruments are designated as cash flow hedges. The fair
market value of these instruments at January 1, 2001, was recorded as
current assets and current liabilities, as applicable, and the
cumulative effect of a change in an accounting principle in
comprehensive income. When the gas is sold and to the extent the
hedge is effective at mitigating the impact of a change in the sales
price of gas, the amounts in other comprehensive income are
reclassified to the consolidated income statement. To the extent that
the hedges are not effective, the ineffective portion of the changes
in fair market value will be recorded directly in gas revenues.
KLT Gas unwound the majority of its gas hedge derivatives with a swap
transaction during the second quarter of 2001 primarily due to
declining production at its gas properties. This transaction does
not qualify for hedge accounting. The fair market value of the swap
has been recorded in gas revenues. Future changes in the fair market
value of this swap will also be recorded in gas revenues.
16
The amounts recorded related to the cash flow hedges are summarized
below.
Activity for three months ended September 30, 2001
Increase
(Decrease) in
June 30 Comprehensive September 30
Balance Sheet Classification 2001 Income Reclassified 2001
Assets (millions)
Other current assets $ 6.0 $ (3.1) $ (2.9) -
Liabilities
Other current liabilities (28.0) 8.8 4.2 $ (15.0)
Other comprehensive income 10.8 3.3 (0.7) 13.4
Deferred income taxes 7.5 2.3 (0.4) 9.4
Other deferred credits 3.7 (11.3) (0.2) (7.8)
Activity for year to date September 30, 2001
Cumulative Increase
Effect to (Decrease) in
January 1, Comprehensive September 30
Balance Sheet Classification 2001 Income Reclassified 2001
Assets (millions)
Other current assets $ 44.5 $(20.4) $(24.1) -
Liabilities
Other current liabilities (6.8) (15.6) 7.4 $ (15.0)
Other comprehensive income (17.4) 23.2 7.6 13.4
Deferred income taxes (12.7) 16.5 5.6 9.4
Other deferred credits (7.6) (3.7) 3.5 (7.8)
7. HSS PURCHASE OF AN ADDITIONAL OWNERSHIP INTEREST IN RSAE
On March 12, 2001, HSS acquired control of RSAE by acquiring an
additional 22.1% of the shares of RSAE for $0.6 million.
This acquisition has been accounted for by the purchase method of
accounting and the operating results of RSAE have been included in the
Company's consolidated financial statements from January 1, 2001, with
the appropriate adjustments to minority interest from January 1, 2001,
through the date of the acquisition. RSAE's September 30, 2001,
assets included $23.1 million of goodwill, which is being amortized
over 40 years. On a pro forma basis, as if the business had been
acquired at the beginning of fiscal 2000, revenue, net income and
earnings per share would not differ materially from the amounts
reported in the Company's year ended December 31, 2000, consolidated
financial statements.
8. KLT TELECOM INC. PURCHASE OF AN ADDITIONAL OWNERSHIP INTEREST IN
DTI
On February 8, 2001, KLT Telecom acquired control of DTI by acquiring
an additional 31.2% of the fully diluted shares of DTI from Richard D.
Weinstein, DTI's former Chairman, President and CEO, for $33.6 million
in cash. An additional 5.0% of the fully diluted shares were
purchased through a tender offer for DTI's outstanding warrants and
the purchase of a separate warrant for 1.0% of DTI's common stock.
Consequently, KLT Telecom now owns 83.6% of DTI's fully diluted
shares. Under the purchase agreement, Weinstein, who resigned as
Chairman, President and CEO, retained just over 15% of the fully
diluted ownership and a seat on the DTI board. Also, the parties
granted put
17
and call options that gave Weinstein the right to sell and KLT Telecom
the right to buy Weinstein's remaining ownership in DTI.
This acquisition has been accounted for by the purchase method of
accounting. Operating results were included in the Company's
consolidated financial statements from the date of the acquisition.
Goodwill of $63.0 million was recorded as a result of this acquisition
and is being amortized over 25 years. At September 30, 2001,
unamortized goodwill totaled $61.2 million.
Extraordinary Item - Early Extinguishment of Debt
The KLT Telecom gain on early extinguishment of debt year to date
September 30, 2001, resulted from DTI's completion of a successful
tender offer for 50.4 percent of its outstanding Senior Discount Notes
prior to KLT Telecom acquiring a majority ownership in DTI. The $15.9
million early extinguishment of debt has been reduced by the losses
previously recorded by DTI but not reflected by KLT Telecom, and is
net of $9.1 million of income taxes.
Telecommunications Property
DTI telecommunications property at September 30, 2001, of $383.3
million, is net of accumulated depreciation of $44.7 million and
consists mainly of fiber optic plant and usage rights. At September
30, 2001, telecommunications property included about $47 million of
construction work in progress.
Operating Leases and Indefeasible Rights to Use (IRU) Commitments
DTI is a lessee under operating leases and IRUs for fiber, equipment
space, maintenance, power costs and office space. Minimum rental
commitments under these agreements for 2001 are $8 million and $9
million annually for the years 2002 through 2005. After 2005,
cumulative minimum rental commitments under these agreements total
$136 million.
DTI Risk Factors
For a description of certain risk factors that may adversely affect
DTI's business and results of operations, see DTI's report on Form 10-
K for the six-month period ended December 31, 2000, filed on May 15,
2001, and DTI's quarterly report on Form 10-Q for the quarter ended
September 30, 2001.
DTI is actively exploring its strategic alternatives including a
merger, sale of assets, bankruptcy, and all other types of
recapitalization. DTI has not yet determined which alternative, or
combination thereof, it will pursue. KLT Telecom has $186.9 million
invested in DTI. For additional information regarding DTI, see the
Telecommunications-DTI Holdings, Inc. and subsidiaries section under
the KLT Inc. Business Overview in the attached Management's Discussion
and Analysis.
18
Consolidated Pro forma Information
The following unaudited pro forma consolidated results of operations
are presented as if the acquisition of an additional ownership
interest in DTI had been made at January 1, 2000. No pro forma
adjustments to net income are required after February 8, 2001.
Three Months Ended
September 30, 2000
(thousands)
Revenues $381,242
EPS
Net income $ 81,618
Eliminate DTI recorded operating loss -
Add DTI operating loss on a 100% basis (11,007)
Other adjustments (678)
Pro forma net income $ 69,933 $1.13
Year to Date September 30
2001 2000
(thousands)
Revenues $1,130,310 $876,345
EPS EPS
Income before extraordinary item and
Cumulative effect of changes in
accounting principles $ 88,792 $108,933
Eliminate DTI recorded operating loss 18,819 8,876
Add DTI operating loss on a 100% basis (22,415) (28,978)
Other adjustments (1,138) (2,034)
Pro forma loss before extraordinary
item and cumulative effect of
changes in accounting principles 84,058 $1.36 86,797 $1.40
Cumulative effect to January 1, 2000
of changes in accounting principles,
net of income taxes - - 30,073 0.49
DTI's early extinguishment of debt, net of
income taxes and minority interests 50,695 0.82 - -
Pro forma net income $ 134,753 $2.18 $116,870 $1.89
The unaudited pro forma consolidated results of operations are not
necessarily indicative of the combined results that would have
occurred had the acquisition occurred on those dates, nor is it
indicative of the results that may occur in the future.
19
9. SALE OF EQUITY INVESTMENTS
Sale of KLT Investments II Inc.'s Ownership of Downtown Hotel Group
On May 31, 2001, KLT Investments II Inc. sold its 25% ownership of
Kansas City Downtown Hotel Group, L.L.C. for total proceeds of $3.8
million resulting in a $2.2 million gain before income taxes. The
after income tax gain on the sale was $1.4 million ($0.02 per share).
Sale of KLT Gas Properties
On June 28, 2001, KLT Gas sold its 50% ownership in Patrick KLT Gas,
LLC for total proceeds of $42.3 million resulting in a $20.1 million
gain before income taxes. The after income tax gain on the sale was
$12.0 million ($0.19 per share).
10. NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 142 - Goodwill and Other Intangible Assets
The Financial Accounting Standards Board (FASB) has issued SFAS No.
142 - Goodwill and Other Intangible Assets. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. The Company will
adopt SFAS 142 on January 1, 2002. Under the new pronouncement,
goodwill will be assigned to reporting units and an initial impairment
test (comparison of the fair value of a reporting unit to its carrying
amount) will be done on all goodwill within six months of initially
applying the statement and then at least annually, thereafter. We
have not yet quantified the effects of adopting SFAS 142 on the
Company's financial condition and results of operations. At September
30, 2001, goodwill reported on the Consolidated Balance Sheet totaled
$98.0 million.
SFAS No. 143 - Accounting for Asset Retirement Obligations
FASB has issued SFAS No. 143 - Accounting for Asset Retirement
Obligations. SFAS 143 is effective for fiscal years beginning after
June 15, 2002. The Company will adopt SFAS 143 on January 1, 2003.
Under the new pronouncement, an entity must recognize as a liability,
the fair value of an asset retirement obligation including nuclear
decommissioning costs. We have not yet quantified the effect of
adopting SFAS 143 on the Company's financial conditions.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Great Plains Energy Incorporated
Effective October 1, 2001, KCPL completed its corporate reorganization
creating a holding company structure. GPE became the holding company
of the following subsidiaries:
- - KCPL, a leading regulated provider of electricity in the Midwest;
- - GPP, a competitive generator that will sell to the wholesale
market; and
- - KLT Inc., a national investment company focusing on energy-related
ventures that are unregulated with high growth potential.
In implementing this strategy, the Company is focused on:
- - Providing reliable, low-cost electricity to retail customers;
- - Acquiring and investing in generation to serve the wholesale
market;
- - Pursuing high growth, unregulated business opportunities;
- - Managing the Company as a portfolio of both regulated and
unregulated, energy-related and growth businesses; and
- - Investing in a diverse group of people in recognition that the
Company's success is dependent upon the skills and expertise of its
people.
After October 1, 2001, all outstanding KCPL shares are honored on a
share for share basis as GPE shares. The new GPE trading symbol "GXP"
replaces the KCPL trading symbol "KLT" and is traded on the New York
Stock Exchange.
The information reported in this report is through September 30, 2001,
and thus is for KCPL prior to the reorganization to GPE. The
following discussion and analysis by management focuses on those
factors that had a material effect on the consolidated financial
condition and results of operations for the three months ended and
year to date September 30, 2001, compared to the three months ended
and year to date September 30, 2000. The discussion should be read in
conjunction with the accompanying Consolidated Financial Statements,
Notes and especially Note 3 - Segment and Related Information which
summarizes the income statement by segment.
21
Consolidated Earnings Overview
Three Months
Ended Year to Date
September 30 September 30
2001 2000 2001 2000
Earnings per share (EPS) summary
KCPL
Excluding cumulative effect $ 0.96 $ 0.70 $ 1.28 $ 1.13
Cumulative effect of changes in
pension accounting - - - 0.49
KCPL EPS 0.96 0.70 1.28 1.62
KLT Inc.
Excluding extraordinary item (0.06) 0.78 0.19 0.81
Extraordinary item:
Early extinguishment of debt - - 0.26 -
KLT Inc. EPS (0.06) 0.78 0.45 0.81
HSS EPS (0.01) (0.17) (0.06) (0.20)
Reported Consolidated EPS $ 0.89 $ 1.31 $ 1.67 $ 2.23
On February 1, 2001, DTI completed a tender offer for 50.4% of its
outstanding senior discount notes. This transaction resulted in KLT
Inc. reporting on an equity basis a $15.9 million ($0.26 per share)
extraordinary item for the gain on the early extinguishment of debt
year to date September 30, 2001.
Effective January 1, 2000, KCPL changed its methods of amortizing
unrecognized net gains and losses and determination of expected return
related to its accounting for pension expense. Accounting principles
required the Company to record the cumulative effect of these changes
increasing common stock earnings year to date September 30, 2000, by
$30.1 million ($0.49 per share). Adoption of the new methods of
accounting for pensions will lead to greater fluctuations in pension
expense in the future. The portions of the cumulative effect of
pension accounting changes attributable to KLT Inc. and HSS are
immaterial and, therefore, were not allocated to these subsidiaries.
For further discussion regarding each segment's contribution to
consolidated EPS, see its respective Earnings Overview section below.
KCPL Operations
KCPL Business Overview
KCPL, a regulated utility, consists of two business units - generation
and delivery. Dividing into two business units has provided KCPL the
opportunity to reexamine the businesses' internal processes in order
to operate more efficiently and create additional value for
shareholders.
The generation business has over 3,700 megawatts of generating
capacity, including Hawthorn No. 5. The rebuild of the boiler at
Hawthorn No. 5 is complete. The unit was returned to commercial
operation on June 20, 2001. During the third quarter of 2001, KCPL
completed a $200 million, five-year operating lease agreement for five
combustion turbines that will add 385 megawatts of peaking capacity.
Site preparation will begin next year for the arrival of the first
combustion turbine in 2003. Some or all of the units may be
transferred to GPP. If transferred, a significant portion of the
output from some of these units may be sold to KCPL.
22
The delivery business consists of transmission and distribution that
serves over 472,000 customers at September 30, 2001, and experiences
annual load growth of approximately 2% to 3% through increased
customer usage and additional customers. Rates charged for
electricity are currently below the national average. Additionally,
there is a moratorium on changes to Missouri retail rates until March
2002.
KCPL has an obligation, under FERC Order 2000, to join a Federal Energy
Regulatory Commission (FERC) approved Regional Transmission Organization
(RTO) by December 2001. RTOs combine regional transmission operations of
utility businesses into an organization that schedules transmission
services and monitors the energy market to ensure regional
transmission reliability and non-discriminatory access. KCPL has been
considering its options for joining an RTO. FERC has indicated a
desire for the numerous RTOs that have been formed and are in the
process of being formed to consolidate into four RTOs covering the
entire nation. To accomplish that objective, FERC directed an
Administrative Law Judge to mediate a potential consolidation among
the various RTOs. The Administrative Law Judge has submitted a report
to the FERC, but FERC has not yet ruled on the issue.
KCPL Earnings Overview
KCPL contributed EPS of $0.96 for the three months ended September 30,
2001, compared to $0.70, for the same period in 2000, and $1.28 year
to date September 30, 2001, compared to $1.13, excluding the
cumulative effect of changes in pension accounting, for the same
period in 2000. The following table and discussion highlight
significant factors affecting the changes in KCPL's EPS contribution
for the periods indicated.
September 30, 2001 compared to September 30, 2000
Three Months
Ended Year to Date
Increased (decreased) revenues $(0.01) $ 0.17
Decreased quantity of energy
and capacity purchased 0.19 0.21
Decreased other operation and
maintenance including 0.11 0.05
administrative and general
expenses
Increased interest charges (0.05) (0.14)
Increased depreciation (0.03) (0.09)
Other (see discussion below) 0.05 (0.05)
Total $ 0.26 $ 0.15
Contributing to the other factors impacting the change in KCPL's EPS
are the following:
- Increased expenses because of the write-off of $2.0 million of
billings incurred after January 1, 2001, to one of KCPL's larger
customers because of its Chapter 11 bankruptcy filing on February 7,
2001. Any recoveries from this bankruptcy proceeding will be recorded
as income when received.
- Decreased gain on property due to a gain on the sale of unit train
coal cars year to date September 30, 2000.
- Fossil fuel and purchased power prices decreased for the three
months ended and increased year to date September 30, 2001, compared
to the same periods of 2000.
23
KCPL Megawatt-hour (mwh) Sales and Electric Sales Revenues
September 30, 2001 compared to September 30, 2000
Three Months Ended Year to Date
Mwh Revenues Mwh Revenues
Retail Sales: (revenue change in millions)
Residential (4) % $ (4.4) 4 % $ 4.2
Commercial - 1.2 3 % 7.5
Large Industrial
Customer (99) % (7.7) (80) % (15.5)
Industrial - Other (5) % (1.3) (4) % (1.3)
Other 6 % - 3 % 0.1
Total Retail (5) % (12.2) (2) % (5.0)
Sales for Resale:
Bulk Power Sales 144 % 11.1 62 % 20.0
Other (5) % (0.3) (1) % -
Total 7 % (1.4) 5 % 15.0
Other revenues 0.3 1.9
KCPL electric sales revenues $ (1.1) $ 16.9
Residential mwh sales decreased for the three months ended September
30, 2001, compared to the same period of 2000, primarily due to milder
weather. The decrease was more than offset for year to date September
30, 2001, compared to the same period of 2000, by colder winter
weather and continued load growth. Load growth consists of higher
usage-per-customer and the addition of new customers. Mwh sales to
one Large Industrial Customer decreased for the three months ended and
year to date September 30, 2001, compared to the the same periods of
2000, due to its February 7, 2001, bankruptcy, and the closing of its
Kansas City, Missouri facilities on May 25, 2001. Industrial - Other
mwh sales decreased primarily due to economic conditions affecting
certain industrial customers. Less than 1% of revenues include an
automatic fuel adjustment provision.
Bulk power sales vary with system requirements, generating unit and
purchased power availability, fuel costs and requirements of other
electric systems. Increased bulk power mwh sales for both the three
months ended and year to date September 30, 2001, compared to the same
periods in 2000, were primarily attributable to the availability of
Hawthorn No. 5 and the loss of the large industrial customer discussed
above. The increase in bulk power sales year to date September 30,
2001, compared to the same period of 2000, was partially offset by
additional residential and commercial sales resulting from colder
winter weather during the first three months of 2001 and continued
load growth. The average prices per mwh of bulk power sales were down
10% for the three months ended and up 10% year to date September 30,
2001, compared to the same periods of 2000.
KCPL's share of LaCygne No. 1 unit's capacity has been temporarily
reduced by approximately 100 megawatts because of the failure, in mid-
July 2001, of one of the two air heaters. KCPL is replacing the 30-
year old air heaters during a 6-week fall outage that began November
2, 2001, at an approximate capitalized cost to KCPL of $2 million.
KCPL anticipates that other units will replace the lost capacity
during the outage. However, this outage will reduce bulk power sales
in the fourth quarter of 2001.
KCPL Fuel and Purchased Power
Fuel costs decreased $1.6 million for the three months ended September
30, 2001, compared to the same period of 2000, due to decreased
generation from natural gas partially offset by increased generation
from coal and a slight decrease in the cost per mmBtu of coal. Fuel
costs increased $5.5 million year to date September 30, 2001, compared
to the same period of 2000, due to increased generation from coal and
the higher cost per mmBtu of natural gas partially offset by decreased
generation from natural gas. Natural gas has a significantly higher
cost per mmBtu than coal or nuclear
24
fuel. Total generation increased 14% for the three months ended and
8% year to date September 30, 2001, compared to the same periods of 2000.
Fossil plants represent about two-thirds of total generation and the
nuclear plant about one-third. Nuclear fuel costs per mmBtu remain
substantially less than the mmBtu price of coal. KCPL expects the
price of nuclear fuel to remain fairly constant through the year 2003.
KCPL's procurement strategies continue to provide delivered coal costs
below the regional average.
Purchased power expenses decreased $21.9 million for the three months
ended and $19.5 million year to date September 30, 2001, compared to
the same periods of 2000. Mwh's purchased decreased 47% for the three
months ended and 22% year to date September 30, 2001, compared to the
same periods of 2000. The decreases were primarily due to Hawthorn
No. 5 returning to commercial operation in June 2001 which contributed
to an increase in the availability of KCPL's generating units and a
decline in capacity purchased. Purchased power prices were down 14%
for the three months ended September 30, 2001, compared to the same
period of 2000, but the decrease in prices for the quarter did not
completely offset the increase in prices during the first half of
2001. The cost per mwh for purchased power is significantly higher
than the fuel cost per mwh of generation.
KCPL Other Operation and Maintenance Expenses
KCPL's other operation and maintenance expense decreased $11.2 million
for the three months ended and $5.1 million year to date September 30,
2001, compared to the same periods of 2000. The primary reasons for
the decrease in KCPL's other operation and maintenance expense were:
- - reductions in replacement power insurance for the summer months
because of the availability of Hawthorn No. 5 during the summer of
2001;
- - less customer information system software consulting in 2001;
- - less advertising in 2001; and
- - decreased net periodic pension cost due to $9 million year to date
credits in 2000 increasing to $12 million year to date credits in
2001. See discussion below.
KCPL's pension benefit accounting principles, as discussed in the
December 31, 2000, report on Form 10-K, can result in large
fluctuations in pension expenses. Excluding the Wolf Creek pension
plan, the fair value of the other pension plan assets at September 30,
2001, decreased significantly from the September 30, 2000, plan year.
This decrease will cause the expected return on plan assets to
decrease approximately $15 million in 2002, an unfavorable change to
net periodic benefit cost.
KCPL Interest Charges
KCPL's interest charges increased $5.2 million for the three months
ended and $13.7 million year to date September 30, 2001, compared to
the same periods of 2000, primarily because of an increase in long-
term debt interest expense and a decrease in the allowance for
borrowed funds used during construction.
The increase in long-term interest expense is reflective of higher
average levels of outstanding long-term debt for the three months ended
and year to date September 30, 2001, compared to the same periods of
2000. The higher average levels of debt primarily reflect $200 million
of unsecured, floating rate medium-term notes issued by KCPL in March
2000, and $250 million of unsecured, fixed-rate senior notes issued in
December 2000, partially offset by $60.5 million of scheduled debt
repayments by KCPL since September 30, 2000. The increase in interest
expense was partially offset by lower interest rates.
Allowance for borrowed funds used during construction decreased $2.9
million for the three months ended and $0.3 million year to date
September 30, 2001, compared to the same periods of 2000,
25
because of decreased construction work in progress due to the completion
of the Hawthorn No. 5 rebuild.
Short-term debt interest expense decreased for the three months ended
and year to date September 30, 2001, compared to the same periods of
2000, due to lower interest rates partially offset by higher levels of
commercial paper outstanding.
Wolf Creek
Wolf Creek is one of KCPL's principal generating units, representing
about 15% of KCPL's generating capacity. The plant's operating
performance has remained strong over the last three years,
contributing about 30% of KCPL's annual mwh generation while operating
at an average capacity of 93%. Furthermore, Wolf Creek has the lowest
fuel cost per mmBtu of any of KCPL's generating units.
KCPL accrues the incremental operating, maintenance and replacement
power costs for planned outages evenly over the unit's operating
cycle, normally 18 months. As actual outage expenses are incurred,
the refueling liability and related deferred tax asset are reduced.
Wolf Creek's next refueling and maintenance outage is scheduled for
the spring of 2002 and is estimated to be a 30-day outage.
Ownership and operation of a nuclear generating unit exposes KCPL to
risks regarding decommissioning costs at the end of the unit's life
and to potential retrospective assessments and property losses in
excess of insurance coverage.
Hawthorn No. 5
On June 20, 2001, Hawthorn No. 5 was returned to commercial operation.
The coal-fired unit has a capacity of 575 megawatts and was rebuilt
following a February 1999 explosion that destroyed the boiler. KCPL
has been recognized nationally, including mention in the National
Energy Policy Report sent to President Bush, for its use of state-of-
the-art pollution control technology in the rebuilt Hawthorn No. 5.
Under KCPL's property insurance coverage, with limits of $300 million,
KCPL received an additional $30 million in insurance recoveries year
to date September 30, 2001, increasing the total insurance recoveries
received to date to $160 million. The recoveries have been recorded
in Utility Plant - accumulated depreciation on the consolidated
balance sheet. Expenditures, excluding capitalized interest, for
rebuilding Hawthorn No. 5 were $35.6 million in 1999, $207.6 million
in 2000 and are projected to be about $73 million in 2001, of which
$58.1 million were incurred year to date September 30, 2001. These
amounts have not been reduced by the insurance proceeds received to
date or future proceeds to be received.
KLT Inc. Operations
KLT Inc. Business Overview
KLT Inc., an unregulated subsidiary, pursues business ventures in
higher growth businesses. Existing ventures include investments in
telecommunications, natural gas development and production, energy
services and affordable housing limited partnerships. KCPL's
investment in KLT Inc. was $150.0 million at September 30, 2001, and
$119.0 million at December 31, 2000.
Telecommunications - DTI Holdings, Inc. and Subsidiaries (DTI)
At December 31, 2000, KLT Telecom, a subsidiary of KLT Inc., owned 47%
of DTI (acquired in 1997), a facilities-based telecommunications
company. Through utilization of a $94 million loan (10% interest
rate) to DTI Holdings, Inc. from KLT Telecom, DTI successfully
completed a tender offer to repurchase a portion of its long-term debt
on February 1, 2001, reducing interest costs. On February 8, 2001,
KLT Telecom increased its ownership of DTI from 47 percent to 84
percent. See Note 8 to the Consolidated Financial Statements for
further information.
26
The strategic design of the DTI network allows DTI to offer reliable,
high-capacity voice and data transmission services, on a region-by-
region basis, to primary carriers and end-user customers who seek a
competitive alternative to existing providers. DTI's network
infrastructure is designed to provide reliable customer service
through back-up power systems, automatic traffic re-routing and
computerized automatic network monitoring. If the network experiences
a failure of one of its links, the routing intelligence of the
equipment transfers traffic to the next choice route, thereby ensuring
delivery without affecting customers. DTI currently provides services
to other communication companies including Tier 1 and Tier 2 carriers.
DTI also provides private line services to targeted business and
governmental end-user customers. All of DTI's operations are subject
to federal and state regulations.
Responding to the current challenges of the telecommunications
industry, DTI has more narrowly focused its strategy. In order to
reduce the capital requirements, DTI will only provide connectivity in
secondary and tertiary markets in five states. In addition, DTI is
evaluating means to enhance its business by utilizing the significant
metropolitan fiber assets that it has in its current regional network
to provide metro access services, including high bandwidth services
over an Ethernet based network targeted at enterprise customers (i.e.,
Gigabit Ethernet services). DTI estimates that its total additional
cash funding requirements subsequent to September 30, 2001, necessary
to implement its refocused and downsized business plan and to fund
existing commitments and payables, will be approximately $28 million
over the next 15 months.
KLT Telecom had committed to provide or arrange a revolving credit
facility for Digital Teleport, Inc., a subsidiary of DTI Holdings,
Inc., in the amount of $75.0 million. A credit facility with bank
lenders has not been possible to obtain due to, among other things,
the downturn in the telecommunications industry. The DTI Holdings and
Digital Teleport Boards of Directors confirmed, in July 2001, that KLT
Telecom is not obligated to make any other future loans to Digital
Teleport. This confirmation was based on the downturn in the
telecommunications industry and the resulting decline in Digital
Teleport's prospects and financial condition. KLT Telecom, in
September 2001, under a credit facility agreed to lend up to $5.0
million subject to Digital Teleport meeting specified conditions. As
of September 30, 2001, Digital Teleport had borrowed $1.5 million of
the $5.0 million. Under these credit facilities, KLT Telecom has
loaned Digital Teleport a total of $47.0 million ($1.0 million was
loaned on October 25, 2001). These loans are secured, to the extent
permitted by law or agreement, by Digital Teleport's assets. DTI is
dependent upon KLT Telecom's continued funding of Digital Teleport.
KLT Telecom will not provide additional funding to Digital Teleport
unless in its sole judgement Digital Teleport meets certain specified
conditions.
Because of the downturn in the telecommunication industry, an
impairment analysis was performed on the DTI, June 30, 2001, assets in
accordance with SFAS 121 Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires
that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Based upon current business strategies, the
analysis indicated there was no impairment as defined in SFAS 121.
DTI is actively exploring its strategic alternatives including a
merger, sale of assets, bankruptcy, and all other types of
recapitalization. DTI has not yet determined which alternative, or
combination thereof, it will pursue. KLT Telecom has $186.9 million
invested in DTI including the loans to date detailed above, interest
accrued on these loans and goodwill recorded.
Natural Gas Development and Production - KLT Gas
KLT Gas' business strategy is to acquire and develop early stage
coalbed methane properties and then divest properties in order to
create shareholder value. KLT Gas believes that coalbed methane
production provides an economically attractive alternative source of
supply to meet the growing demand for natural gas in North America and
has built a knowledge base in coalbed methane production and
27
reserves evaluation. Therefore, KLT Gas focuses on coalbed methane -
a niche in the natural gas industry where it believes its expertise
gives it a competitive advantage. Because it has a longer, predictable
reserve life, coalbed methane is inherently lower risk than conventional
gas exploration.
Although gas prices have been volatile recently, KLT Gas
continues to believe that the long-term future price scenarios for
natural gas appear strong. Environmental concerns and the increased
demand for natural gas for new electric generating capacity are
contributing to this projected growth in demand.
KLT Gas' properties are located in Colorado, Texas, Wyoming, Kansas,
and Nebraska. These leased properties cover approximately 210,000
undeveloped acres. The development of this acreage is in accordance
with KLT Gas' exploration plan and capital budget. The timing of the
development may vary from the plans based upon obtaining the required
environmental and regulatory approvals and permits.
Energy Management Service - Strategic Energy LLC (SEL)
SEL is an energy management services provider that operates in several
deregulated electricity markets, including Pennsylvania, Southern
California, Ohio and New York. Recently, SEL has expanded its
geographic reach by entering into additional deregulated electricity
markets in Massachusetts and Texas. In 2001, in exchange for
approximately $4.7 million preferred stock ownership in an energy
services company, the ownership in SEL was increased from
approximately 72% to approximately 83%.
SEL acts as an energy manager in deregulated markets on behalf of
approximately 15,000 commercial and small manufacturing customers.
SEL enters into one to five year contracts with customers to supply
energy and manage their energy needs. For this service they receive
an ongoing management fee plus the contracted price for the
electricity and natural gas. SEL will phase out its natural gas
retail service in the fourth quarter of 2001.
SEL's suppliers and customer base are very diverse. Suppliers include
small and large energy generators across the country. Customers
include numerous Fortune 500 companies, school districts, and
governmental entities. Based on current signed contracts and expected
usage, SEL forecasts a peak load of 1,433 megawatts. The largest
concentration of the forecasted load, 568 megawatts, is in
Pennsylvania.
Investments in Affordable Housing Limited Partnerships - KLT
Investments
At September 30, 2001, KLT Investments had $87.1 million in affordable
housing limited partnerships. About 69% of these investments were
recorded at cost; the equity method was used for the remainder. Tax
expense is reduced in the year tax credits are generated. The
investments generate future cash flows from tax credits and tax losses
of the partnerships. The investments also generate cash flows from
the sales of the properties (estimated residual value). For most
investments, tax credits are received over ten years. A change in
accounting principle relating to investments made after May 19, 1995,
requires the use of the equity method when a company owns more than 5%
in a limited partnership investment. Of the investments recorded at
cost, $58.3 million exceed this 5% level but were made before May 19,
1995.
On a quarterly basis, KLT Investments completes a valuation study of
its cost method investments in affordable housing by comparing the
cost of those properties to the total of projected residual value of
the properties and remaining tax credits to be received. Estimated
residual values are based on studies performed by an independent firm.
Based on the latest valuation study, KLT Investments reduced its
investments in affordable housing limited partnerships by about $8
million during the third quarter of 2001. KLT Investments estimates
that additional reductions in affordable housing
28
investments will approximate $5 million in the fourth quarter of 2001
and $9 million, $12 million, $8 million and $7 million, for the years
2002 through 2005, respectively. Even after these reductions, earnings
from affordable housing are expected to be positive for the next five
years.
These projections are based on the latest information available but
the ultimate amount and timing of actual reductions made could be
significantly different from the above estimates.
KLT Inc. Earnings Overview
The following table and discussion highlight significant factors
affecting KLT Inc.'s effect on consolidated EPS for the three months
ended and year to date September 30, 2001, and September 30, 2000.
Three Months
Ended Year to Date
September 30 September 30
2001 2000 2001 2000
Earnings per share (EPS) summary
KLT Inc.
SEL $ 0.16 $ 0.05 $ 0.28 $ 0.09
DTI
Operations subsequent
to 2/8/01 (0.13) - (0.31) -
Gain on early extinguishment
of debt and equity losses
prior to majority
ownership - - 0.26 (0.14)
KLT Gas
Operations - 0.04 0.03 0.12
Sale of gas properties - 0.62 0.19 0.62
Realized loss on CellNet stock - - - (0.05)
KLT Investments (0.02) 0.06 0.09 0.18
Other (0.07) 0.01 (0.09) (0.01)
KLT Inc. EPS $(0.06) $ 0.78 $ 0.45 $ 0.81
SEL's increase in earnings per share for the three months ended and
year to date September 30, 2001, compared to the same periods of 2000,
is due to continued strong growth in its electric energy management
business and a significant increase over the prior year periods in
wholesale bulk power sales, which have a considerably higher gross
margin (revenues less cost of energy supplied) than SEL's retail
electric sales.
In February 2001, KLT Telecom increased its investment in DTI from 47%
to 84%, which required a change in the method of accounting from
equity to consolidation. DTI's loss per share on operations
subsequent to 2/8/01 primarily reflects increased personnel costs
mostly due to increased marketing and sales efforts and higher
depreciation and amortization expenses due to increasing amounts of
its fiber optic network being placed into service.
DTI's $0.26 EPS contribution prior to the change in ownership resulted
from the net impact of the gain from early extinguishment of $193
million of senior discount notes by DTI, reduced by the losses
previously recorded by DTI but not reflected by KLT Telecom. KLT
Telecom stopped recording equity losses on its investment in DTI after
the second quarter of 2000 because at June 30, 2000, its investment
had been written down to zero. The gain from early extinguishment is
reflected in the consolidated financial statements as an extraordinary
item.
29
During June 2001, KLT Gas sold its 50% equity ownership in Patrick KLT
Gas, LLC for $42.3 million, resulting in an after tax gain of $12.0
million ($0.19 per share). During September 2000, KLT Gas sold
producing natural gas properties to Evergreen Resources, Inc. for
$145.4 million, resulting in an after tax gain of $38.6 million ($0.62
per share).
During the third quarter of 2001, KLT Investments reduced its
investments in affordable housing limited partnerships by $8.1 million
($0.08 per share). Also during the third quarter of 2001, KLT Energy
Services recorded a mark-to-market, unrealized loss of $5.2 million
($0.05 per share) on its investment in common stock of a publicly
traded company, which is reflected in Other in the table above.
KLT Inc. Revenues
September 30, 2001 compared to September 30, 2000
Three Months
Ended Year to Date
Increase (Decrease) (millions)
DTI $ 4.6 $ 11.6
SEL
Electric - Retail 86.4 154.7
Electric - Bulk Power 25.7 50.5
Sales
Gas (6.4) 4.5
KLT Gas (10.5) (27.1)
Total $ 99.8 $ 194.2
KLT Inc. acquired a majority ownership in DTI in February 2001. Prior
to this, the investment in DTI was recorded on an equity basis.
SEL's retail revenues increased for the three months ended and year to
date ended September 30, 2001, compared to the same periods of 2000,
due to continued strong growth in its electric energy management
business. SEL currently serves approximately 15,000 commercial and
small manufacturing customers, an increase of 8,000 customers from the
beginning of 2001. In addition, based on current signed contracts and
expected usage, SEL forecasts a peak load of 1,433 megawatts compared
to 485 megawatts under management at the beginning of 2001.
SEL has an option to purchase up to 270 megawatts of power at $21 per
mwh through the end of 2001. Almost all of the bulk power sales
increase for the three months ended and year to date September 30,
2001, compared to the same periods of 2000, is related to large block
sales of the power purchased under the option. SEL also purchases
energy in the wholesale markets to meet its customers' energy needs.
On occasion, SEL must purchase small blocks of power prior to the
sales contract in order to quote stable pricing to potential new
customers. Power purchased in excess of retail sales is sold in the
wholesale markets.
SEL's gas sales decreased for the three months ended September 30,
2001, compared to the same period of 2000, because SEL began to phase
out its retail natural gas service. SEL intends to complete the phase
out in the fourth quarter of 2001.
KLT Gas revenues decreased for the three months ended and year to date
September 30, 2001, compared to the same periods of 2000, primarily
due to the sale of KLT Gas properties in September and October 2000.
Also contributing to the three months ended and year to date decreases
were declines in production and in the average price per MCF of gas
sold, particularly during the three months ended September 30, 2001,
and transactions associated with gas hedging activites. KLT Gas
30
unwound the majority of its gas hedge derivatives with a swap
transaction during the second quarter of 2001. The fair market value
of the swap has been recorded in gas revenues.
Gain on Property
KLT Inc.'s gain on property year to date September 30, 2001, includes
a $20.1 million before tax gain on KLT Gas' sale of its 50% equity
ownership in Patrick KLT Gas, LLC. KLT Inc.'s gain on property for
the three months ended and year to date September 30, 2000, includes a
$60.4 million before tax gain on KLT Gas' sale of producing natural
gas properties to Evergreen Resources, Inc.
Other Income and Expenses
The unfavorable changes in KLT Inc.'s other income and expenses for
the three months ended and year to date September 30, 2001, compared
to the same periods in 2000, were primarily due to KLT Investments
Inc.'s $8.1 million reduction in affordable housing limited
partnerships and a $5.2 million mark-to-market, unrealized loss from
KLT Energy Services' investment in the common stock of a
publicly-traded company. Year to date September 30, 2000, included
$4.8 million of realized losses on the write off of an investment in
CellNet in 2000.
KLT Inc. Taxes
KLT Inc. accrued tax credits of $6.5 million and $19.5 million for the
three months ended and year to date September 30, 2001, and $7.0
million and $20.7 million for the three months ended and year to date
September 30, 2000. These tax credits are related to investments in
affordable housing limited partnerships and natural gas properties.
HSS Operations
HSS, an unregulated subsidiary, pursues business ventures primarily in
residential services. In 2001, HSS increased its ownership to 72%
from 49% in RSAE, a consumer services company in Atlanta, Georgia,
which required a change in the method of accounting for RSAE from
equity to consolidation. Additionally, Worry Free Service, Inc., a
wholly owned subsidiary of HSS, assists residential customers in
obtaining financing primarily for heating and air conditioning
equipment.
KCPL's investment in HSS was $46.9 million at September 30, 2001, and
$46.3 million at December 31, 2000. HSS' loss year to date September
30, 2001, totaled $3.7 million ($0.06 per share) compared to a loss of
$12.7 million ($0.20 per share) year to date September 30, 2000. HSS'
decreased loss year to date September 30, 2001, compared to 2000, was
primarily due to a write-down of its investment in RSAE during 2000.
At September 30, 2001, the Company's accumulated losses were $21.7
million on its investment in HSS. HSS' consolidated assets increased
to $55.1 million at September 30, 2001, compared to $25.3 million at
December 31, 2000, reflecting the consolidation of RSAE in 2001.
Great Plains Power Incorporated (GPP)
GPP will focus on fossil fuel-fired electric generation in the central
part of the U.S. GPP is considering building, in the Midwest region,
one to five coal-fired plants ranging from 500 to 900 megawatts each.
One of the units, Weston Bend I, is anticipated to be on line in 2006.
GPP announced an agreement with the boiler and air quality control
equipment vendor and construction firm, Babcock and Wilcox, and the
design and engineering firm, Burns and McDonnell, to conduct the
design and development study for Weston Bend I, a coal-fired plant
near Weston, Missouri. This agreement reunites the same team that
rebuilt Hawthorn No. 5.
31
Other Consolidated Discussion
Significant Consolidated Balance Sheet Changes
(September 30, 2001 compared to December 31, 2000)
- Receivables increased $106.3 million primarily due to strong growth
in SEL's electric energy management business and the seasonal nature
of the utility business.
- Equity securities decreased $18.3 million primarily due to KLT Gas'
sale of $12.3 million of stock in Evergreen Resources, Inc. and the
decline in the market value of an equity security that KLT Energy
Services, Inc. held.
- Telecommunications property of $386.2 million at September 30,
2001, resulted from KLT Telecom's purchase of an additional ownership
interest in DTI, which required a change in the method of accounting
for DTI from equity to consolidation.
- Gas property and investments decreased $12.3 million primarily due
to KLT Gas' sale of its 50% equity ownership in Patrick KLT Gas, LLC
partially offset by additions to gas property.
- Other nonutility property and investments decreased $18.6 million
due to the sale by KLT of its $1.6 million investment in the Downtown
Hotel Group, the sale of $8.1 million of various other investments and
the exchange of $4.7 million preferred stock in an energy services
company for an additional ownership in SEL.
- Combined electric utility plant and construction work in progress
increased $147.2 million primarily due to expenditures and capitalized
interest of $68.2 million at Hawthorn No. 5 to rebuild the boiler and
$92.2 million for other utility capital expenditures. The completion
of rebuilding the boiler at Hawthorn No. 5 resulted in a transfer of
$288.9 million from construction work in progress to electric plant.
- Goodwill increased $87.2 million due to increased goodwill at
September 30, 2001, of $61.2 million resulting from the consolidation
of DTI and an additional $2.9 million in goodwill recorded because of
increased ownership in SEL. An additional $23.1 million of goodwill
at September 30, 2001, relates to the consolidation of RSAE, resulting
from an increased ownership by HSS.
- Notes payable of $22.4 million includes $19.3 million of short-term
notes at September 30, 2001, relating to the consolidation of RSAE and
$3.1 million relating to short-term notes held by DTI.
- Commercial paper increased $137.6 million due to the repayment of
medium-term notes of $50 million and additional commercial paper
borrowings as expenditures exceeded cash receipts.
- Current maturities of long-term debt increased $274.2 million,
reflecting a $227.0 million increase in the current portion of KCPL's
medium-term notes offset by $50.0 million of maturing medium-term
notes, and $99.5 million borrowed under KLT Inc.'s bank credit
agreement. KLT Inc.'s bank credit agreement was repaid October 3,
2001, with proceeds from GPE's bridge credit facility which terminates
on February 28, 2002.
- Accounts payable decreased $24.2 million primarily due to the
timing of cash receipts and cash payments partially offset by strong
growth in SEL's electric energy management business.
- Accrued taxes increased $62.6 million primarily due to the timing
of income tax and property tax payments.
- Other current liabilities increased $36.2 million including $3.4
million at September 30, 2001, due to the consolidation of RSAE, $17.1
million because of SFAS 133 - Accounting for Derivative Instruments
and Hedging Activities, as amended, (See Note 6 to the Consolidated
Financial Statements) and $12.4 million at September 30, 2001, due to
the consolidation of DTI.
- Deferred telecommunications revenue of $45.6 million at September
30, 2001, is due to the consolidation of DTI. This deferred revenue
results from advances under contracts being deferred and then
recognized on a straight-line basis as revenue over the terms of the
contract. In many cases, recognition does not start until completion
of specified route segments.
32
Capital Requirements and Liquidity
The Company's liquid resources at September 30, 2001, included cash
flows from operations, $150 million of registered but unissued debt
securities, and $52.8 million of unused bank lines of credit. The
unused lines consisted of KCPL's short-term bank lines of credit.
KLT Inc.'s bank credit agreement was repaid October 3, 2001, with
proceeds from a new GPE bridge credit facility which terminates on
February 28, 2002, and has $9.0 million remaining available at October
3, 2001. On October 12, 2001, KCPL paid $40.8 million by issuing
commercial paper to purchase the Hawthorn No. 6 combustion turbine
unit from the lessor in accordance with the terms of the lease with KCPL.
The Company generated positive cash flows from operating activities
year to date September 30, 2001. Individual components of working
capital will vary with normal business cycles and operations, such as
the increase in receivables of $101.2 million year to date September
30, 2001, the reduction of accounts payable by $61.7 million and the
increase in accrued taxes of $60.2 million for the same period. Also,
the timing of the Wolf Creek outage affects the refueling outage
accrual, deferred income taxes and amortization of nuclear fuel.
Cash used for investing activities varies with the timing of utility
capital expenditures and purchases of investments and nonutility
property. Cash used for purchases of investments and nonutility
property increased year to date September 30, 2001, compared to the
same period of 2000, primarily reflecting cash paid by KLT Telecom for
additional ownership in DTI and additional telecommunications property
partially offset by investments in gas properties during the same
period of 2000. The note receivable from DTI prior to majority
ownership is reflected as an investing activity. See additional
discussion of DTI loan activity in the Telecommunications section of
the KLT Inc. Business overview. These amounts were partially offset
by cash received from the sale of KLT gas properties in the current
and prior year and the sale of securities in the current period.
Cash from financing activities increased year to date September 30,
2001, compared to the same period of 2000, primarily because short-
term borrowings increased $144.7 million year to date September 30,
2001, compared to a $16.6 million decrease for the same period of
2000. However, this change in short-term borrowings was partially
offset by a decrease in long-term debt issuances, net of repayments,
year to date September 30, 2001, compared to the same period of 2000.
The Company expects to meet day-to-day operations, construction
requirements (excluding new generating capacity and telecommunications
construction) and dividends with internally-generated funds. However,
the Company might not be able to meet these requirements with
internally-generated funds because of the effect of inflation on
operating expenses, the level of mwh sales, regulatory actions,
compliance with future environmental regulations and the availability
of generating units. The funds needed to retire $752 million of
maturing debt through the year 2005 will be provided from operations,
refinancings and/or short-term debt. The Company may issue additional
debt and/or additional equity to finance growth or take advantage of
new opportunities.
Environmental Matters
The Company's operations must comply with federal, state and local
environmental laws and regulations. The generation and transmission
of electricity produces and requires disposal of certain products and
by-products, including polychlorinated biphenyl (PCBs), asbestos and
other hazardous materials. The Federal Comprehensive Environmental
Response, Compensation and Liability Act (the Superfund law) imposes
strict joint and several liability for those who generate, transport
or deposit hazardous waste. In addition, the current owner of
contaminated property, as well as prior owners since the time of
contamination, may be liable for cleanup costs.
33
The Company continually conducts environmental audits to detect
contamination and ensure compliance with governmental regulations.
However, compliance programs need to meet new and future environmental
laws, as well as regulations governing water and air quality,
including carbon dioxide emissions, nitrogen oxide emissions,
hazardous waste handling and disposal, toxic substances and the
effects of electromagnetic fields. Therefore, compliance programs
could require substantial changes to operations or facilities (see
Note 4 to the Consolidated Financial Statements).
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This disclosure is for the interim periods presented and should be
read in connection with the quantitative and qualitative disclosures
about market risk included in our 2000 annual report on Form 10-K.
The consolidated company is exposed to market risks associated with
commodity price and supply, interest rates and equity prices. Market
risks are handled in accordance with established policies, which may
include entering into various derivative transactions. In the normal
course of business, the Company also faces risks that are either non-
financial or non-quantifiable. Such risks principally include
business, legal, operational and credit risks and are not represented
in the following analysis.
Commodity Risk
KCPL has its forecasted coal requirements under contract for the year
2001. A portion of these coal requirements are subject to the market
price of coal. Because of the increased price of coal and additional
commitments, KCPL's coal commitments for 2001 have increased 16% to
$41.8 million since the 2000 annual report on Form 10-K was filed. A
hypothetical 10% increase in the price of coal would result in an
immaterial decrease in the year 2001 pretax earnings.
35
PART II - OTHER INFORMATION
ITEM 2(a). CHANGES IN SECURITIES
On October 1, 2001, KCPL completed a corporate
reorganization creating a holding company structure.
Pursuant to and through an agreement and plan of merger
among KCPL, Great Plains Energy Incorporated (GPE) and
another wholly owned subsidiary of GPE, KCPL became the
wholly owned subsidiary of GPE. GPE became the holding
company and successor issuer for all of KCPL shares of (i)
Common Stock; (ii) 3.80% Cumulative Preferred Stock; (iii)
4.50% Cumulative Preferred Stock; (iv) 4.20% Cumulative
Preferred Stock; and (v) 4.35% Cumulative Preferred Stock.
GPE replaced KCPL as the listed entity on the New York Stock
Exchange. The new GPE trading symbol GXP replaces the old
KCPL symbol KLT. With the exception of the change in issuer,
all other designations, preferences, rights, qualification,
restrictions, and limitations pertaining to each class of
stock remain the same.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
3-(i) Restated Articles of Consolidated as amended
October 1, 2001
10 Credit Agreement between KLT Telecom Inc. and
Digital Teleport, Inc. dated as of September 25,
2001
REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities
and Exchange Commission during the nine months ended
September 30, 2001.
A report on Form 8-K was filed October 1, 2001, by
Kansas City Power & Light Company announcing the completion
of its corporate restructuring.
36
SIGNATURES
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.
KANSAS CITY POWER & LIGHT COMPANY
Dated: November 9, 2001 By: /s/Bernard J. Beaudoin
(Bernard J. Beaudoin)
(Chief Executive Officer)
Dated: November 9, 2001 By: /s/Neil Roadman
(Neil Roadman)
(Principal Accounting Officer)
Exhibit 3-(i)
RESTATED ARTICLES OF CONSOLIDATION
KANSAS CITY POWER & LIGHT COMPANY
AS AMENDED OCTOBER 1, 2001
RESTATED ARTICLES OF CONSOLIDATION
OF
KANSAS CITY POWER & LIGHT COMPANY
The following shall constitute the Restated Articles of
Consolidation of Kansas City Power & Light Company.
Kansas City Power & Light Company consolidated with Carroll
County Electric Company under the corporate name of Kansas City
Power & Light Company. The original Articles of Consolidation
were filed with the Secretary of State of Missouri on July 29,
1922. The Restated Articles of Consolidation were originally
approved by the Board of Directors on February 7, 1989, and duly
adopted by an affirmative vote of the holders of a majority of
all outstanding stock entitled to vote at the Annual Meeting of
Shareholders held on April 25, 1989.
The registered office of Kansas City Power & Light Company
is located at 1201 Walnut, Kansas City, Missouri 64106; and the
name of the registered agent at such address is Jeanie Sell Latz.
ARTICLE FIRST. The name of this corporation shall be KANSAS
CITY POWER & LIGHT COMPANY.
ARTICLE SECOND. The name of the city or town and county in
which said corporation is to be located is Kansas City, Jackson
County, Missouri, and its registered office shall be 1201 Walnut,
Kansas City, Missouri, but it shall have power to transact
business anywhere in Missouri, and also in the several States of
the United States if and when so desired under the respective
laws thereof regarding foreign corporations.
ARTICLE THIRD. The amount of authorized capital stock of
the Company is One Thousand (1,000) shares of Common Stock
without par value.
(a) Dividends. Subject to the limitations in this ARTICLE THIRD
set forth, dividends may be paid on the Common Stock out of any
funds legally available for the purpose, when and as declared by
the Board of Directors.
(b) Liquidation Rights. In the event of any liquidation or
dissolution of the Company, after there shall have been paid to
or set aside for the holders of outstanding shares having
superior liquidation preferences to Common Stock the full
preferential amounts to which they are respectively entitled, the
holders of outstanding shares of Common Stock shall be entitled
to receive pro rata, according to the number of shares held by
each, the remaining assets of the Company available for
distribution.
(c) Voting Rights. Except as set forth in this ARTICLE THIRD or
as by statute otherwise mandatory provided, the holders of the
Common Stock shall exclusively possess full voting powers for the
election of Directors and for all other purposes.
(d) No Preemptive Rights. No holders of outstanding shares of
Common Stock shall have any preemptive right to subscribe for or
acquire any shares of stock or any securities of any kind
hereafter issued by the Company.
(e) Consideration for Shares. Subject to applicable law, the
shares of the Company, now or hereafter authorized, may be issued
for such consideration as may be fixed from time to time by the
Board of Directors. Subject to applicable law and to the
provisions of this ARTICLE THIRD, shares of the Company issued
and thereafter acquired by the Company may be disposed of by the
Company for such consideration as may be fixed from time to time
by the Board of Directors.
1
(f) Crediting Consideration to Capital. The entire
consideration hereafter received upon the issuance of shares of
Common Stock without par value shall be credited to capital, and
this requirement may not be eliminated or amended without the
affirmative vote of consent of the holders of two-thirds of the
outstanding Common Stock.
ARTICLE FOURTH. [Deleted]
ARTICLE FIFTH. The number of Directors which shall
constitute the whole Board of Directors shall be fixed by the
By-laws of the Company, but shall not be less than three (3).
Any changes in the number of Directors shall be reported to the
Secretary of State of Missouri within thirty (30) calendar days
of such change.
ARTICLE SIXTH. That the said corporation, KANSAS CITY
POWER & LIGHT COMPANY, shall continue perpetually.
ARTICLE SEVENTH. That the said corporation, KANSAS CITY
POWER & LIGHT COMPANY, is formed for the following purposes:
The acquisition, construction, maintenance and
operation of electric power and heating plant or
plants and distribution systems therefor; the
purchase of electrical current and of steam and of
other heating mediums and forms of energy;
distribution and sale thereof; the doing of all
things necessary or incident to carrying on the
business aforesaid in the State of Missouri and
elsewhere, and generally the doing of all other
things the law may authorize such a corporation so
to do.
ARTICLE EIGHTH. [Deleted]
ARTICLE NINTH. The Board of Directors may make, alter,
amend or repeal By-laws of the Company by a majority vote of the
whole Board of Directors at any regular meeting of the Board or
at any special meeting of the Board if notice thereof has been
given in the notice of such special meeting. Nothing in this
ARTICLE NINTH shall be construed to limit the power of the
shareholders to make, alter, amend or repeal By-laws of the
Company at any annual or special meeting of shareholders by a
majority vote of the shareholders present and entitled to vote at
such meeting, provided a quorum is present.
ARTICLE TENTH. At any meeting of shareholders, a majority
of the outstanding shares entitled to vote represented in person
or by proxy shall constitute a quorum; provided, that less than
such quorum shall have the right successively to adjourn the
meeting to a specified date not longer than 90 days after such
adjournment, and no notice need be given of such adjournment to
shareholders not present at the meeting.
ARTICLE ELEVENTH. These Restated Articles of Consolidation
may be amended in accordance with and upon the vote prescribed by
the laws of the State of Missouri; provided, that in no event
shall any such amendment be adopted after the date of the
adoption of this ARTICLE ELEVEN without receiving the affirmative
vote of at least a majority of the outstanding shares of the
Company entitled to vote.
ARTICLE TWELFTH. In addition to any affirmative vote
required by these Restated Articles of Consolidation or By-laws,
the affirmative vote of the holders of at least 80% of the
outstanding shares of Common Stock of the Company entitled to
vote shall be required for the approval or authorization of any
Business Combination with an Interested Shareholder; provided,
however, that such 80% voting requirement shall not be applicable
if:
2
(a) the Business Combination shall have been approved by a
majority of the Continuing Directors; or
(b) the cash or the Fair Market Value of the property,
securities or other consideration to be received per share
by holders of the Common Stock in such Business Combination
is not less than the highest per share price paid by or on
behalf of the Interested Shareholder for any shares of
Common Stock during the five-year period preceding the
announcement of such Business Combination.
The following definitions shall apply for purposes of
this ARTICLE TWELFTH:
(a) The term "Business Combination" shall mean: (i) any
merger or consolidation involving the Company or a
subsidiary of the Company with or into an Interested
Shareholder; (ii) any sale, lease, exchange, transfer or
other disposition (in one transaction or a series) of any
Substantial Part of the assets of the Company or a
subsidiary of the Company to or with an Interested
Shareholder; (iii) the issuance of any securities of the
Company or a subsidiary of the Company to an Interested
Shareholder other than the issuance on a pro rata basis to
all holders of shares of the same class pursuant to a stock
split or stock dividend; (iv) any recapitalization or
reclassification or other transaction that would have the
effect of increasing the proportionate voting power of an
Interested Shareholder; (v) any liquidation, spinoff,
splitup or dissolution of the Company proposed by or on
behalf of an Interested Shareholder; or (vi) any agreement,
contract, arrangement or understanding providing for any of
the transactions described in this definition of Business
Combination;
(b) The term "Interested Shareholder" shall mean and
include (i) any individual, corporation, partnership or
other person or entity which, together with its "Affiliates"
or "Associates" (as defined on March 1, 1986, in Rule 12b-2
of the General Rules and Regulations under the Securities
Exchange Act of 1934) "beneficially owns" (as defined on
March 1, 1986, in Rule 13d-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934) in
the aggregate 5% or more of the outstanding shares of the
Common Stock of the Company, and (ii) any Affiliate or
Associate of any such Interested Shareholder;
(c) The term "Continuing Director" shall mean any member of
the Board of Directors of the Company who is unaffiliated
with the Interested Shareholder and was a member of the
Board of Directors prior to the time that the Interested
Shareholder became an Interested Shareholder, and any
successor of a Continuing Director if the successor is
unaffiliated with the Interested Shareholder and is
recommended or elected to succeed the Continuing Director by
a majority of Continuing Directors;
(d) The term "Fair Market Value" shall mean: (i) in the
case of stock, the highest closing sale price during the
30-day period immediately preceding the date in question of
a share of such stock on the Composite Tape for New York
Stock Exchange-Listed Stocks, or, if such stock is not
quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange,
on the principal United States securities exchange
registered under the Securities and Exchange Act of 1934 on
which such stock is listed, or, if such stock is not listed
on any such exchange, the highest closing bid quotation with
respect to a share of such stock during the 30-day period
preceding the date in question on the National Association
of Securities Dealers, Inc. Automated Quotations System or
any similar system then in use, or, if no such quotations
are available, the Fair Market Value on the date in question
of a share of such stock as determined by a majority of the
Continuing Directors; and (ii) in the case of property other
than cash or stock, the Fair Market Value of such property
on the date in question as determined by a majority of the
Continuing Directors; and
3
(e) The term "Substantial Part" shall mean 10% or more of
the Fair Market Value of the total assets as reflected on
the most recent balance sheet existing at the time the
shareholders of the Company would be required to approve or
authorize the Business Combination involving the assets
constituting any such Substantial Part.
Notwithstanding ARTICLE ELEVENTH or any other provisions of
these Restated Articles of Consolidation or the By-laws of the
Company (and not withstanding the fact that a lesser percentage
may be specified by law), this ARTICLE TWELFTH may not be
altered, amended or repealed except by the affirmative vote of
the holders of at least 80% or more of the outstanding shares of
Common Stock of the Company entitled to vote.
ARTICLE THIRTEENTH. (a) Right to Indemnification. Each
person who was or is made a party or is threatened to be made a
party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or
she is or was a Director or officer of the Company or is or was
an employee of the Company acting within the scope and course of
his or her employment or is or was serving at the request of the
Company as a Director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit
plans, shall be indemnified and held harmless by the Company to
the fullest extent authorized by The Missouri General and
Business Corporation Law, as the same exists or may hereafter be
amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid to or to be paid in settlement)
actually and reasonably incurred by such person in connection
therewith. The Company may in its discretion by action of its
Board of Directors provide indemnification to agents of the
Company as provided for in this ARTICLE THIRTEENTH. Such
indemnification shall continue as to a person who has ceased to
be a Director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators.
(b) Rights Not Exclusive. The indemnification and other
rights provided by this ARTICLE THIRTEENTH shall not be deemed
exclusive of any other rights to which a person may be entitled
under any applicable law, By-laws of the Company, agreement, vote
of shareholders or disinterested Directors or otherwise, both as
to action in such person's official capacity and as to action in
any other capacity while holding the office of Director or
officer, and the Company is hereby expressly authorized by the
shareholders of the Company to enter into agreements with its
Directors and officers which provide greater indemnification
rights than that generally provided by The Missouri General and
Business Corporation Law; provided, however, that no such further
indemnity shall indemnify any person from or on account of such
Director's or officer's conduct which was finally adjudged to
have been knowingly fraudulent, deliberately dishonest or willful
misconduct. Any such agreement providing for further indemnity
entered into pursuant to this ARTICLE THIRTEENTH after the date
of approval of this ARTICLE THIRTEENTH by the Company's
shareholders need not be further approved by the shareholders of
the Company in order to be fully effective and enforceable.
(c) Insurance. The Company may purchase and maintain
insurance on behalf of any person who was or is a Director,
officer, employee or agent of the Company, or was or is serving
at the request of the Company as a Director, officer, employee or
agent of another Company, partnership, joint venture, trust or
other enterprise against any liability asserted against or
incurred by such person in any such capacity, or arising out of
his or her status as such, whether or not the Company would have
the power to indemnify such person against such liability under
the provisions of this ARTICLE THIRTEENTH.
(d) Amendment. This ARTICLE THIRTEENTH may be hereafter
amended or repealed; however, no amendment or repeal shall
reduce, terminate or otherwise adversely affect the right of a
person entitled to obtain indemnification or an advance of
expenses with respect to an action, suit or proceeding that
pertains to or arises out of actions or omissions that occur
prior to the later of (a) the effective date of such amendment or
repeal; (b) the expiration date of such person's then current
term of office with, or service for, the Company (provided such
person has a stated term of office or service and completes such
term); or (c) the effective date such person resigns his or her
office or terminates his or
4
her service (provided such person has a stated term of office or
service but resigns prior to the expiration of such term).
ARTICLE FOURTEEN. Any act or transaction by or involving
the Company that requires for its adoption pursuant to Chapter
351 of the Missouri General and Business Corporation Law or these
Restated Articles of Consolidation the approval of the
shareholders of the Company shall, pursuant to Section 351.448 of
the Missouri General and Business Corporation Law, require, in
addition, the approval of the shareholders of Great Plains Energy
Incorporated, a Missouri corporation, or any successor thereto by
merger, by the same vote as is required pursuant to Chapter 351
of the Missouri General and Business Corporation Law or the
Restated Articles of Consolidation of the Company.
5
Exhibit 10
CREDIT AGREEMENT
BETWEEN
KLT TELECOM INC.
AS LENDER,
AND
DIGITAL TELEPORT, INC.
AS BORROWER
DATED AS OF SEPTEMBER 25, 2001
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of September 25, 2001, is
between Digital Teleport, Inc., a Missouri corporation (the
"Borrower"), and KLT Telecom Inc., a Missouri corporation (the
"Lender").
WHEREAS, the Borrower wishes to obtain, and the Lender is
willing to make, a certain term loan on the terms and conditions
set forth herein, such indebtedness to be evidenced by one or
more Notes.
NOW, THEREFORE, in consideration of the representations,
warranties, covenants and agreements contained in this Agreement,
and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01. DEFINITIONS. Definitions as used in this
Agreement:
"Action" means any action, suit, arbitration, inquiry,
proceeding or investigation by or before any Governmental
Authority.
"Advance" means a borrowing hereunder by the Borrower.
"Affiliate" shall have the meaning ascribed to such term in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended,
as such Rule is in effect on the date of this Agreement.
"Aggregate Available Commitment" means, at any time, the
Aggregate Commitment at such time, MINUS the aggregate amount of
all Advances.
"Aggregate Commitment" means the total amount which the
Lender is obligated to advance under SECTION 2.04 below.
"Agreement" means this Credit Agreement, as it may be
amended, modified or restated and in effect from time to time.
"Article" means an article of this Agreement unless another
document is specifically referenced.
"Authorized Officer" means any of the chairman, chief
executive officer or chief financial officer of the Borrower, or
any other officer of the Borrower they or any of them designate
to the Lender.
"Borrower" means Digital Teleport, Inc., a Missouri
corporation, and its successors and permitted assigns.
"Borrowing Date" means a date on which an Advance is made
hereunder.
"Borrower Material Adverse Effect" has the meaning set forth
in SECTION 11.13.
"Borrowing Notice" is defined in SECTION 2.05.
"Business Day" means with respect to any borrowing or
payment, a day (other than a Saturday or Sunday) on which banks
generally are open in Kansas City, Missouri for the conduct of
substantially all of their commercial lending activities.
"Business Plan" has the meaning set forth in SECTION 6.02.
"Capitalized Lease" of a Person means any lease of Property
by such Person as lessee which would be capitalized on a balance
sheet of such Person prepared in accordance with GAAP.
"Capitalized Lease Obligations" of a Person means the amount
of the obligations of such Person under Capitalized Leases which
would be shown as a liability on a balance sheet of such Person
prepared in accordance with GAAP.
"Code" means the Internal Revenue Code of 1986, as amended,
reformed or otherwise modified from time to time.
"Collateral" means Borrower's Property which is subject to a
security interest held by the Lender pursuant to the Loan
Documents.
"Condemnation" is defined in SECTION 7.08.
"Consolidated" or "consolidated", when used in connection
with any calculation, means a calculation to be determined on a
consolidated basis (as determined in accordance with GAAP) for
the Borrower.
"Consolidated Person" means, for the taxable year of
reference, each Person which is a member of the affiliated group
of which the Borrower is a member if consolidated returns are or
shall be filed for such affiliated group for federal income tax
purposes or any combined or unitary group of which the Borrower
is a member for state income tax purposes.
"Contingent Obligation" of a Person means any agreement,
undertaking or arrangement by which such Person assumes,
guarantees, endorses, contingently agrees to purchase or provide
funds for the payment of, or otherwise becomes or is contingently
liable upon, the obligation or liability of any other Person, or
agrees to maintain the net worth or working capital or other
financial condition of any other Person, or otherwise assures any
creditor of such other Person against loss, including, without
limitation, any operating agreement or take-or-pay contract or
application for a letter of credit.
"Controlled Group" means all members of a controlled group
of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the
Borrower, are treated as a single employer under Section 414 of
the Code.
"Default" means any event or condition the occurrence of
which would, with the passage of time or the giving of notice, or
both, constitute an Event of Default.
"Encumbrance" means any charge, claim, community property
interest, equitable interest lien, tax lien, option, pledge,
security interest, right of first refusal or restriction of any
kind, including any restriction on transfer, receipt of income or
exercise of any other attribute of ownership.
"Environment" means soil, land surface or subsurface strata,
surface waters (including navigable waters, ocean waters,
streams, ponds, drainage basins, and wetlands), groundwaters,
drinking water supply, stream sediments, ambient air (including
indoor air), plant and animal life, and any other environmental
medium or natural resource.
"Environmental Law" means any Law that requires or relates
to protection of human health or the Environment.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any rule or regulation
issued thereunder.
"Event of Default" is defined in ARTICLE VII.
"Facility Termination Date" is defined in SECTION 2.02.
"Fair Market Value" means the amount which a willing buyer
would pay a willing seller in an arm's-length transaction.
"Fiscal Quarter" means one of the four consecutive three-
month accounting periods beginning on the first day of each
Fiscal Year.
"Fiscal Year" means the twelve-month accounting period
ending on December 31 of each year.
"GAAP" means generally accepted accounting principles,
consistently applied.
"Governmental Authority" means any federal, state, foreign
or local government, any of its subdivisions, administrative
agencies, authorities, commissions, boards or bureaus, any
federal, state, foreign or local court or tribunal and any
arbitrator.
"Indebtedness" of a Person means such Person's (a)
obligations for borrowed money, (b) obligations representing the
deferred purchase price of Property or services (other than
accounts payable arising in the ordinary course of such Person's
business), (c) obligations, whether or not assumed, secured by
Liens or payable out of the proceeds or production from Property
now or hereafter owned or acquired by such Person, (d)
obligations which are evidenced by notes, acceptances, or other
instruments, (e) Capitalized Lease Obligations, (f)
Contingent Obligations, (g) Rate Hedging Obligations, and (h)
repurchase obligations or liabilities of such Person with respect
to accounts receivable or notes receivable sold by such Person.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees
made in the ordinary course of business), extension of credit
(other than accounts receivable arising in the ordinary course of
business), or contribution of capital by such Person to any other
Person or any investment in, or purchase or other acquisition of,
the stock, partnership interests, notes, debentures, other
securities or other indebtedness of any other Person made by such
Person.
"Knowledge," in the case of an individual, means that such
individual will be deemed to have "Knowledge" of a particular
fact or other matter if (i) such individual is actually aware of
such fact or other matter or (ii) a prudent individual could be
expected to discover or otherwise become aware of such fact or
other matter in the course of conducting a reasonably
comprehensive investigation concerning the existence of such fact
or other matter; and, in the case of the Borrower, "Knowledge"
means that the Borrower will be deemed to have "Knowledge" of a
particular fact or other matter if any one or more of the
following individuals had knowledge of such fact or other matter:
Daniel A. Davis, Gary Douglass, Andrew Whipple and Paul Pierron.
"Law" means any federal, state, local, municipal, foreign,
international, multinational, or other judicial or administrative
order, judgment, decree, constitution, law, ordinance, common law
of Missouri, regulation, statute, or treaty.
"Lender" means KLT Telecom Inc., a Missouri corporation, and
its successors and assigns.
"Lien" means any lien, pledge, claim, security interest or
Encumbrance whatsoever, including any mortgage, deed of trust,
security interest (including any Capitalized Lease or other title
retention agreement), charge, pledge, retention of title
agreement, easement, encroachment, condition, reservation,
covenant, lis pendens lien, claim of lien, adverse claim,
restriction on attributes of ownership, or other Encumbrance
affecting title.
"Loan" means the aggregate of all Advances.
"Loan Documents" means this Agreement, the Notes, the
Security Documents and the other documents and agreements
contemplated by this Agreement and executed by the Borrower in
favor of the Lender in connection with this Agreement.
"Margin Stock" has the meaning assigned to that term under
Regulation G of the Board of Governors of the Federal Reserve.
"Material Adverse Effect" means a material adverse effect on
(i) the business, Property, condition (financial or otherwise),
results of operations, or prospects of the Borrower taken as a
whole, (ii) the ability of the Borrower to perform its
obligations under the Loan Documents, or
(iii) the validity or enforceability of any of the Loan Documents
or the rights and remedies of the Lender thereunder.
"Multiemployer Plan" means a Plan coming within Section
4001(a)(3) of ERISA.
"Net Income" means, for any computation period, with respect
to the Borrower on a consolidated basis with its Subsidiaries
(other than any Subsidiary which is restricted from declaring or
paying dividends or otherwise advancing funds to its parent
whether by contract or otherwise), cumulative net income earned
during such period in accordance with GAAP.
"Note" and "Notes" means one or more of the Promissory Notes
substantially in the form attached hereto as EXHIBIT A each
evidencing an Advance (including any such Promissory Notes issued
in exchange or substitution).
"Obligations" means all unpaid principal of and accrued and
unpaid interest on the Notes, all accrued and unpaid fees and all
expenses, reimbursements, indemnities and any and all other
obligations of any kind of the Borrower to the Lender, including,
without limitation, those arising under the Loan Documents.
"Ordinary Course of Business" means an action taken by a
Person will be deemed to have been taken in the "Ordinary Course
of Business" only if:
(a) such action is consistent with the past practices
of such Person and is taken in the ordinary course of the
normal day-to-day operations of such Person; and
(b) such action is not required to be authorized by
the board of directors of such Person (or by any Person or
group of Persons exercising similar authority);
"Party" and "Parties" shall mean individually a party to
this Agreement and collectively all of the parties to this
Agreement.
"Payment Date" means February 1, 2002 and any other date on
which any payment of principal and/or interest is due hereunder
or under any Note.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereto.
"Permitted Telecommunication Asset Sale" means any
Telecommunication Asset Sale approved in advanced in writing by
the Lender.
"Person" means any natural person, corporation, limited
liability company, firm, joint venture, partnership, association,
enterprise, trust or other entity or organization, or any
government or political subdivision or any agency, department,
division or instrumentality of any of the foregoing.
"Plan" means an employee pension benefit plan, as defined in
Section 3(2) of ERISA, as to which the Borrower or any member of
the Controlled Group has any liability.
"Property" of a Person means any and all property, whether
real, personal, tangible, intangible, or mixed, of such Person,
or other assets owned, leased or operated by such Person.
"Purchase" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement,
by which the Borrower or any of its Subsidiaries (a) acquires any
business or all or substantially all of the assets of any other
Person, whether through purchase of assets, merger or otherwise,
or (b) directly or indirectly acquires (in one transaction or as
the most recent transaction in a series of transactions) at least
a majority (in number of votes) of the securities of a
corporation which have ordinary voting power for the election of
directors (other than securities having such power only by reason
of the happening of a contingency) or a majority in interest (by
percentage or voting power) of the outstanding interests of any
other Person.
"Rate Hedging Obligations" of a Person means any and all
obligations of such Person, whether absolute or contingent and
howsoever and whensoever created, arising, evidenced or acquired
(including all renewals, extensions and modifications thereof and
substitutions therefor), under (i) any and all agreements,
devices or arrangements designed to protect at least one of the
parties thereto from the fluctuations of interest rates, exchange
rates or forward rates applicable to such party's assets,
liabilities or exchange transactions, including, but not limited
to, dollar-denominated or cross-currency interest rate exchange
agreements, forward currency exchange agreements, interest rate
cap or collar protection agreements, forward rate currency or
interest rate options, puts and warrants, and (ii) any and all
cancellations, buy backs, reversals, terminations or assignments
of any of the foregoing.
"Release" is defined in the Comprehensive Environmental
Response, Compensation and Liability Act, as amended, 42 U.S.C.
9601 ET SEQ.
"Reportable Event" means a reportable event as defined in
Section 4043 of ERISA and the regulations issued under such
section, with respect to a Plan, excluding, however, such events
as to which the PBGC has by regulation waived the requirement of
Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event; PROVIDED, that a failure to meet
the minimum funding standard of Section 412 of the Code and of
Section 302 of ERISA shall be a Reportable Event regardless of
the issuance of any such waiver of the notice requirement in
accordance with Section 4043(a) of ERISA.
"Returns" means all tax returns that must be filed with any
federal, state or local taxing authority.
"SEC" means the Securities and Exchange Commission of the
United States Government.
"Section" means a numbered section of this Agreement, unless
another document is specifically referenced.
"Security Documents" means and includes all assignments,
deeds of trust, mortgages, security agreements, and pledge
agreements, and any other agreement or instrument evidencing,
pledging or granting a security interest in any property or
assets to secure the Loan and the
Obligations, as may from time to time be executed and delivered
to or in favor of Lender by Borrower.
"Single Employer Plan" means a Plan subject to Title IV of
ERISA, other than a Multiemployer Plan.
"Subsidiary" of any Person means any corporation or other
entity of which a majority of the voting power of the voting
equity securities or equity interest is owned, directly or
indirectly, by such Person. Unless otherwise expressly provided,
all references herein to a "Subsidiary" shall mean a Subsidiary
of the Borrower.
"Substantial Portion" means, with respect to the Property of
the Borrower and its Subsidiaries, Property which (a) represents
more than 10% of the consolidated assets of the Borrower, as
would be shown in the consolidated financial statements of the
Borrower as at the end of the Fiscal Quarter next preceding the
date on which such determination is made, or (b) is responsible
for more than 10% of the consolidated net sales or of the Net
Income of the Borrower for the 12-month period ending as of the
end of the Fiscal Quarter next preceding the date of
determination.
"Tax" or "Taxes" means all income, profits, franchise, gross
receipts, capital, sales, use, withholding, value added, ad
valorem, transfer, employment, social security, disability,
occupation, property, severance, production, excise and other
taxes, duties and similar governmental charges and assessments
imposed by or on behalf of any Governmental Authority (including
interest and penalties thereon).
"Telecommunication Asset Sale" means any transfer,
conveyance, sale, lease or other disposition of assets, rights
(contractual or otherwise) and properties, whether tangible or
intangible, used or intended for use in connection with the
Borrower's business; provided that such assets are accounted for
as "property, plant and equipment" on the Borrower's consolidated
balance sheet in accordance with GAAP, the proceeds of which are
treated as revenues (including deferred revenues) by the Borrower
in accordance with GAAP.
"Termination Event" means, with respect to a Plan which is
subject to Title IV of ERISA, (a) a Reportable Event, (b) the
withdrawal of the Borrower or any other member of the Controlled
Group from such Plan during a plan year in which the Borrower or
any other member of the Controlled Group was a "substantial
employer" as defined in Section 4001(a)(2) of ERISA or was deemed
such under Section 4066 of ERISA, (c) the termination of such
Plan or the filing of a notice of intent to terminate such Plan
under Section 4041 of ERISA, or (d) the institution by the PBGC
of proceedings to terminate such Plan or the occurrence of any
event or condition which constitutes grounds under Section 4042
of ERISA for the termination of, or appointment of a trustee to
administer, such Plan.
"Threatened" means any demand or statement that has been
made in writing that would lead a prudent person to conclude that
a claim, proceeding, dispute, Action, or other matter is likely
to be asserted, commenced, taken, or otherwise pursued in the
future.
"Unfunded Liability" means the amount (if any) by which the
present value of all vested and unvested accrued benefits under a
Single Employer Plan exceeds the fair market value of assets
allocable to such benefits, all determined as of the then most
recent valuation date for such Plan using PBGC actuarial
assumptions for single employer plan terminations.
The foregoing definitions shall be equally applicable to
both the singular and plural forms of the defined terms.
ARTICLE II
THE CREDITS
SECTION 2.01. ADVANCES.
(a) From and including the date of this Agreement and prior
to the Facility Termination Date, the Lender agrees, on the terms
and subject to the conditions set forth in this Agreement, to
make Advances to the Borrower from time to time in amounts not to
exceed the Aggregate Available Commitment existing at such time.
Lender agrees that the initial Advance to Borrower pursuant to
the terms of this Agreement shall be in the amount of $1,500,000
and shall be made within one (1) business day of the date of this
Agreement. Although the Borrower may obtain multiple Advances
hereunder, this is not a revolving line of credit and Advances
may not be repaid and re-advanced. Prepayment may only be made
in accordance with ARTICLE III.
(b) The Borrower agrees that if at any time the outstanding
balance of the Loan exceeds the Aggregate Commitment, the
Borrower shall repay immediately the then outstanding Loan
balance in such amount as is necessary to eliminate such excess.
(c) The Borrower's obligation to pay the principal of, and
interest on, each Advance shall be evidenced by a Note executed
by the Borrower in the principal amount equal to such Advance and
dated the date of such Advance.
Each Advance shall mature, and the principal amount thereof and
any unpaid accrued interest thereon shall be due and payable, on
February 1, 2002 (or as otherwise provided in the related Note).
SECTION 2.02. FACILITY TERMINATION DATE. The Facility
Termination Date is the date after which the Lender is no longer
obligated to make Advances hereunder and shall occur upon the
earlier of:
(a) February 1, 2002; or
(b) Acceleration by the Lender in accordance with the
provisions of ARTICLE VIII.
Such termination of the credit facility shall not affect in any
way the Lender's rights, including the rights to accelerate the
Loans, under this Agreement and the Notes.
SECTION 2.03. MINIMUM AMOUNT AND MAXIMUM AMOUNT OF EACH
ADVANCE. After the initial Advance, each Advance shall be in the
minimum amount of $500,000 (and in multiples of $50,000 if in
excess thereof) and in the maximum amount of $1,000,000.
SECTION 2.04. AGGREGATE COMMITMENT. The Lender shall not be
obligated to make any Advance prior to the date of this
Agreement. From and after the date of this Agreement the
"Aggregate Commitment" shall be $5,000,000.
SECTION 2.05. BORROWING NOTICES FOR NEW ADVANCES. After
the initial Advance, Borrower shall give the Lender irrevocable
notice containing the following information (the "Borrowing
Notice") not later than 10:00 a.m. (Kansas City time) at least
three (3) Business Days and not more than twenty (20) Business
Days before the proposed Borrowing Date of each Advance:
(a) the proposed Borrowing Date, which shall be a
Business Day, of such Advance;
(b) the aggregate amount of such Advance;
(c) a statement to the effect that all of the
representations and warranties of the Borrower contained herein
and in the Loan Documents are true and correct (i) as of the
date referred to in any representation or warranty that
addresses a matter as of a particular date and (ii) as to
all other representations and warranties as of the date of
such Borrowing Notice;
(d) a description of any Default that exists as to which
the proviso of clause (f) in ARTICLE IV may apply;
(e) a statement that the then applicable financial
milestones set forth in SCHEDULE 2.05(E) hereto ("Financial
Milestones") have been achieved; and
(f) a statement that the then applicable contractual and
operational milestones set forth in SCHEDULE 2.05(F) hereto
("Contractual and Operational Milestones") have been achieved.
Subject to the terms hereof and subject to the satisfaction of
the conditions set forth in ARTICLE IV, the Lender shall, not
later than noon (Kansas City time) on each Borrowing Date, make
available to Borrower immediately available funds in the amount
of the Advance requested to be made on such Borrowing Date.
Notwithstanding anything to the contrary contained herein,
Borrower shall not give Lender a Borrowing Notice until all
previous Borrowing Notices are either funded or denied pursuant
to the terms of this Agreement.
SECTION 2.06. RATES APPLICABLE AFTER AN EVENT OF DEFAULT.
During the continuance of an Event of Default, the Lender may, at
its option, by notice to the Borrower (which notice may be
revoked at the option of the Lender), declare that for the
duration of time during which such Event of Default shall be
continuing, the outstanding balance of the Loan shall bear
interest at a rate equal to twelve and one-half percent (12.5%)
per annum calculated for actual days elapsed on the basis of a
360-day year.
SECTION 2.07. METHOD OF PAYMENT. All payments of the
Obligations hereunder shall be made, without setoff, deduction or
counterclaim, in immediately available funds to the Lender
pursuant to wire transfer instructions provided to the Borrower
by a duly authorized executive officer of the Lender, or absent
such instructions, at the Lender's address specified pursuant to
SECTION 11.01, on the date when due. If the Borrower shall be
required by law to deduct any such amounts from or in respect of
any sum payable hereunder to the Lender, then the sum payable
hereunder shall be increased so that, after making all required
deductions, the Lender receives an amount equal to the sum it
would have received had no such deduction been made, and the
Borrower shall indemnify the Lender for taxes, assessments and
governmental charges imposed by any jurisdiction on account of
amounts paid or payable pursuant to this sentence. Within 30
days after the date of any payment of any such amount withheld by
either Borrower in respect of any payment to the Lender, the
Borrower shall furnish to the Lender the original or certified
copy of a receipt evidencing payment thereof.
SECTION 2.08. NOTES. Upon receipt of a Borrowing Notice,
the Lender shall promptly deliver to the Borrower a Note for
execution by the Borrower; PROVIDED, HOWEVER, that the Lender may
refuse to deliver such Note if the Lender is not obligated to
make an Advance hereunder.
SECTION 2.09. INTEREST RATE; PAYMENT DATES; INTEREST AND
FEE BASIS. Interest on principal shall be payable at a rate
equal to nine and one-half percent (9.5%) per annum, provided,
however, such interest rate may be increased as provided in this
Agreement under certain circumstances to 12.5% per annum. The
principal amount of each Advance, and all interest accrued on
each Advance, shall be payable on the Payment Date. Interest
accrued on each Advance shall be payable on any date on which
principal is prepaid, whether due to acceleration or otherwise.
Interest shall be calculated for actual days elapsed on the basis
of a 360-day year. Interest shall be payable for the day an
Advance is made but not for the day of any payment on the amount
paid if payment is received prior to noon (Kansas City time) at
the place of payment. If any payment of principal of or interest
on an Advance shall become due on a day which is not a Business
Day, such payment shall be made on the next succeeding Business
Day and, in the case of a principal payment, such extension of
time shall be included in computing interest in connection with
such payment.
SECTION 2.10. SECURITY. As security for the repayment of
the Obligations and for the payment and performance of all other
obligations of the Borrower to the Lender, Borrower shall cause
the following documents, all in form and content acceptable to
the Lender, to be executed and delivered to the Lender, and
Borrower shall cooperate with Lender to cause all filings,
recordings and other actions to be taken, all at no cost to the
Lender, as reasonably required by the Lender to establish of
record and to perfect the Lender's security interests or Liens to
the satisfaction of the Lender: (i) the Security Agreement
attached hereto as EXHIBIT C and (ii) such other and additional
instruments and reports as may reasonably be required in the
opinion of the Lender to validate and perfect its security
interest or lien and enable it to exercise and enforce its rights
under this Agreement or the Security Documents executed and
delivered to the Lender as security for the Obligations.
ARTICLE III
PREPAYMENT
The Borrower may at any time and from time to time prepay
the Loan, in full or in part, without penalty or premium. All
prepayments made, whether a scheduled installment, prepayment, or
payment as a result of acceleration, shall be allocated first to
accrued but unpaid interest on all outstanding Notes, next to any
costs of collection, and then to installments of principal
remaining outstanding on the Notes, first to principal amounts
overdue then to principal amounts currently due and then to
installments of principal due in the future in the inverse order
of their maturity. In the event that the Borrower prepays a Note
in part, the Borrower, at Lender's option, shall execute and
deliver to the Lender a new Note in a principal amount equal to
the principal remaining outstanding.
ARTICLE IV
ADVANCE CONDITIONS
The Lender shall not be required to make a requested
Advance, if on the proposed Borrowing Date for such Advance:
(a) All representations and warranties of the Borrower
contained herein and in the Loan Documents are not true and
correct (i) as of the date referred to in any representation
or warranty that addresses a matter as of a particular date
and (ii) as to all other representations and warranties as
of the date of such proposed Advance;
(b) An accurate and complete Borrowing Notice shall not
have been properly submitted with respect to such Advance;
(c) A duly executed Note representing the Advance has
not been received by the Lender;
(d) A Security Agreement, in the form of EXHIBIT C
hereto, duly executed by an Authorized Officer of the Borrower
has not been received by the Lender;
(e) The Facility Termination Date shall have occurred;
(f) A Default or Event of Default has occurred and is
continuing or will exist as a result of the requested
Advance; provided, however, this clause (f) shall not apply
to any Default, the facts of which have been specifically
disclosed to the Lender in the Borrowing Notice for such
Advance and as to which the Lender has, within five (5)
Business Days after the Lender's receipt of the Borrowing
Notice, neither advised the Borrower of its intent to
declare an Event of Default nor, advised the Borrower that
it intends to exercise its rights in this clause (f) and not
make the requested Advance (as is the Lender's right,
exercising such right in its sole discretion);
(g) An Event of Force Majeure (as defined in Section
11.13 of this Agreement) has occurred; or
(h) The applicable Financial Milestones or the applicable
Contractual and Operational Milestones have not been achieved.
Each Borrowing Notice with respect to each such Advance shall
constitute a representation and warranty by the Borrower that the
conditions contained in this ARTICLE IV have been satisfied. The
Lender may require a duly completed compliance certificate (dated
the Borrowing Date) in substantially the form of EXHIBIT B hereto
as a condition to making an Advance.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
SECTION 5.01. ORGANIZATION, STANDING AND POWER. The
Borrower is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is
incorporated and has all requisite power and authority to own,
lease and operate its properties and to carry on its business as
now being conducted. The Borrower is duly qualified or licensed
to do business and is in good standing in each jurisdiction in
which the nature of its business or the ownership or leasing of
its properties makes such qualification or licensing necessary,
other than in such jurisdictions where the failure to be so
qualified or licensed (individually or in the aggregate) would
not have a Material Adverse Effect.
SECTION 5.02. AUTHORITY; NONCONTRAVENTION. The Borrower
has the requisite corporate power and authority to enter into
this Agreement and perform its obligations hereunder and under
the Loan Documents and the same have been duly authorized by all
necessary corporate action on the part of the Borrower, and
assuming this Agreement constitutes the valid and binding
agreement of the Lender, constitute valid and binding obligations
of the Borrower enforceable against the Borrower, in accordance
with its terms, except to the extent that the enforcement thereof
may be limited by (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally, and (ii) general
principles of equity regardless of whether enforceability is
considered in a proceeding in equity or at law. Except as set
forth on the attached SCHEDULE 5.02, the execution and delivery
of this Agreement by the Borrower did not, and the consummation
of the transactions contemplated by this Agreement will not,
conflict with, or result in any violation of, or default (with or
without notice or lapse of time, or both) under, or give rise to
a right of termination, cancellation or acceleration of any
obligation or to loss by the Borrower of a material benefit
under, or result in the creation of any Lien upon any of the
properties or assets of the Borrower under, (i) the articles of
incorporation or bylaws of the Borrower, (ii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit or license applicable to the
Borrower or its properties or assets or (iii) subject to any
required governmental filings, any law applicable to the Borrower
or its properties or assets, other than any such conflicts,
violations, defaults, rights or Liens that individually or in the
aggregate would not (x) have a Material Adverse Effect,
(y) materially impair the ability of the Borrower to perform its
obligations under this Agreement or (z) prevent the consummation
of any of the transactions contemplated by this Agreement.
SECTION 5.03. TAXES. The Borrower has timely filed all
Returns and reports required to be filed by it, except where
failure to timely file would not have a Material Adverse Effect.
All such Returns and reports are complete and accurate except
where the failure to be complete or accurate would not have a
Material Adverse Effect. The Borrower has paid or has set up an
adequate reserve for the payment of all Taxes shown as due on
such Returns except where the failure to do so would not have a
Material Adverse Effect. No deficiencies for any Taxes have been
asserted, proposed or assessed against the Borrower that have not
been paid or otherwise settled or reserved against, except for
deficiencies the assertion, proposing or assessment of which
would not have a Material Adverse Effect, and no requests for
waivers of the time to assess any such taxes are pending. There
are no material Liens for Taxes (other than for current taxes not
yet due and payable) on the assets of the Borrower.
SECTION 5.04. COMPLIANCE WITH LAWS. The Borrower has in
effect all permits from approvals, authorizations, certificates,
filings, franchises, licenses, notices, permits, variances,
exemptions, orders and rights ("Permits") necessary for it to
own, lease or operate its properties and assets and to carry on
its business as now conducted, and there has not occurred any
default under any Permit, except for the absence of Permits and
for defaults under Permits that, individually or in the
aggregate, have not had a Material Adverse Effect. The Borrower
is in compliance with all applicable Law, except where failures
to so comply, individually or in the aggregate, would not have a
Material Adverse Effect.
SECTION 5.05. ENVIRONMENTAL MATTERS. The Borrower is and
at all times has been in full compliance with, and has not been
and is not in violation of or liable under, any Environmental Law
(which compliance includes the possession by the Borrower of all
Permits required under applicable Environmental Law and
compliance with the terms and conditions thereof), except for
such failure to be in compliance which, individually or in the
aggregate, would not have a Material Adverse Effect. There are
no pending or, to the Knowledge of the Borrower, Threatened
claims, orders, notices, administrative or judicial actions, or
Encumbrances, relating to environmental, health, and safety
liabilities arising under or pursuant to any federal, state or
local Environmental Laws, with respect to or affecting any of the
properties and assets (whether real, personal, or mixed) in which
the Borrower has an interest, except for any such claim, order,
notice, administrative or judicial action, Encumbrance or other
restriction that would not, individually or in the aggregate,
have a Material Adverse Effect.
SECTION 5.06. INTELLECTUAL PROPERTY. Except as set forth
in the attached SCHEDULE 5.06, the Borrower owns sufficient
right, title and interest in and to, or has valid licenses of
sufficient scope and duration for, all patents, patent rights,
copyrights, trademarks, service marks, trade names, software,
trade secrets, confidential information and other intellectual
property material to the operation of the business of the
Borrower as currently conducted and as proposed to be conducted
(the "Intellectual Property Assets"). The Intellectual Property
Assets are free and clear of all Liens which would materially
impair the Borrower's ability to use the Intellectual Property
Assets in the business of the Borrower as currently conducted or
proposed to be conducted. The Borrower has not granted any third
party any rights in and to the Intellectual Property Assets. No
Intellectual Property Assets of the Borrower infringes, or
conflicts with, or to the Knowledge of the Borrower, is alleged
to infringe upon or conflict with the intellectual property
rights of any third party. The Borrower has no Knowledge that
any of its employees performing or managing key functions of the
Borrower is obligated under any contract
(including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the
use of such employee's best efforts to promote the interests of
the Borrower or that would conflict with the Borrower's business
as proposed to be conducted. To the Knowledge of the Borrower,
neither the execution nor delivery of this Agreement, nor the
carrying on of the Borrower's business by the employees of the
Borrower, nor the conduct of the business of the Borrower as
proposed, will conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such
employees is now obligated, which conflict or breach would have a
Material Adverse Effect. The Borrower does not utilize nor
intends to utilize any inventions of any of its employees (or
people it currently intends to hire) made prior to their
employment by the Borrower.
SECTION 5.07. CERTAIN PAYMENTS. Neither the Borrower, nor
any of the directors, officers, agents, or employees of the
Borrower, nor to the Knowledge of the Borrower, any other Person
associated with or acting for or on behalf of the Borrower, has
directly or indirectly (a) made any contribution, gift, bribe,
rebate, payoff, influence payment, kickback, or other payment to
any Person, private or public, regardless of form, whether in
money, property, or services (i) to obtain favorable treatment in
securing business, (ii) to pay for favorable treatment for
business secured, (iii) to obtain special concessions or for
special concessions already obtained, for or in respect of the
Borrower or any Affiliate of the Borrower, (b) established or
maintained any fund or asset that has not been appropriately
recorded in the books and records of the Borrower, which in the
case of either clause (a) or (b) would be in violation of Law or
would have a Material Adverse Effect.
SECTION 5.08. SECURITY DOCUMENTS. The provisions of each
Security Document providing for any Lien will be effective to
create in favor of the Lender a legal, valid and enforceable Lien
in all right, title and interest of the Borrower in the
collateral described therein. When financing statements have
been duly filed and, when appropriate, possession or control of
such collateral has been taken by the Lender, each Security
Document providing for the creation of a security interest shall
constitute a fully perfected security interest in all right,
title and interest of the Borrower in such collateral, subject
only to any (i) prior Liens held by Lender and (ii) any Liens
expressly permitted under the terms of such Security Document and
set forth on SCHEDULE 5.08 attached hereto (but only to the
extent such Liens are perfected or otherwise have priority over
the Lien created by the Security Documents).
SECTION 5.09. BUSINESS PLAN MILESTONES. The Financial
Milestones and the Contractual and Operational Milestones have
been derived from the Business Plan and each of them have been
prepared in good faith with a reasonable basis.
SECTION 5.10. ACCURACY OF INFORMATION. All information,
exhibits or reports with respect to Debtor that has been or is
hereafter furnished by or on behalf of Debtor to Secured Party is
or will be, as of the date furnished to Secured Party, accurate,
correct and complete in all material respects.
SECTION 5.11. MATERIAL AGREEMENTS. Except as set forth in
the attached SCHEDULE 5.11, the Borrower is not in default in the
performance, observance of fulfillment of any of the
obligations, covenants or conditions contained in any agreement
or instrument to which Borrower is a party, which default could
reasonably be expected to have a Material Adverse Effect.
SECTION 5.12. LITIGATION. Except as set forth in the
attached SCHEDULE 5.12, there is no litigation, arbitration,
governmental investigation, proceeding or inquiry pending or, to
Borrower's Knowledge, threatened against or affecting the
Borrower which could have a Material Adverse Effect.
ARTICLE VI
COVENANTS
So long as any Note remains unpaid, unless the Lender shall
otherwise consent in writing:
SECTION 6.01. FINANCIAL REPORTING. The Borrower will
maintain a system of accounting established and administered in
accordance with GAAP, and furnish to the Lender:
(a) Within 90 days after the close of each of its Fiscal
Years, an audit report certified by independent certified
public accountants, acceptable to the Lender, prepared in
accordance with GAAP for itself, including balance sheets as
of the end of such period, related profit and loss and
reconciliation of surplus statements, and a statement of
cash flows, accompanied by (a) any management letter prepared
by said accountants, and (b) a certificate of said accountants
that, in the course of their examination necessary for their
certification of the foregoing, they have obtained no
knowledge of any Default or Event of Default, or if, in the
opinion of such accountants, any Default or Event of Default
shall exist, stating the nature and status thereof.
(b) Within 45 days after the close of the first three
quarterly periods of each of its Fiscal Years, unaudited
balance sheets as at the close of each such period and
profit and loss and reconciliation of surplus statements and
a statement of cash flows for the period from the beginning
of such Fiscal Year to the end of such quarter, all certified
by its President or the Chief Financial Officer.
(c) As soon as available, but in any event within 60
days after the beginning of each Fiscal Year of the Borrower,
a copy of the plan and forecast (including a projected
consolidated and consolidating balance sheet, income statement
and funds flow statement and updated projections) of the
Borrower for such Fiscal Year.
(d) Together with the financial statements required
hereunder, a compliance certificate in substantially the form
of EXHIBIT B hereto signed by its chief financial officer
showing the calculations necessary to determine compliance
with this Agreement and stating that no Default or Event of
Default exists, or if any Default or Event of Default exists,
stating the nature and status thereof.
(e) Within 270 days after the close of each Fiscal Year,
a statement of the
Unfunded Liabilities of each Single Employer Plan, certified
as correct by an actuary enrolled under ERISA.
(f) As soon as possible and in any event within ten (10) days
after the Borrower knows that any event has occurred which is a
Termination Event with respect to any Plan which is subject to
Title IV of ERISA, a statement, signed by the chief financial
officer of the Borrower, describing said Termination Event and
any action which the Borrower proposes to take with respect
thereto.
(g) As soon as possible and in any event within ten (10) days
after receipt by the Borrower, a copy of (i) any notice, claim,
complaint or order to the effect that the Borrower is or may be
liable to any Person as a result of the release by the Borrower
or any other Person of any Hazardous Materials into the
Environment or requiring that action be taken by the Borrower to
respond to or clean up a Release of Hazardous Materials into the
Environment, and (ii) any notice, complaint or citation alleging
any violation of any Environmental Law or environmental permit by
the Borrower. Within ten (10) days after the Borrower having
Knowledge of the proposal, enactment or promulgation of any
Environmental Law which would have a Material Adverse Effect, the
Borrower shall provide the Lender with written notice thereof.
(h) Promptly upon the furnishing thereof to the stockholders of
Borrower, copies of all financial statements, reports and proxy
statements so furnished.
(i) Promptly, and in any event within five (5) days after the
filing thereof, copies of any reports which the Borrower files
with the SEC.
(j) Such other information (including non-financial information)
as the Lender may from time to time reasonably request.
SECTION 6.02. USE OF PROCEEDS. The Borrower will use the
proceeds of the Advances for working capital and general
corporate purposes in accordance with the Borrower's August 2001
business plan, dated August 12, 2001, prepared by management of
the Borrower which includes financial projections and budgeted
capital expenditures (the "Business Plan"). The Business Plan is
the most current Business Plan prepared by management of the
Borrower and presented to Borrower's board of directors. A copy
of the Business Plan was delivered to the Lender prior to the
date of this Agreement. The Borrower will not use any
identifiable portion of the Advances to purchase or carry any
Margin Stock.
SECTION 6.03. NOTICE OF DEFAULT The Borrower will give
prompt notice in writing to the Lender of the occurrence of any
Default or Event of Default and of any other development relating
to the Borrower, financial or other, which could reasonably be
expected to have a Material Adverse Effect.
SECTION 6.04. CONDUCT OF BUSINESS. The Borrower will carry
on and conduct its business in generally the same manner and in
generally the same fields of enterprise as it is presently
conducted and to do all things necessary to remain duly
incorporated, validly existing and in good standing as a domestic
corporation in its jurisdiction of incorporation and, except
where the failure to do so would not have a Material Adverse
Effect, maintain all requisite authority to conduct its business
in each jurisdiction in which its business is conducted.
SECTION 6.05. TAXES. The Borrower will timely file
complete and correct United States federal and applicable
foreign, state and local tax returns required by applicable law
and pay when due all taxes, assessments and governmental charges
and levies upon it or its income, profits or Property, except
those which are being diligently contested in good faith by
appropriate proceedings and with respect to which adequate
reserves have been set aside.
SECTION 6.06. INSURANCE. The Borrower will maintain with
financially sound and reputable insurance companies insurance on
all its Property in such amounts and covering such risks as is
consistent with sound business practice, and will furnish to the
Lender upon request full information as to the insurance carried.
SECTION 6.07. COMPLIANCE WITH LAWS. The Borrower will
comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be
subject, the failure to comply with which would have a Material
Adverse Effect.
SECTION 6.08. MAINTENANCE OF PROPERTIES. The Borrower will
do all things necessary and consistent with sound business
practices to maintain, preserve, protect and keep its Property in
good repair, working order and condition, and, consistent with
sound business practices, make all necessary and proper repairs,
renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
SECTION 6.09. INSPECTION. The Borrower will permit the
Lender, by its representatives and agents, to inspect any of the
Property, corporate books and financial records of the Borrower,
to examine and make copies of the books of accounts and other
financial records of the Borrower, and to discuss the affairs,
finances and accounts of the Borrower with, and to be advised as
to the same by, their respective officers at such reasonable
times and intervals as the Lender may designate.
SECTION 6.10. INVESTMENTS AND PURCHASES. The Borrower will
not make or suffer to exist any Investments or commitments
therefor, or become or remain a partner in any partnership or
joint venture, or make any Purchase of any Person.
SECTION 6.11. LIENS. The Borrower will not create, incur,
or suffer to exist any Lien in, of or on the Property of the
Borrower, except:
(a) Liens for taxes, assessments or governmental charges or
levies on its Property if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are
being contested in good faith and by appropriate proceedings and
for which adequate reserves in accordance with GAAP shall have
been set aside on its books;
(b) Liens imposed by law, such as landlords', carriers',
warehousemen's and mechanics' liens and other similar liens
arising in the ordinary course of business which secure payment
of obligations not more than 60 days past due or which are being
contested in good faith by appropriate proceedings and for which
adequate reserves in
accordance with GAAP shall have been set aside on its books;
(c) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions, or
other social security or retirement benefits, or similar
legislation;
(d) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a nature
generally existing with respect to properties of a similar
character and which do not in any material way adversely affect
the marketability of the same or interfere with the use thereof
in the business of the Borrower;
(e) Liens existing on the date hereof as disclosed on
SCHEDULE 5.08;
(f) Liens on Property in existence at the time of
acquisition of such Property by the Borrower;
(g) Deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds, and
other obligations of a like nature incurred in the ordinary
course of business by the Borrower;
(h) Liens created by the Loan Documents; and
(i) Liens arising from or in connection with a
Permitted Telecommunication Asset Sale.
SECTION 6.12. AFFILIATES. The Borrower shall not enter
into any transaction (including, without limitation, the purchase
or sale of any Property or service) with, or make any payment or
transfer to, any other Affiliate except in the Ordinary Course of
Business and pursuant to the reasonable requirements of the
Borrower's business and upon fair and reasonable terms no less
favorable to the Borrower than the Borrower would obtain in a
comparable arms-length transaction.
SECTION 6.13. CHANGE IN CORPORATE STRUCTURE; FISCAL YEAR.
The Borrower shall not (a) permit any amendment or modification
to be made to its certificate of incorporation or bylaws which is
adverse to the interests of the Lender or (b) subject to the
Lender's consent (which consent shall not be unreasonably
withheld), change its Fiscal Year to end on any date other than
December 31 of each year.
SECTION 6.14. INCONSISTENT AGREEMENTS. The Borrower shall
not enter into any indenture, agreement, instrument or other
arrangement which contains any provision which would be violated
or breached by the making of Advances or by the performance by
the Borrower of any of the Borrower's obligations under any Loan
Document.
SECTION 6.15. ASSET SALES. The Borrower will not, directly
or indirectly, assign, license, sell or transfer any of the
Borrower's Property other than in the ordinary course of
business. In addition, Borrower will not engage in any
Telecommunication Asset Sale involving
Property which is part of Borrower's "metro" or "regional"
business (as described in the Business Plan), whether or not such
Telecommunication Asset Sale is in the ordinary course of
business, without first obtaining the Lender's written consent to
such sale. All cash proceeds from the sale of Collateral,
including cash proceeds from a Permitted Telecommunication Asset
Sale, shall be used to prepay the Loan in accordance with
ARTICLE III hereof.
SECTION 6.16. FURTHER ASSURANCES. The Borrower shall
execute and file all such further instruments and perform such
other acts as the Lender may determine are necessary or advisable
to maintain the first priority of the Liens and security
interests created by the Security Documents in all property
subject thereto or otherwise to carry out the purposes of this
Agreement.
ARTICLE VII
EVENTS OF DEFAULT
The occurrence of any one or more of the following events
shall constitute an Event of Default:
SECTION 7.01. Any representations or warranties of the
Borrower made or deemed made by or on behalf of the Borrower to
the Lender under or in connection with this Agreement, any
Advance, or in any certificate or information delivered in
connection with this Agreement or any other Loan Document are not
true and correct (i) as of the date referred to in such
representations or warranties that addresses a matter as of a
particular date and (ii) as to all other representations and
warranties as of the date of such representation or warranty.
SECTION 7.02. Nonpayment of principal of any Note when due,
or nonpayment of interest upon a Note or other obligations under
any of the Loan Documents within five (5) days after the same
becomes due.
SECTION 7.03. The breach by the Borrower of any of the
terms or provisions of SECTIONS 6.02, 6.11, 6.13 or 6.14.
SECTION 7.04. The breach by the Borrower (other than a
breach which constitutes a Default under SECTION 7.01, 7.02 or
7.03) of any of the terms or provisions of this Agreement, in any
such case, which is not remedied within five (5) days after
written notice to the Borrower from the Lender.
SECTION 7.05. Failure of the Borrower to pay any
Indebtedness when due; or the default by the Borrower in the
performance of any term, provision or condition contained in any
agreement under which any Indebtedness was created or is
governed, or any other event shall occur or condition exist, the
effect of any of which is to cause, or to permit the holder or
holders of such Indebtedness to cause, such Indebtedness to
become due prior to its stated maturity; or any such Indebtedness
of the Borrower shall be declared to be due and payable or
required to be prepaid (other than by a regularly scheduled
payment) prior to the stated maturity thereof; or the Borrower
shall not pay, or admit in writing its inability to pay, its
debts generally as they become due.
SECTION 7.06. The Borrower shall (a) have an order for
relief entered with respect to it under the Federal bankruptcy
laws as now or hereafter in effect, (b) make an assignment for
the benefit of creditors, (c) apply for, seek, consent to, or
acquiesce in, the appointment of a receiver, custodian, trustee,
examiner, liquidator or similar official for it or any
Substantial Portion of its Property, (d) institute any proceeding
seeking an order for relief under the Federal bankruptcy laws as
now or hereafter in effect or seeking to adjudicate it a bankrupt
or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or
its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, (e) take any corporate
action to authorize or effect any of the foregoing actions set
forth in this SECTION 7.06, (f) fail to contest in good faith any
appointment or proceeding described in SECTION 7.07 or (g) become
unable to pay, not pay, or admit in writing its inability to pay,
its debts generally as they become due.
SECTION 7.07. Without the application, approval or consent
of the Borrower, a receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Borrower or any
Substantial Portion of its Property, or a proceeding described in
SECTION 7.06(D) shall be instituted against the Borrower, and
such appointment continues undischarged or such proceeding
continues undismissed or unstayed for a period of thirty (30)
consecutive days.
SECTION 7.08. Any Governmental Authority shall condemn,
seize or otherwise appropriate, or take custody or control of
(each a "CONDEMNATION"), all or any portion of the Property of
the Borrower which, when taken together with all other Property
of the Borrower so condemned, seized, appropriated, or taken
custody or control of, during the twelve-month period ending with
the month in which any such Condemnation occurs, constitutes a
Substantial Portion.
SECTION 7.09. The Borrower shall fail within thirty (30)
days to pay, bond or otherwise discharge any judgments or orders
for the payment of money in an aggregate amount in excess of
$100,000, which are not stayed on appeal or otherwise being
appropriately contested in good faith.
SECTION 7.10. The Unfunded Liabilities of all Single
Employer Plans shall exceed in the aggregate $100,000 or any
Reportable Event shall occur in connection with any Plan.
SECTION 7.11. The Borrower or any other member of the
Controlled Group shall have been notified by the sponsor of a
Multiemployer Plan that it has incurred withdrawal liability to
such Multiemployer Plan in an amount which, when aggregated with
all other amounts required to be paid to Multiemployer Plans by
the Borrower or any other member of the Controlled Group as
withdrawal liability (determined as of the date of such
notification), exceeds $100,000.
SECTION 7.12. The Borrower or any other member of the
Controlled Group shall have been notified by the sponsor of a
Multiemployer Plan that such Multiemployer Plan is in
reorganization or is being terminated, within the meaning of
Title IV of ERISA, if as a result of such reorganization or
termination the aggregate annual contributions of the Borrower
and the other members of the Controlled Group (taken as a whole)
to all Multiemployer Plans which are then in reorganization or
being terminated have been or will be increased over the amounts
contributed to such Multiemployer Plans for the respective plan
years of each such
Multiemployer Plan immediately preceding the plan year in which
the reorganization or termination occurs by an amount exceeding
$100,000.
SECTION 7.13. The Borrower shall be the subject of any
proceeding or investigation pertaining to the release by the
Borrower or any other Person of any toxic or hazardous waster or
substance into the Environment, or any violation of any federal,
state or local environmental, health or safety law or regulation,
which, in either case, could reasonably be expected to have a
Material Adverse Effect.
SECTION 7.14. The failure of any Security Document, for any
reason, to be in full force and effect.
SECTION 7.15. The occurrence of a default or Event of
Default under any other agreement, instrument and/or document
between Lender and Borrower, including, without limitation, any
Note or Security Document, which is not cured within the time, if
any, specified therefor in such other agreement, instrument
and/or document.
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
SECTION 8.01. ACCELERATION. If any Event of Default
described in SECTION 7.06 or 7.07 occurs with respect to the
Borrower, the obligations of the Lender to make Advances
hereunder shall automatically terminate and the Obligations shall
immediately become due and payable without any election or action
on the part of the Lender. If any other Event of Default occurs,
the Lender may terminate or suspend the obligations of the Lender
to make Advances hereunder, or declare the Obligations to be due
and payable, or both, whereupon the Obligations shall become
immediately due and payable, without presentment, demand, protest
or notice of any kind, all of which each of the Borrower hereby
expressly waives.
Within ten (10) Business Days after acceleration of the
maturity of the Obligations or termination of the obligations of
the Lender to make Advances hereunder as a result of any Event of
Default (other than any Event of Default as described in SECTION
7.06 or 7.07 with respect to the Borrower) and before any
judgment or decree for the payment of the Obligations due shall
have been obtained or entered, the Lender may (in its sole
discretion), by notice to the Borrower, rescind and annul such
acceleration and/or termination.
SECTION 8.02. AMENDMENTS. Subject to the provisions of
this ARTICLE VIII, the Lender and the Borrower may enter into
agreements supplemental hereto for the purpose of adding or
modifying any provisions to the Loan Documents or changing in any
manner the rights of the Lender or the Borrower hereunder or
waiving any Default hereunder.
SECTION 8.03. PRESERVATION OF RIGHTS. No delay or omission
of the Lender to exercise any right under the Loan Documents
shall impair such right or be construed to be a waiver of any
Default or an acquiescence therein, and the making of an Advance
notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Advance
shall not constitute any waiver or acquiescence. Any single or
partial exercise of any such right
shall not preclude other or further exercise thereof or the
exercise of any other right, and no waiver, amendment or other
variation of the terms, conditions or provisions of the Loan
Documents whatsoever shall be valid unless in contained in a
writing signed by the Lender, and then only to the extent set
forth in such writing. All remedies contained in the Loan
Documents or afforded by law shall be cumulative and all shall be
available to the Lender until the Obligations have been paid in
full.
ARTICLE IX
SETOFF
In addition to, and without limitation of, any rights of the
Lender under applicable law, if any Default or Event of Default
occurs, any and all deposits (including all account balances,
whether provisional or final and whether or not collected or
available) and any other Indebtedness at any time held or owing
by the Lender or any Affiliate of the Lender to or for the credit
or account of the Borrower may be offset and applied toward the
payment of the Obligations owing to the Lender or such Affiliate
of the Lender, whether or not the Obligations, or any part
hereof, shall then be due or have matured.
ARTICLE X
BENEFIT OF AGREEMENT; ASSIGNMENTS
SECTION 10.01. SUCCESSORS AND ASSIGNS. The terms and
provisions of the Loan Documents shall be binding upon and inure
to the benefit of the Borrower and the Lender and their
respective successors and assigns, except that (a) the Borrower
shall not have the right to assign any rights or obligations
under the Loan Documents, and (b) any assignment by the Lender
must be made in compliance with SECTION 10.02. Any assignee or
transferee of any Note agrees by acceptance thereof to be bound
by all the terms and provisions of the Loan Documents. Any
request, authority or consent of any Person, who at the time of
making such request or giving such authority or consent is the
holder of the Note, shall be conclusive and binding on any
subsequent holder, transferee or assignee of such Note or of any
note or notes issued in exchange therefor.
SECTION 10.02. ASSIGNMENTS BY THE LENDER.
10.02.1. ASSIGNMENTS OF THIS AGREEMENT AND THE
OBLIGATIONS THEREUNDER. An Assignment or transfer of this
Agreement may be made without the prior consent of the Borrower
(i) by the Lender to any of its Affiliates, provided that any
such assignment or transfer to such Affiliate shall not release
the Lender from the obligations of the Lender under this
Agreement, or (ii) pursuant to any merger or sale of
substantially all of the assets or stock of the Lender or such
Affiliates (or any transaction having such effect) that is
pursuant to an agreement entered into after the date of this
Agreement and pursuant to which in the case of a purchase of
substantially all of the assets or stock of the Lender or such
Affiliates, the party purchasing such assets or stock of the
Lender or such Affiliates assumes the obligations of the Lender
under this Agreement.
10.02.2. TRANSFERS OF THE NOTES. The Lender may in
accordance with applicable law and without the prior consent of
the Borrower, at any time, transfer and assign all or part of the
Notes to one or more Persons ("Transferees"). In the case of
such an assignment or transfer, the Lender shall surrender the
Notes subject to such assignment to the Borrower prior to the
transfer and assignment being effective and the Borrower shall,
simultaneously with such surrender, reissue and deliver new Notes
in the same aggregate outstanding principal amount as the
surrendered Note in the name of such holders as requested by the
Lender. On or after the effective date of such transfer and
assignment, (a) each such Transferee shall acquire all of the
rights of the Lender in the Notes assigned to such Transferee,
and (b) the Lender shall remain subject to the Aggregate
Commitment and Loans.
10.02.3. ADMINISTRATION. As a condition to any
transfer or assignment of the Notes pursuant to SECTION 10.02.2,
each Transferee shall appoint the Lender (or any other Person to
whom this Agreement has been assigned in accordance with SECTION
10.02.1 or with the consent of the Borrower) (the "Agent") to act
as agent of such Transferee, provided that the Agent shall not
have a fiduciary relationship in respect of the Borrower or any
Transferee of the Notes. The Agent shall exclusively exercise
such powers under this Agreement as are specifically delegated to
the Lender by the terms hereof, including the right to receive
notices, requests, waivers, instructions, information regarding
the Borrower, consents and other documents which the Borrower may
be required to deliver pursuant to this Agreement. The Agent
shall have no implied duties to the Transferees, or any
obligation to the Transferees to take any action thereunder.
SECTION 10.03. DISSEMINATION OF INFORMATION. The Borrower
authorizes the Lender to disclose to any Person to whom this
Agreement is being assigned pursuant to SECTION 10.02.1 or
Transferees under SECTION 10.02.2 any and all information in the
Lender's possession concerning the creditworthiness of the
Borrower, subject however, to the Lender obtaining an appropriate
confidentiality agreement respecting such information.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01. NOTICES. Unless otherwise provided herein,
any notice, request, waiver, instruction, consent or document or
other communication required or permitted to be given by this
Agreement shall be effective only if it is in writing and (a)
delivered by hand or sent by certified mail, return receipt
requested, (b) if sent by a nationally-recognized overnight
delivery service with delivery confirmed, or (c) if telexed or
telecopied, with receipt confirmed as follows:
The Borrower: Digital Teleport, Inc.
8112 Maryland Avenue
St. Louis, MO 63105
Attn: President
Facsimile: (314) 880-1999
with a copy to: Digital Teleport, Inc.
8112 Maryland Avenue
St. Louis, MO 63105
Attn: CFO
Facsimile: (314) 880-1999
and a copy to: Digital Teleport, Inc.
8112 Maryland Avenue
St. Louis, MO 63105
Attn: General Counsel
Facsimile: (314) 880-1999
The Lender: KLT Telecom Inc.
10740 Nall, Suite 230
Overland Park, KS 66211
Attn: President
Facsimile: (913) 967-4340
with a copy to: KLT Inc.
10740 Nall, Suite 230
Overland Park, Kansas 66211
Attn: General Counsel
Facsimile: (913) 967-4340
The Parties shall promptly notify each other of any change in
their respective addresses or facsimile numbers or of the Person
or office to receive notices, requests or other communications
under this SECTION 11.01. Notice shall be deemed to have been
given as of the date when so personally delivered, when actually
delivered by the U.S. Postal Service at the proper address, the
next day when delivered during business hours to an overnight
delivery service properly addressed or when receipt of a telex or
telecopy is confirmed, as the case may be, unless the sending
party has actual Knowledge that such notice was not received by
the intended recipient.
SECTION 11.02. ENTIRE AGREEMENT. This Agreement, together
with all Loan Documents, Schedules and Exhibits hereto, and a
certain letter agreement between the Parties concerning SCHEDULE
5.02, embody the entire agreement and understanding of the
Parties in respect to the matters contemplated hereby and
supersedes and renders null and void all other prior agreements
and understandings, written and oral, with respect to the subject
matters hereof, PROVIDED that this provision shall not abrogate
any other written agreement between the Parties executed
simultaneously with this Agreement. No Party shall be liable or
bound to any other Party in any manner by any promises,
conditions, representations, warranties, covenants, agreements
and understandings, except as specifically set forth herein or
therein.
SECTION 11.03. WAIVER. Except as otherwise permitted in
this Agreement, the terms or conditions of this Agreement may not
be waived unless set forth in a writing signed by the Party
entitled to the benefits thereof. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute
a waiver of such provision at any time in the future or a waiver
of any other provision hereof. The rights and remedies of the
Parties are cumulative and not alternative.
Except as otherwise provided in this Agreement, neither the
failure nor any delay by any Party in exercising any right, power
or privilege under this Agreement, or the documents referred to
in this Agreement or therein will operate as a waiver of such
right, power or privilege, and no single or partial exercise of
any such right, power or privilege will preclude any other or
further exercise of such right, power or privilege or the
exercise of any other right, power or privilege.
SECTION 11.04. GOVERNING LAW. This Agreement shall be
governed by and construed in accordance with the laws of the
State of Missouri, without regard to conflict of laws principles.
SECTION 11.05. SEVERABILITY. If any term or provision of
this Agreement or the application thereof to either party or set
of circumstances shall, in any jurisdiction and to any extent, be
finally held invalid or unenforceable, such term or provision
shall only be ineffective as to such jurisdiction, and only to
the extent of such invalidity or unenforceability, without
invalidating or rendering unenforceable any other terms or
provisions of this Agreement or under any other circumstances,
and the parties shall negotiate in good faith a substitute
provision which comes as close as possible to the invalidated or
unenforceable term or provision, and which puts each party in a
position as nearly comparable as possible to the position it
would have been in but for the finding of invalidity or
unenforceability, while remaining valid and enforceable.
SECTION 11.06. COUNTERPARTS. This Agreement may be executed
in one or more counterparts each of which when so executed and
delivered shall for all purposes be deemed to be an original but
all of which, when taken together, shall constitute one and the
same Agreement.
SECTION 11.07. HEADINGS. The table of contents, captions
and headings used in this Agreement are inserted for convenience
only and shall not be deemed to constitute part of this Agreement
or to affect the construction or interpretation hereof.
SECTION 11.08. NO THIRD-PARTY BENEFICIARIES. Nothing in
this Agreement, express or implied, shall create or confer upon
any Person (including but not limited to any employees), other
than the Parties or their respective successors and permitted
assigns, any legal or equitable rights, remedies, obligations,
liabilities or claims under or with respect to this Agreement,
except as expressly provided herein.
SECTION 11.09. INTERPRETATION.
(a) Unless specifically stated otherwise, references to
Articles, Sections, Exhibits and Schedules refer to Articles,
Sections, Exhibits and Schedules in this Agreement. References
to "includes" and "including" mean "includes without limitation"
and "including without limitation." Whenever the context may
require, any pronoun shall include the corresponding masculine
feminine and neuter forms. Unless the context shall otherwise
require or provide, any reference to any agreement or other
instrument or statute or regulation is to such agreement,
instrument statute or regulation as amended and supplemented from
time to time (and, in the case of a statute or regulation, to any
successor provision).
(b) Each Party is a sophisticated legal entity that was
advised by experienced counsel and, to the extent it deemed
necessary, other advisors in connection with this Agreement.
Accordingly, each Party hereby acknowledges that no Party has
relied or will rely in respect of this Agreement or the
transactions contemplated hereby upon any document or written or
oral information previously furnished to or discovered by it or
its representatives, other than this Agreement or the documents
and instruments delivered on the date of this Agreement.
(c) No provision of this Agreement shall be interpreted in
favor of, or against, any of the Parties by reason of the extent
to which any such Party or its counsel participated in the
drafting thereof or by reason of the extent to which any such
provision is inconsistent with any prior draft hereof or thereof.
SECTION 11.10. INCLUSION OF INFORMATION IN SCHEDULES. The
inclusion of any information in any Schedule (i) shall not be
deemed an admission that any such information is material for
purposes of the representation and warranty to which it relates
or any other representation and warranty or for any other purpose
related to this Agreement or the transactions contemplated
hereby, including for purposes of any covenants, closing
conditions or any other remedies the Parties may have, and
(ii) shall not be used or interpreted in any manner to create a
standard of materiality for any such purpose.
SECTION 11.11. AMENDMENT. No amendment, modification or
alteration of the terms or provisions of this Agreement,
including any Schedules and Exhibits hereto or thereto, shall be
binding unless the same shall be in writing and duly executed by
the Party against whom such amendment, modification or alteration
is sought to be enforced.
SECTION 11.12. EFFECTIVENESS OF AGREEMENT. This Agreement
shall become effective as of the date of this Agreement.
SECTION 11.13. FORCE MAJEURE. The Lender shall have no
obligation to make any further Advances under, or otherwise be
obligated to perform, carry out or observe any of the terms,
conditions or covenants set forth in, this Agreement at any time
subsequent to the occurrence of an Event of Force Majeure (as
hereinafter defined). The term "Event of Force Majeure" as used
in this Agreement shall mean and include any of the following
which occurs after the date of this Agreement or, in the case of
any of the following which exist as of the date of this
Agreement, a material acceleration or worsening thereof: (i) any
general suspension or material limitation of trading in, or any
limitation on prices for, securities on any United States
national securities exchange, the NASDAQ Stock Market or in the
over-the-counter market; (ii) the declaration of a banking
moratorium or any suspension of payments in respect of banks in
the United States or a moratorium or suspension in foreign
exchange trading declared by major international banks or any
governmental authority; (iii) the commencement or escalation of a
war, armed hostilities, national emergency, international or
national crisis or calamity, acts of a public enemy, riot,
sabotage, insurrection, blockade or embargo, in any such case
directly or indirectly involving the United States; (iv) any
limitation (whether or not mandatory) by any Governmental
Authority on, or any other event which could, in the sole
judgment of the Lender, affect the extension of credit by banks
or other lending institutions in the United States; (v) any
change in the general political, market, economic or financial
conditions in the United States or abroad that could, in the sole
judgment of the Lender, have a material adverse effect on the
business, condition (financial or otherwise), results of
operations, prospects, operations or assets of the Borrower and
its subsidiaries, taken as a whole, or otherwise could, in the
sole judgment of the Lender, materially impair in any way the
contemplated future conduct of the business of the Borrower or
any of its subsidiaries, or materially impair the contemplated
benefits to the Lender of this Agreement (any such effect is
referred to hereinafter as a "Borrower Material Adverse Effect"),
(vi) the enactment, publication, decree, or other promulgation of
any statute, rule, regulation, or order of any Governmental
Authority which, in the sole judgment of the Lender, could have a
Borrower Material Adverse Effect, (vii) the taking of any action
by Governmental Authority in respect of monetary or (including,
without limitation, a devaluation of currency) which could, in
the sole judgment of the Lender, have a material adverse effect
on the securities markets in the United States, (viii) fire,
storm, flood, earthquake, explosion, or other acts of nature, God
or public enemy that could, in the sole judgment of the Lender,
have a Borrower Material Adverse Effect, (ix) labor strikes,
disputes, lockouts or other labor troubles causing cessation,
slowdown or interruptions of work that could, in the sole
judgment of the Lender, have a Borrower Material Adverse Effect,
or (x) shortages or delays in obtaining adequate labor, raw
materials, equipment or transportation, interruption of utility
services or accidents that could, in the sole judgment of the
Lender, have a Borrower Material Adverse Effect.
SECTION 11.14. EXPENSES; INDEMNIFICATION. The Borrower
shall reimburse the Lender for any costs, internal charges and
out-of-pocket expenses (including attorneys' fees and time
charges of attorneys for the Lender, which attorneys may be
employees of the Lender) paid or incurred by the Lender in
connection with the preparation, negotiation, execution,
delivery, review, amendment, modification, and administration of
the Loan Documents. The Borrower also agrees to reimburse the
Lender for any costs, internal charges and out-of-pocket expenses
(including attorneys' fees and time charges of attorneys for the
Lender, which attorneys may be employees of the Lender) paid or
incurred by the Lender in connection with the collection and
enforcement of the Loan Documents. The Borrower further agrees
to indemnify the Lender, its directors, officers and employees
against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all
expenses of litigation or preparation therefor whether or not the
Lender is a party thereto) which any of them may pay or incur
arising out of or relating to this Agreement, the other Loan
Documents, the transactions contemplated hereby or the direct or
indirect application or proposed application of the proceeds of
any Advance hereunder except to the extent such obligations arise
from the gross negligence or willful misconduct of the Lender.
The obligations of the Borrower under this Section shall survive
the termination of this Agreement.
SECTION 11.15. EXCLUSIVE JURISDICTION AND CONSENT TO SERVICE
OF PROCESS. THE PARTIES AGREE THAT ANY ACTION ARISING OUT OF OR
RELATING TO THIS AGREEMENT, THE NOTES, THE LOAN DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY SHALL BE INSTITUTED IN A FEDERAL
COURT SITTING IN MISSOURI OR STATE COURT SITTING IN MISSOURI,
WHICH SHALL BE THE EXCLUSIVE VENUE OF ANY SUCH ACTION. EACH
PARTY WAIVES ANY OBJECTION WHICH SUCH PARTY MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION, AND IRREVOCABLY
CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY SUCH COURT (AND
THE APPROPRIATE APPELLATE COURTS) IN ANY SUCH ACTION. ANY AND
ALL SERVICE OF PROCESS
AND ANY OTHER NOTICE IN ANY SUCH ACTION SHALL BE EFFECTIVE
AGAINST SUCH PARTY WHEN TRANSMITTED IN ACCORDANCE WITH SECTION
11.01. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO AFFECT THE
RIGHT OF ANY PARTY TO SERVE PROCESS IN ANY MANNER PERMITTED BY
LAW.
SECTION 11.16. WAIVER OF JURY TRIAL. THE PARTIES HERETO
MUTUALLY, EXPRESSLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL
BY JURY FOR ANY PROCEEDINGS ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT, OR ANY OTHER DOCUMENT ENTERED
INTO BY BORROWER AND LENDER IN CONNECTION WITH THIS TRANSACTION,
OR ANY CONDUCT RELATING TO THIS AGREEMENT OR THE LOANS MADE
HEREUNDER OR THE DEBTOR-CREDITOR RELATIONSHIP ESTABLISHED HEREBY,
INCLUDING WITH REGARD TO ANY COUNTERCLAIMS, CAUSES OF ACTION, AND
DEFENSES WHETHER BASED IN CONTRACT OR TORT OR OTHERWISE. THIS
WAIVER IS GRANTED IN THE INTEREST OF AVOIDING DELAYS AND EXPENSES
ASSOCIATED WITH JURY TRIALS. THE PARTIES HERETO ACKNOWLEDGE
THAT THEY HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT IN PART
BY THE PROVISIONS OF THIS PARAGRAPH.
[THE BALANCE OF THIS PAGE LEFT BLANK INTENTIONALLY]
NOTICE TO DEBTOR
NO ORAL AGREEMENTS; ENTIRE AGREEMENT. ORAL AGREEMENTS OR
COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR FROM
ENFORCING REPAYMENT OF A DEBT, INCLUDING PROMISES TO EXTEND
OR RENEW SUCH DEBT, ARE NOT ENFORCEABLE. TO PROTECT YOU,
THE BORROWER, AND US, THE LENDER, FROM MISUNDERSTANDING OR
DISAPPOINTMENT, ANY AGREEMENTS WE REACH COVERING SUCH
MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE
AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT
AS WE MAY LATER AGREE IN WRITING TO MODIFY IT.
The Lender: /s/ MRS
Initials
The Borrower: /s/ GWD
Initials
IN WITNESS WHEREOF, The Borrower and the Lender have
executed this Agreement as of the date first above written.
DIGITAL TELEPORT, INC
By: /s/ Gary W. Douglass
Print Name: Gary W. Douglass
Title: SVP & CFO
KLT TELECOM INC.
By: /s/ Mark R. Schroeder
Print Name: Mark R. Schroeder
Title: President
SIGNATURE PAGE FOR CREDIT AGREEMENT